Smart Investing is the radio show where Brent and Chase try to make investing easier to understand. They demonstrate long-term investment strategies to help you find good value investments.
Episodes
Monday Apr 22, 2024
Monday Apr 22, 2024
Retail Sales
People may be complaining about higher interest rates, but it does not appear to be slowing down the consumer. Retail sales climbed 0.7% in the month of March, which is easily topped the estimate of 0.3%. Compared to last year, sales were up an impressive 4.0%. Areas of strength continued to be nonstore retailers, which were up 11.3% compared to last year and food services and drinking places, which were up 6.5% over the same time period. Areas that continued to weigh on the report were furniture & home furnishing stores (-6.1%), electronics and appliance stores (-0.6%), and building material & garden equipment & supplies dealers (-0.6%). While energy prices have increased lately and gasoline stations saw an increase of 2.1% compared to February, compared to last year sales were actually down 0.7%. This makes the retail sales number even more impressive considering the fact that if gas stations were excluded from the headline number, it would have been up 4.4% compared to last year. Overall, this report provides further proof that the consumer remains resilient. This could bring into question the number of rates cuts this year. If the consumer remains strong, we may only see one or two cuts this year.
Value Companies
With the market’s recent highs, we have had a few companies that reached their target sell price. We sold those companies and now we’re sitting on a large amount of cash. We were considering investing into an oil and/or natural gas company because based on the valuations they are still not that expensive. One thing that has concerned me is that we are probably near the peak for gasoline consumption, but oil is also used in chemicals with a big demand coming from plastics. Approximately 102 million barrels of oil are produced every day and roughly 60 million barrels go to diesel, gasoline and jet fuel. Only 12 million of that ends up in chemicals. What concerned me even more is how all the oil companies like Chevron, Shell and Saudi Aramco have a big push to produce more for chemicals. For instance, Shell opened a chemical complex with capacity to produce about 1.6 million tons of plastic pellets per year. Saudi Aramco is working on turning 4 million barrels of crude oil per day into chemicals by the year 2030, today just 1 million barrels go into chemicals. For many years China has been a major consumer of plastic and they accounted for 70% of plastic demand. Now they are producing their own plastic capacity, which is exceeding demand. On top of all this, you have the push for recycling plastics and statistics show that only 10% or less of plastic gets recycled. Even a doubling of that over the next few years would mean less oil needed for plastics. Recycled plastics are roughly 50% more expensive than virgin plastic, but I believe that will come down in future years. In summary, at this point it does not make any sense that I can see to invest in an oil company or the chemical companies. It may look like they could be on sale, but with the large supply going forward sales and earnings could decline, which would mean they are currently fully priced. The abundance of plastics is estimated to go on until the year 2030. So…. the search for that great value company to add our portfolio continues!
Home Owners Insurance
You hear and read that insurance companies are dropping homeowners for no reason. Well, it turns out that insurance companies are becoming wiser on how to verify that policy owners are following the rules. To keep costs and risks down, insurance companies are now using drones, satellites, and airplanes to take aerial photos of your house. If you neglected to tell the insurance company that you have a pool, trampoline, a roof in bad shape or yard debris and hanging tree branches that are fire hazards, these will show up in the aerial views. You may think this is unfair, but when you sign your policy, you agree to home visits to verify that you’re telling the truth. Another question for consumers, is it fair for you to pay the same insurance premium with a brand-new roof then your next-door neighbor whose roof is 25 years old? At first thought it seems unfair that insurance companies can take pictures of your home from the sky, but if you neglected to tell them the truth about that pool or trampoline, maybe they have the right to drop you. In the long run, this could help insurance companies keep premiums lower for those who follow the rules and disclosed to the insurance company all the insurable risks that they have.
Avoiding Social Security Reductions Caused by Pensions
If you receive a pension from work that was not covered by Social Security, you may see a reduction in any Social Security benefits you are entitled to which includes benefits from your own earnings or any spousal benefits you are claiming. This is caused by the Windfall Elimination Provision and the Government Pension Offset. Keep in mind, if you earned a pension from a job where you also paid into Social Security, you will not see any reduction. One of the common pension systems we see in California is CalSTRS for teachers. Teachers do not pay into Social Security so their pension will reduce their Social Security amount. One way to get around this is by taking a “refund” from the pension. This allows you to withdraw all your contributions plus interest and roll them into your own retirement account so you can invest how you would like, and you will no longer have any reduction to your social security benefits, including any spousal benefits. The reason this works is because the refund only includes your own contributions, not the contributions made by the employer. This doesn’t work with all pensions as some lump sum options include employer contributions, so the same Social Security reduction would apply. Taking a refund from CalSTRS is not appropriate for everyone. If you are close to retirement or have been part of the CalSTRS system for many years, it likely makes sense to stay with it to receive your pension and any Social Security reduction that comes along with it. However, if you are younger, have a limited earnings history with CalSTRS, or are entitled to sizable Social Security Spousal or Survivor benefits, rolling over your CalSTRS pension to a retirement account may make sense so you get the benefit of both your pension dollars and Social Security.
Stocks Discussed: KBhomes (KBH), Northrop Grumman Corporation (NOC) and Boeing (BA)
Monday Apr 15, 2024
Monday Apr 15, 2024
March CPI
The March Consumer Price Index (CPI) report spooked investors and sent the likelihood of a Fed rate cut in June to around 20%, which was a sharp drop from the greater than 50% chance that was priced in before the data was released. The concern came as headline CPI was 3.5% over the last 12 months, which topped the estimate of 3.4% and core CPI rose 3.8% from a year ago, compared with the estimate of 3.7%. Last month the annual rate for headline CPI was 3.2% and for core CPI it was 3.8%. Energy prices were a benefit to headline CPI over the last year or so, but with the recent increase in energy we are beginning to see them not benefit the headline number as much and I soon worry they will cause the headline number to top the core CPI reading. In the March report, energy was up 2.1%, but as we lap the easy comparisons from last year the annual increase could climb substantially which would cause the headline CPI to increase. Shelter continues to be a major weight on the numbers as the index climbed 5.7% compared to last year and accounted for over 60% of the climb in core CPI. Transportation services were also a major negative as they climbed 10.7% compared to last year. I believe this can largely be attributed to rising energy prices. Also, motor vehicle insurance continues to be a major negative as it saw an increase of 22.2% over the last year. While this report wasn’t overly positive, I would like to wait and see the PCE release on April 26th before abandoning the idea for a potential of three rate cuts this year.
March PPI
The March Producer Price Index (PPI) report looked much more favorable than the CPI. Headline PPI rose 0.2% for the month, less than the 0.3% estimate and core PPI matched the estimate as it also rose 0.2% in the month. On a 12-month basis, PPI rose 2.1% which was the biggest gain since April 2023. While that may sound concerning, the inflation rate is near the Fed’s target so I would not say that is problematic. Core PPI rose 2.4% over the last year, which was the highest since September. Like the headline number, I don’t believe this is problematic considering the rate is still very reasonable in relation to the Fed’s 2% target.
Investing Highs and Lows
I love to read information from smart people like Daniel Kahneman, who unfortunately passed away at age 90 on March 27. He was a pioneer in behavioral economics, although he felt he was really a psychologist. If investors would listen to his advice, their returns would probably be much higher and their psychological well-being would be far better when it came to investing. He mentions that people who lost on an investment feel at least twice as much pain as the gains feel pleasant. He also discusses how people do not incorporate all available information and people believe that short streaks in a random process enables them to predict what will come next. Interestingly, he also points out that based on research of asking people if they want to take a risk with an 80% chance of success, most people say yes. However, if you flip-flop that around and ask if they incurred the same risk with a 20% chance of failure, they say no. Obviously the risk is the same, but the psychology is different. I believe this is why many people get into bad investments. Sales people just focus on the positive side and leave the unsuspecting investor to do their own risk analysis.
Semiconductor Industry
While the semiconductor industry is likely to continue growing, I do worry about China hurting the growth of US semiconductor companies. Shares of chip companies like Intel and Advanced Micro Devices fell after the Wall Street Journal reported that China is ordering the country’s largest telecommunications carriers to cease use of foreign chips. According to the Journal, Chinese officials issued the directive earlier this year for the telecom systems to replace non-Chinese core processors by 2027. China also recently set new guidelines to remove U.S. chips from government computers and servers. The problem here is China still remains a major market for US chip companies as the country accounted for 27% of Intel’s revenue in 2023 and AMD generated 15% of sales from China. Data from S&P Global showed that U.S. chip giants Intel, Broadcom, Qualcomm and Marvell Technology all generate more revenue from China compared with the U.S. The relationship with China is definitely worth keeping an eye on if you are investing in semiconductor companies, especially since most of them now trade at lofty valuations.
To Reinvest or Not Reinvest Dividends
From a retirement planning standpoint, it can be helpful to not reinvest dividends, especially in non-retirement accounts. In a non-retirement account, or a taxable account as they are called, dividends are taxed exactly the same way whether they are reinvested or not. In retirement, the focus shifts from accumulation to building tax-advantaged cashflow. When a dividend is automatically reinvested, it repurchases the same holding it came from. On the other hand if it is paid in cash, it will remain in the account where it can be invested or withdrawn. Therefore, when a dividend is paid in cash and incurs its normal tax, that cash can be accessed without any additional tax consequences. Alternatively, when dividends are automatically reinvested which is still taxable, if cashflow is needed, sells will also need to be made to generate that cash which can result in additional capital gain taxes. In a way, you’re getting taxed twice to create the same amount of cashflow. From a tax perspective, if a dividend is produced from a holding that is held for more than 60 days within the 121-day period surrounding the ex-dividend date, it will be considered a qualified dividend and taxed at the lower long-term capital gain rate. That criterion is a little technical but basically it means dividends from long-term holdings are taxed at the lower rate. It is popular to have dividends reinvested but this can force unnecessary taxation in retirement and can limit other planning opportunities like Roth Conversions.
Stocks Discussed: BP (BP), Redfin (RDFN) and Highwood Properties (HIW)
Monday Apr 08, 2024
Monday Apr 08, 2024
March Jobs Report
I must say, I was very surprised by the strength in the March Jobs Report. Nonfarm payrolls increased 303,000 in the month, which easily topped the estimate of 200,000. Unlike prior reports, there wasn’t a major change to the previous months as February saw a negative revision of just 5,000 and January’s revision brought the total up by 27,000. There were many positives in the report considering the unemployment rate ticked lower to 3.8%, the labor force participation rate actually increased 0.2 percentage points to 62.7%, and average hourly earnings increased 4.1% which was lower than last month’s reading of 4.3%. Areas of strength in the economy included health care and social assistance (+81,300), government (+71,000), leisure and hospitality (+49,000), and construction (+39,000). According the BLS, the leisure and hospitality sector is finally now back to its pre-pandemic level. If the economy and labor market continue to remain resilient, I do worry we may not see those three interest rate cuts we have been expecting during the remainder of the year.
JOLTs
In the Job Openings and Labor Turnover Survey (JOLTs) it showed there were 8.8 million job openings in February, which pretty much matched expectations and last month’s reading. The job market has continued to remain resilient and I do believe that it will need to enter a Goldilocks period where it is not too hot or too cold. Too many job openings may deter the Fed from considering rate cuts and obviously we do not want a weak labor market as that would be bad for the economy.
Stock Market
The stock market has gotten off to a strong start and in the first quarter the S&P 500 was up 10.2%, which marked the best first quarter performance since 2019. The Dow and Nasdaq also had good quarters as they were respectively up 5.6% and 9.1% in Q1. In a recent study, it was pointed that of the 16 times the S&P 500 rose 8% or more in the first quarter from 1950 through 2023, only once (1987) did the index lose ground the rest of the year. In the remaining years, the index gained an average of 9.7% over the next three quarters. In 10 of the 15 years the first quarter’s gains were higher than those seen over the remainder of the year. While this is bullish for the remainder of the year, I do worry about the concentration of the market. With Nvidia’s strong start and large market cap it accounted for close to half of the entire gain for the index. I don’t believe this will be able to continue, but I am optimistic that the rally could continue to broaden which would be beneficial to other stocks.
Office Rents
Across the country office rents are holding firm and they are higher now than they were back in the fourth quarter of 2019. The average US office rent has an asking price of $35.24 per square foot. This is an increase from $34.92 per square foot in 2019. It is not a high increase, but compared to a lot of the negativity that the media is spreading, it shows office rents as a whole are still doing OK. I would recommend for investors looking into office real estate to really do their due diligence to make sure they are not buying or investing in a declining property.
Stocks Discussed: Visa (V), Tesla (TSLA), Disney (DIS) and McCormack (MKC)
Monday Apr 01, 2024
Monday Apr 01, 2024
Electric Vehicle Sales
Electric vehicle sales have really not kept up with expectations and I’m concerned for the smaller companies such as Lucid, Fisker and Rivian, which besides Tesla may be the only other exclusive electric vehicle company that may survive. Digging deeper into the numbers for Lucid, since 2021 they’ve only built 10,495 cars and the most recent quarterly loss per vehicle was $145,824. When the company first went public back in 2021, they had $4.8 billion in cash, but as of the end of 2023 the company is down to cash of $1.4 billion. In 2023 the company burned through $3.4 billion in cash. The only thing that could save this company would be another billion-dollar investment from the Saudi Arabia Public Investment Fund as they did back in 2018 when they invested $1 billion. I really like the look of the Lucid Air, but do not see how this company will survive. I would speculate that by 2025 this company will be in bankruptcy. The sad part is for people buying the cars today because of the great deals they may be receiving, think ahead a few years about who will be around to service these cars and they may be stuck in your garage with no way to get them serviced. I would encourage people if you’re going to buy an electric vehicle, buy it from a well-known brand like Ford or General Motors who will be around for years to come to service that vehicle.
History of Hype Investing
Are people so smart that they really don’t need to look at what happened in history? We have said many times we stay away from the hype investments like Nvidia and cryptocurrencies and back this up with reality. Let’s go back and learn from the late 90s about a company called CMGI, which helped fund internet startups. It was claimed to be one of the hottest investments in history and the CEO, David Wetherell, was deemed to be a hero and a genius. Keep in mind this was 24 years ago and when the company hit a $34 billion market cap, it was larger than Alcoa or Texaco. All the financial talk shows could not talk enough about CMGI and why the stock would continue to go up and what a great investment it was. Anyone on the other side who warned about this was considered a fool, or an idiot. They were told they didn’t understand enough about the company. In 1999, the stock rose 940% and everybody wanted a piece of it. Starting to sound familiar yet? However, the next year when the curtain came down, the stock fell 96%. That was the end of the story for many investors!
PCE
No real exciting news from the personal consumption expenditures price index (PCE) as it was right in line with expectations. The headline number showed an annual increase of 2.5%, which matched the forecast. This was however above the January reading of 2.4%. This increase was likely a result of energy prices as they climbed 2.3% in the month. Core PCE, which excludes food and energy also matched expectations with a 2.8% rise compared to last year. This was slightly lower than last month’s reading of 2.9% and marked the smallest gain since March 2021.
Roth IRA 5-Year Rules
There is often confusion around the nuances of the 5-year Roth IRA rules. There are two separate 5-year rules that apply depending on whether a contribution or a conversion is made. In a nutshell, the rule for contributions dictates how long you must wait to access the earnings without taxes or penalties, while the rule for conversions dictates how long you must wait to access the conversion principal. When making a contribution to a Roth IRA, you can always withdraw the contribution principal no matter your age. This is because contributions are made with after-tax funds. To access the earnings, the account must have been funded at least 5 tax years ago, and you must be at least age 59.5. Being age 59.5 alone is not enough to access those earnings. A contribution of any size will start this 5-year clock and after those 5 years it will no longer be relevant. After making a Roth Conversion, there is a separate 5-year rule which states that 5 tax years must pass for each individual conversion or the account holder must reach age 59.5 in order to access the conversion principal. Upon reaching age 59.5 this rule no longer applies. Therefore, if a conversion is made by someone who is 60, they can immediately access the conversion principal, or if someone who is 58 makes a conversion, they can access conversion principal upon reaching age 59.5 without waiting the 5 years. In these cases, the accounts must still be funded for at least 5 years to access any earnings. Since the conversion rule is triggered by the sooner of reaching age 59.5 or 5 years, a 30-year-old could make a conversion and withdraw that conversion principal after 5 years without tax or penalty even though they are not age 59.5. It is common for people to question making a contribution or conversion in fear that money will be locked up for 5 years, but if done correctly there can be ways to access funds without waiting.
Monday Mar 25, 2024
Monday Mar 25, 2024
Lawsuits Against Apple
On Thursday, March 21st, the Department of Justice (DOJ) filed an anti-trust lawsuit along with 16 states against Apple. The DOJ claims Apple’s iPhone ecosystem is a monopoly that drove its “astronomical valuation” at the expense of consumers, developers and rival phone makers. The lawsuit claims that Apple’s anti-competitive practices extend beyond the iPhone and Apple Watch businesses, citing Apple’s advertising, browser, FaceTime and news offerings. The DOJ also said in a release that to keep consumers buying iPhones, Apple moved to block cross-platform messaging apps, limited third-party wallet and smartwatch compatibility and disrupted non-App Store programs and cloud-streaming services. With pressure also surrounding the App store in the EU, I worry the expected growth from the services business could be under pressure. We have often said Apple is a great company, but trading at such lofty levels has left many investors open to declines in the value of their investment. The stock trading around $170 per share is down from the high of over $200 per share, and while this lawsuit will take a couple years to go through the court system, it could have a major impact on the growth of Apple’s earnings. At Wilsey Asset Management, we do continue to believe that Apple is overpriced and has no potential for growth going forward. Looking out a couple years from now the stock could still be trading around these levels due to the high valuation and limited prospect for business growth. We do believe it’s very possible for the stock to drop at least another 10% to 20%.
Retirement Assets and Target Date Funds
I was so disappointed to read recently that Vanguard has 63% of their US retirement assets allocated to Target Date Funds. I cannot stress what a poor investment these are. They make nice fees for Wall Street and people think it’s an easy way to retire but the allocation and numbers are just so wrong. A good example is as recent as 2022 when the bond index went down about 14% that year. Based on the theory of Target Date Funds and how they are invested, most of a 65-year-old retiree’s money would be invested in bonds. On a million dollar account a 14% decline would have led to an account value of $860,000 and now a couple years later, bonds are still lower. I do believe in buying and holding, but you must understand what you’re holding and why you’re holding it. It does make sense to just implement a blind strategy. If you have a target date fund, I would highly recommend that you sit down with a knowledgeable financial advisor that really understands and can explain how they work…. Yes, I’m available!
Mind Games of Investing
I learned a new word this weekend, counterfactual. In my 40+ years of investing I believed what this word meant, but I just didn’t know there was a word that described what I knew. What I’m talking about as it stares in your face where you would have been if you would’ve bought Microsoft, Nvidia or Tesla a few years ago. The emotional psyche is great at tracking the big misses and convincing you why you should’ve invested, but it never seems to remember the investment losses that you missed because you didn’t take that risk. Over the years we’ve talked about these types of companies many times. Just to remind you, take a look at the cannabis companies or during the pandemic had you invested in Zoom or Peloton. More recently, we just discussed in our newsletter about had you invested in electric vehicle companies you would’ve lost about 90% of your investment had you purchased at the top. Investing is hard, throughout your lifetime there will always be some companies that you “knew” were going to go up after the fact. Comeback to reality and realize if you can average about 10% on your investments, in 21 years a $100,000 investment would be worth close to $800,000. But if you lost principal along the way by taking on risk, you may not even have your $100,000. And if one of your friends tells you they bought one of these high flyers and they brag about it, ask them percentage wise how much does it make up of their entire portfolio? More than likely it’ll be less than one percent, but even at one percent be sure to inform them that the investment, even if it doubles in price would only add a one percent increase to their entire portfolio. And if you would like to use the new word counterfactual, the definition is what might have been an imaginary alternative to the actual past.
Mortgage Points and Lender Credits
When you apply for a mortgage, there’s a lot more to consider than just the interest rate. When you get a mortgage, there are closing costs that include things like title and escrow fees that are not part of the loan itself. Then there is prepaid interest which is the interest that accrues from the closing date through the remainder of the month. Since mortgage payments are paid in arrears, your first payment will be two months after the month you close. For example, if you close your mortgage in the beginning of April, you’ll have more prepaid interest at closing since you’ll have to pay interest for the bulk of April, but you won’t have to make the next payment until the middle of June. Also, at closing you might have points or credits. A mortgage point is an extra fee you pay in exchange for a lower interest rate. A lender credit is the opposite where you receive a higher interest rate, but the lender will provide you funds that can be applied to closing costs and prepaid interest. You can also choose to pay no points and receive no credits for an interest rate in the middle which is called the par rate. For example, if you were to get a mortgage right now your par rate might be 7%, or you could pay a few thousand dollars in points to receive a 6.75% rate, or you could receive a few thousand dollars in credits in exchange for a 7.25% rate. With where interest rates are at now, pretty much everyone agrees that mortgage rates will be coming down in the coming months and years. This means if you are considering buying or refinancing, even if you are using a 30-year mortgage, it is best to think of it as a 6, 7, or 8 month loan as there should be an opportunity to refinance in a few months at a lower rate. Therefore, if you are getting a loan now, you want to structure that loan so you have the lowest overall cost during the next 6 to 8 months. During a decreasing interest rate environment, this typically means accepting a higher interest rate and using the accompanying lender credits to cover as much closing costs and interest as possible. You might pay a few hundred dollars more in interest over the next several months, but that is worth it if you receive a few thousand dollars in credits upfront.
Monday Mar 18, 2024
Monday Mar 18, 2024
CPI
The Consumer Price Index (CPI) came in a little bit hotter than expected as the headline number for February showed an annual increase of 3.2% versus on expectation of 3.1% and the core CPI showed an annual increase of 3.8% versus an expectation of 3.7%. While it was not much progress, there was still a decline from last month’s core CPI reading of 3.9%. This marked the lowest reading since May 2021 when core CPI was 3.8%. Food was a bright spot in the report as the annual increase was just 2.2%. Food at home came in at an annual increase of 1.0%, while food away from home increased 4.5%. With wage pressures continuing, I believe this discrepancy will continue. Energy was also an interesting sector as the annual reading showed a decline of 1.9%, but the monthly reading was up 2.3%. Energy has been a big positive for the headline number, but as we lap easier levels it will likely not be as big of a benefit. One of the areas that remains very hot is motor vehicle insurance as it was up 20.6% compared to last year. I believe this item will remain hot for the next several months, but as we lap higher prices it should subdue. Shelter also remained a large weight on the report as it increased 5.7% over the last year and accounted for about two-thirds of the annual increase in core CPI. I feel like I sound like a broken record, but I continue to believe that this is heavily distorting the numbers and is it declines over the remainder of the year it should be a benefit to both headline and core CPI. I don’t believe this report does anything to change the expectation for three cuts in the back half of the year.
PPI
I was somewhat surprised to see the negative reaction to the February Producer Price Index (PPI). It seems as if people were fixated on the monthly jump of 0.6%, which doubled both the estimate and January’s reading of 0.3%. Looking year-over-year though the numbers still look quite manageable. The headline number increased just 1.6% and core PPI, which excludes food and energy was up 2%. I don’t think this report should have a major impact on the Fed’s expected interest rate direction.
401k
It's no secret that I'm a big advocate of saving in your 401k, but I was surprised to see that according to a recent survey 77% workers believe that the unavailability of pensions is making it harder to achieve the American dream and 83% say all workers should have a pension to be independent and self-reliant in retirement. I was also surprised to see some UAW members are still unsatisfied with the automaker’s retirement plans as some are continuing to push for pensions. A Ford spokesperson recently shared the current retirement structure at their company, "The company contributes 10% of employee base wages, plus $1 per hour worked (capped at 2,080 hours a year), with zero employee contribution required.” I would take that over a defined benefit plan any day. 401ks give participants the power to grow their wealth more effectively, they are much better estate planning tools, and they are much more portable if changing employers. The key is you have to take accountability and actually participate in your 401k to reap the benefits.
Bitcoin Peaking Point
I admit it myself that I have no idea where bitcoin will peak. But the truth is, no one does. I do know that demand is high right now because Wall Street continues to build their ETF’s to collect their fees, which I have talked about before. But can we please get off some of the comparisons of Bitcoin to make one feel better, especially the one with gold and saying it is a digital gold. The value of all mined gold is around $15 trillion. A good portion of that is in gold jewelry. I know when I buy a gift for my wife like a gold bracelet or necklace, she’s going to be pretty happy, but I can’t even write the words how to compare if I gave her a gift somehow of a Bitcoin that she can open and do something with it. I think if I would try, I could be sleeping on the sofa that night. Also, let’s stop saying this will be the replacement currency if the dollar falls. Just think of the calamity the country would go through with a fall of the dollar in the United States. Do you think you will still be able to plug into the Internet and access your Bitcoin? You may not even have electricity to plug-in your electronic devices like phones, computers and laptops? Let’s really understand what Bitcoin is, it is a speculative game that is being played right now, and it really cannot be used for anything that is really of any value. There are smart economists like David Kelly from JPMorgan who have similar feelings. He recently told Barron’s, “I worry about the silly decisions investors make. People get misled by all sorts of fads and fantasies as to how they should invest. I worry about the money that’s been poured into things like Bitcoin, which is absolute nonsense. It is simply a focus of speculation. I worry that someday that’ll all go poof and people will lose money.” I’ve said it before, but congratulations if you have made money on Bitcoin, if you want to continue to hold it you should really think through what it is. If you don’t have a sound answer, you should sell it.
Tax Brackets vs Your Tax Rate
Most people believe tax rates are going up, which may be true. With the level of government spending and debt, it is logical to conclude taxes will need to increase to keep up. Starting in 2026, the federal tax brackets are set to increase due to the sunset of the current tax rates implemented in 2018. We may also see further tax increases to address issues like the deficit or Social Security. However, there is a difference between the tax brackets and the tax rate you will experience as an individual. Just because tax rates increase, doesn’t necessarily mean the rate you will be subject to will be higher or that your tax bill will be higher. Currently the federal tax rates are 10%, 12%, 22%, 24%, 32%, 35%, 37%, and they are expected to change to 10%, 15%, 25%, 28%, 33%, 35%, 39.6%, which is technically an increase. These are brackets which means the more income you have, the higher you get pushed into the brackets. What most people don’t understand is that your individual level of income will also fluctuate up and down over time, not just the tax brackets. In retirement you have much more flexibility in choosing where your income comes from, so while you’re working you might find yourself in the 4th tax bracket which is 24%, but in retirement with the right planning you may get to the 2nd tax bracket which could be 15% at that time. Even though tax rates increased, your tax rate could go down because you will be in a lower bracket due to your income level. I’m not saying taxes aren’t a problem in retirement, because they absolutely can be, but the way to address them is to understand how your individual income will change over time so you can take advantage of the tax system all along the way.
Monday Mar 11, 2024
Monday Mar 11, 2024
Labor Market
While the headline number of 275k jobs created easily topped the estimate of 198k and sparked concerns the labor market remained too hot, the details of the report showed a much softer labor market. To begin, the prior two months saw a downward revision of 167k jobs, which more than offsets the beat we saw in the month of February. Also, while I generally am a little more skeptical of the household survey, it did show a decline of 184k in those that were counted as employed, which led to an uptick in the unemployment rate to 3.9%. This was above the estimate of 3.7%. I was also disappointed to see that government remained a large contributor in the establishment survey as the sector added 52k jobs. Outside of government, other areas that were strong included health care & social assistance (+90.7k), leisure & hospitality (+58k), and construction (+23k). Wage gains were also a bright spot in the report as average hourly earnings increased 4.3% compared to last year. This was below the estimate of 4.4% and below last month’s reading of 4.5%. I believe this report continues to put us on track for 3-4 rate cuts in the back part of the year.
JOLTs Report
The January Job Openings and Labor Turnover Survey (JOLTs) was right in line with expectations and the previous month as job openings totaled about 8.9 million. This remains well below the high of 12.2 million in March 2022, but is still well above historical norms as prepandemic we had not seen a reading above 8 million. I continue to believe job openings will continue to trend lower to come back in line with historic levels. This does not mean we believe we are seeing a weak labor market, but I would call it a normalizing labor market. We have also seen a normalization in quits which should be a positive for wage pressure. Quits in the month were 3.4 million. This compares to annual quits of 44.4 million or 3.7 million per month in 2023. Total quits in 2023 fell by 6.1 million when compared to 2022. Looking at prepandemic levels, quits totaled 42.1 million in 2019 which would have been an average of 3.5 million. Layoffs were also strong in the month as they totaled just 1.6 million. This is right in line with 2023 levels as for the full year they totaled 19.8 million and averaged 1.65 million per month. In 2019, layoffs totaled 21.7 million and averaged 1.8 million per month. I wanted to provide all this data to show the labor market may be softening from strong levels, but I believe there is still some room to have numbers normalize without tilting us into a weak labor market.
China
What happened to China? The country had such a robust economy just a few short years ago, but the writing was on the wall. Here are the problems that caused the economic downfall. A real estate boom which accounted for 25% of China’s annual economic output. The debt and inventory continued to rise in houses and condos but many remained empty with no one able to buy them. The government cutoff the debt to developers, which ended the real estate boom. Consumers who did buy into the expensive housing market in China leveraged beyond their means with the expectation that the growth would continue and they could sell out with a profit. Unfortunately, they are now sitting under water in much of their real estate, but still have to pay the debt and don’t have much discretionary income to spend in other parts of the economy. China is now experiencing deflation, which will give them negative growth in parts of their economy for perhaps years to come. China’s overall debts have now surpassed 300% of GDP with very little chance of the economy growing to pay down that debt. Many years ago, they put a cap on how many babies people could have and now that is hurting them with an aging workforce and a shrinking workforce. It will take years to reverse this. In the meantime, the economy remains underwater. Since 1998 foreign investment in China has always been on the upswing, but that run came to an end in the third quarter of 2023 as foreign companies sold out and left or just stopped investing in China. There is nothing left to build in China when looking at their infrastructure. They have built many roads, railroads and airports so there’ll be no future investment in infrastructure. China has always been a communist country and I don’t think they really understood capitalism very well. An economy will always go through the ups and downs, but the United States has been around for 200 years and we have learned some valuable lessons like 1929 and 2008. While we can’t avoid the down turns, we have learned how to minimize the depths of the down turns.
Personal Consumption Expenditures
The Personal Consumption Expenditures Price Index, known as the PCE and is the main inflation gauge that the Federal Reserve looks at came in with a good inflation number. Excluding food and energy the change from one year ago for January was 2.8%, which shows a nice downward trend from December 2023 of 2.9%, November 2023 at 3.2%, and then October 2023 at 3.4%. The numbers are going in the right direction, but they are now falling a little more slowly than the big jumps we had. I still believe by the end of the year we should be at 2%, which is the Fed’s target and they should start reducing rates by midyear. Even though they won’t be at their target of 2% by June or July they need to start reducing rates a little bit to prevent a recession in 2025. At Wilsey Asset Management, we do believe the Federal Reserve came to the rescue to reduce inflation a little bit late but have now done a good job on managing the economy. We continue to believe that the Federal Reserve will do a good job in 2024, but stay tuned as we will be on top of it each month as the data is released.
Social Security Changes Coming?
The State of the Union was this week and one of President Biden’s talking points was Social Security. He stated, “Working people who built this country pay more into Social Security than millionaires and billionaires do” so he vowed to “make the wealthy pay their fair share”. It is true that millionaires and billionaires whose incomes do not come in the form of wages or self-employment do not pay into Social Security, but they are also not entitled to Social Security benefits in retirement. Working class people do in fact pay more into Social Security, but they are also the only ones who receive it. However, for people who do pay into Social Security, benefits are subsidized by high-wage earners and business owners for the benefit of low-income earners. As an employee, 6.2% of wages are withheld for Social Security up to a cap of $168,600. The Social Security benefit amount is based on 35 years of earnings which is used to determine the average monthly earnings. The full retirement amount will be the sum of 90% of the first $1,174 of average monthly earnings, 32% of the next $5,904, and 15% of any monthly earnings above that. For example someone who made $50,000 per year would receive $2,014 per month at their full retirement age which is 48% of their earnings. For someone who made $150,000 per year, their Social Security would be $3,759 per month which is 30% of their earnings. Even though both paid the same 6.2% of their income into Social Security, the lower-earner received a much larger percentage of their income in the form of benefits. In the case of business owners, they have to pay double the tax for a total of 12.4% because they are considered both an employee and employer, and they have to pay 6.2% for all their employees. So a business owner is really paying more into Social Security than all their employees combined. In regards to making the wealthy pay their fair share, there have been proposed bills that would tax earnings over $250,000, over $400,000, or possibly tax investment income. However, it is unclear if these additional taxes would change the potential benefit amount of those paying them, or if they would just benefit lower wage earners. There is no doubt that the Social Security system needs some adjustments, but we must understand the facts before implementing change.
Monday Mar 04, 2024
Monday Mar 04, 2024
401k Loans
It was nice to see that retirement assets saw a nice increase in 2023. According to Fidelity, the average 401k was up 14% from a year earlier to $118,600 and the average IRA was up 12% to $116,600. While it is good to see this progress, balances are still short of the year end 2021 levels when the average 401k reached $136k and the average IRA stood at $131k. I was somewhat surprised but happy to see the average 401k contribution rate, including employer and employee now stands at 13.9%. With the decline in companies offering pensions, employees really need to make sure they are saving at least 10% of their pay to achieve an enjoyable retirement. On the other side of the equation, I was disappointed to see the percentage of workers who took a loan from their 401k, including for hardship reasons, increased to 8.9% from 7.8% at the end of 2022. Many times, people believe 401k loans are great option, but it costs you greatly when you consider the loss of compounding and the tax inefficiency. They are better than mounting high interest credit card debt, but they should only be used as a last resort rather than a tool to fund a vacation or buy a new toy.
Hype Investing
At Wilsey Asset Management we avoid hype investing. From time to time, we attempt to give evidence of how long-term, hype investing can destroy your portfolio. Here’s another example, in 2021, you may recall the hype around electric vehicles, people made it sound as if an internal combustion engine vehicles would never be sold again and we would all be driving electric vehicles. Well, the hype of the stock price matched that excitement, two examples are Lucid and Rivian automotive. The all-time high a couple years ago for Lucid was $35, recently it has fallen to under three dollars a share, a 91% decline. The other example is Rivian, in late 2021, it hit an all-time high of $146 per share and has recently fallen under $11 a share, a 92.5% decline. It is possible for these companies to turnaround and may do well in years to come, the massive decline in stock price is the reason we will not invest in a company which does not have earnings, and we will not pay more than 10 to maybe 12 times for those earnings going forward. We may miss out on some highfliers. but I’d rather take it slow and steady than try and hit the home run and lose 80 to 90% on an investment. For Lucid to get back to $35 a share that would be over a 1000% return.
US Farmland
Farmland in the United States has been on quite the ride for the past 26 years. Back in 1997, the average price per acre for farmland in the US was $1,270. It has now increased by over 430% to $5,500 per acre. Now before you people in San Diego think that is not that good because of the appreciation you’ve seen on your house, remember this is nationwide and a 400% plus return is very good on real estate. The question is, will it continue? Over the last 20 years, farm acreage has declined by about 50,000,000 acres to just under 900,000,000 acres nationwide. Development has been taking away some of the agricultural land which could drive prices higher. That could encourage farmers to take advantage of their high value real estate and retire. That would not be a good thing for our agricultural needs going forward.
Is Long-Term Care Insurance Worth it?
Most people know that elder care can be expensive later in life which begs the question, “Is long-term care insurance a viable solution?”. The long-term care insurance industry has evolved a lot over the last four decades. In the 80’s, 90’s and early 2000’s there were policies available that were affordable and provided more coverage, such as lifetime benefits. However, over time the insurance companies came to realize they weren’t making money because more people were filing claims than expected. As a result, most insurance companies have stopped selling this type of insurance all together, and the ones that remain have substantially reduced benefits and increased premiums on new and existing policyholders. Therefore, the cost/benefit ratio for long-term care insurance is not nearly as attractive as it once was and retirees are typically better off exploring other ways to pay for elder care.
Monday Feb 26, 2024
Monday Feb 26, 2024
Commercial Real Estate
We hear that commercial real estate properties are having problems, but how bad are those problems? After the 2008/2009 financial crisis, by the second quarter of 2010 commercial property had a record $194.8 billion properties in distress. Compare that to the end of 2023, when commercial properties in distress totaled $86 billion. Also, think about how much commercial real estate has appreciated since 2010. Another point to consider, after the financial crisis there were not many funds on the sidelines and today real estate private equity firms are sitting on $544 billion in cash, which is a record level up from $457 billion in cash at the end of 2022. With that much cash, they will be interested in doing some deals and give a floor to many commercial properties across the country.
Should You Buy Nvidia Now?
We all know that Nvidia has done very well, and after the most recent report the stock is at a new high. I heard the dumbest thing from a money manager on CNBC, who didn’t own Nvidia and said you need to buy one percent of the stock in your portfolio. The reason I say it is dumb is because even if the stock doubles from here that would only increase your investment return by one percent. In other words, if your return was 10% over the next year, with the addition of Nvidia your return would be 11% if the stock doubles from here. This also assumes that had you invested one percent somewhere else it would’ve made no return at all. When it comes to investing, discipline is very important and yes, we all want to invest in investments that will increase in value, but an investor must understand their objective and their discipline, stay the course, and realize that one will not always own all the hot stocks and should not chase returns.
Chinese Car Makers
A Chinese electric auto maker, BYD, is sending chills across the auto makers in the US. Elon Musk said “If there are not trade barriers established, they will pretty much demolish most other car companies in the world. “In a memo from executives at Toyota, they stated Chinese companies have a 25 to 30% advantage over global competitors when manufacturing EVs. If not protected against, Chinese EV companies could storm the US market. In 2018, the Trump administration applied an additional 25% tariff on Chinese cars on top of the regular 2.5% tariff on all cars coming to the US. To get around this, BYD is looking at building a factory right across the border in Mexico. They have not purchased any land yet and this is a few years down the road, but it could be devastating to all car makers 3 to 5 years from now. I looked to see what the BYD cars look like and some of them are not that bad looking. Whoever becomes president in November 2024, I hope they look seriously at this situation to prevent BYD or any other Chinese carmaker from flooding our car market.
Financial Planning: Investment Return of Annuities
An annuity is exchanging your assets for income, you’re essentially buying a pension. It’s funny that pensions have such a positive connotation but annuities aren’t as popular, even though they’re pretty much the same thing. We don’t sell annuities and we don’t ever recommend annuities because when you look at the numbers, they aren’t that appealing for an investor. To illustrate this, I got a quote for a 65-year-old purchasing a $500k immediate annuity. In exchange for the $500k, they will receive monthly income of $3,000 for the rest of their life, which is a 7.2% yield. Keep in mind, the $500k is now gone, so they can’t decide down the road to do something else with their money. Statistically someone who is 65 has a life expectancy of about 83, or more 18 years. With this information we can calculate the expected return of the $500k investment and it comes out to 2.88% per year. In other words, if you were to invest $500k and then withdraw $3,000 per month for the next 18 years, you would need that $500k to return 2.88% per year to last the full 18 years. From an investment standpoint, most people wouldn’t be happy with an annualized return of less than 3% over almost 2 decades, but that’s what people agree to when they purchase an annuity. Don’t get confused by the 7.2% yield, which is misleading since those payments stop when you die. Instead, calculate the actual return to see if it still seems like a good idea. Keep in mind, the insurance company and the agent selling the annuity will not break down the actual return for you.
Tuesday Feb 20, 2024
Tuesday Feb 20, 2024
AI Outlook So Far
Microsoft spent about $7 million per 30 second ad for the Super Bowl promoting their Copilot AI service. Some results are not coming in so good for Copilot with some testers after using the software for more than six months said it was useful but doesn’t live up to its price. Another survey adopter said the initial excitement wears off with a 20% drop in use after only a month. Executives at Microsoft expected billions of dollars in new revenue as their search engine Bing would take market share from Google. Unfortunately, nearly a year later Bing has only seen less than a one percent gain in market share. A survey from Boston consulting group said that roughly 90% of business executives said generative AI is a priority for the company this year; however, 66% said it would take a couple years for the technology to move beyond the hype. 70% of those executives said they were only going to do small investments with limited testing. I’ve been concerned about the over hype of the money going into AI and the return on investment taking years to payoff. This would not be the first time on Wall Street that the hype sent stocks into orbit, only to come back down to earth when reality set in.
Investing in Technology
More strange news with the markets. As of the week ending February 9th, the NASDAQ was up 6.5% this year and the S&P 500, which is also heavily weighted in tech companies had increased 5.4% in 2024. This compares to a return of just 0.84% for the broader Russell 2000 index. The S&P 500 has increased 14 of the last 15 weeks something we have not seen since the end of 1972. I’m not saying the market is going to crash tomorrow, but the 73/74 market period had a very long bear market. The difference here is that our market is so concentrated in technology that I think we could see a bear market, but many companies will still gain going forward because of the great value that has been ignored. Another example of exuberance in technology would be that fact that since the 2008 financial crisis, US companies with dividends above 5% gave investors a return of 450%. Over that same timeframe, companies that don’t pay a dividend have returned nearly 1200%. Going back to the 1870s, this flies in the face of normal behavior. The excitement in tech has led to some major gains for the big tech companies and Microsoft is now the most valuable company with a market cap around $3.1 trillion. It is almost twice the $1.6 trillion value of the entire S&P 500 energy sector, yet it’s annual free cash flow of around $67 billion is less than half the $135 billion from these energy companies. I do not know what will cause a drop or when it will happen, I just believe many investors do not realize the risk that they are taking by investing heavily into technology. Unfortunately, all parties do come to an end.
CPI
The Consumer Price Index (CPI) caused a lot of concern and sent stocks lower as the reading came in above expectations. Frankly, looking through the data I don’t think the numbers were that bad. CPI rose 3.1% compared to last year which was above expectations of 2.9%, but was lower than the reading of 3.4% in December. Core CPI, which excludes food and energy rose 3.9% and came in above the expectation of 3.7%. This reading matched December’s 3.9% rise which was the smallest increase since May 2021. It is important to remember that numbers don’t always go in a straight line and I believe this report should not have a major impact on the Fed’s rate decisions. Especially, when looking deeper at the numbers. The shelter index again continued to be a heavyweight on the report as it climbed 6% compared to last year. This increase accounted for over two thirds of the 12-month increase in core CPI. It was also interesting that there was a little bit of a divergence between the rent of a primary residence which was up 0.4% in the month compared to the owners’ equivalent rent of residences which was up 0.6% in the month. I believe this is a silly metric that distorts the CPI level. The Owners’ equivalent rent is obtained through surveys and asks members of a household: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished, and without utilities?" I don’t believe this is a great way for tracking shelter inflation and that these numbers should be taken with a grain of salt. Other areas of the report continued to see positive deceleration or even deflation in some cases. The energy index was down 4.6% compared to last year with gasoline falling 6.4%. Food at home showed a gain of just 1.2%, which compares to a peak of 13.5% in August 2022. Food away from home did have a larger increase of 5.1%, which likely stems from higher wages and the elevated demand we are seeing at restaurants and bars. Overall, as I said I don’t think this was a bad report, but investors need to realize that the Fed will not be cutting rates 6 times this year.
PPI
I was somewhat disappointed by the Producer Price Index (PPI), as I thought we would see better numbers. In January, PPI rose 0.3% compared to the prior month, which was the biggest move since August and it was well above the expected increase of 0.1%. Core PPI was even more troubling considering it saw a 0.5% increase, which easily topped the expectation for an increase of just 0.1%. Looking at the year over year increase, the numbers are less concerning. Headline PPI increased just 0.9%, but core PPI did see an increase of 2.6%. I wouldn’t recommend panicking over one report, but I will definitely be keeping an eye on inflation over the next few months. I still believe the broader trend will show a decline towards the 2% target, but there will likely be bumps in the road.
Financial Planning: Health Insurance Before Medicare
Most become eligible for Medicare at age 65. With Medicare you will have a Part B premium, which is $174.70 per month in 2024, and potentially an additional premium of up to $200 per month depending if you select a Medicare Advantage Plan or a Medicare Supplement Plan. If you retire before age 65, health insurance can be much more expensive and range into the thousands of dollars per month. For many this is a major factor in why they delay retirement. However, with the correct planning ahead of time, it is possible to retire early without being subject to exorbitant insurance premiums. When purchasing health insurance through the Health Insurance Marketplace, the actual premium is based on your income. This means if you can keep your income lower, you will qualify for the same coverage, but at a lower monthly cost. Some ways to keep income low is to keep extra cash, taxable brokerage accounts, and Roth accounts available as withdrawals from these accounts are not considered income. Therefore, these types of assets can cover livings expenses until reaching Medicare at age 65 while also keeping health insurance premiums, federal taxes, and state taxes at a minimum. This also means it may be necessary to defer other types of income such as Social Security, pensions, capital gains, pre-tax retirement account withdrawals, and Roth conversions until reaching age 65. There are many insurance plans available all with their own premium based on income, so it is important to choose the right plan to cover your individual medical needs, but with the right planning, there are affordable options available for early retirement.
Monday Feb 12, 2024
Monday Feb 12, 2024
CPI
One of the main reasons I continue to believe the Consumer Price Index (CPI) will continue to decelerate this year is I don’t believe there will be as much pressure from the shelter index. In December, the median U.S. asking rent price fell 0.8% from the prior year to $1,964. According to Redfin, this marked the third consecutive monthly decline as prices dropped 2.1% in November and 0.3% in October. The rent price reflects new leases which means I believe this will have a larger impact as we progress through 2024. I believe there will be even less concern over rent increases going forward considering the number of new buildings in the U.S. with five units or more. Looking at the chart below you can see that the amount of completed buildings is near the highest level in over 30 years and the number of new buildings under construction is at levels we have not seen before.
China Owning U.S. Debt
I have heard people worry about China owning U.S. treasury debt. Over the last decade or so, it truly has become a very small concern. China now holds just $782 billion of our debt which trails Japan at $1.1 trillion. China still tops the UK, but the gap has been narrowing over the years as the UK now holds $716 billion of US debt. The next largest foreign holders of our debt are Luxembourg at $371 billion and Canada at $321 billion. With our debt now over $34 trillion, China owns just over 2%. Compare this back to 2013 when Beijing’s holdings peaked at just over $1.3 trillion and our debt stood at close to $17 trillion and you will see the concerns over China controlling our debt are currently overblown. Back then they owned over 7% of our debt. The main benefit here is China no longer could threaten dumping our debt and causing a major spike in interest rates. The downside is our debt has continued to grow and with less demand for our debt from China, interest rates are likely higher than they would be if China was actively participating in buying more of our debt. Remember like everything else these markets are based on supply and demand. If there is more demand for our debt, prices would go higher and since there is an inverse correlation, interest rates would go lower.
Growth Companies
I don’t like to invest in the expensive growth companies because of the risk that comes with them. People often forget how much value they can lose and how long the recovery can be. One great example of this is Microsoft during the Tech Boom. In 1999, Microsoft could do no wrong and they were one of the most exciting companies in the world. The stock hit a peak of a split-adjusted value of $59.96 per share in December of 1999. The stock then fell dramatically during the tech bust and financial crisis and bottomed out in March 2009 at a price of $15.15 per share. This resulted in a decline of about 75% over essentially a 10-year period. The shares would not reach the 1999 peak until October 2016, essentially 17 years after it reached the tech boom peak. While the stock has done well as of late, how many people are patient enough to hold through a 17-year period with no growth? Not to mention if you need income from your portfolio, that would have been a complete disaster. While tech is hot again, I still recommend people be careful as they often forget the lessons from the past.
Financial Planning: Understanding Your Tax Phases
Sometimes it feels like taxes only go up, but it doesn’t have to be that way. In fact, most people go through different tax phases during their lives. While you’re working, taxes seem high because you’re subject to 5 different taxes. You are taxed federally, on the state side, and you have Social Security, Medicare, and disability taxes withheld from payroll. Then when you retire, things change. You’re no longer subject payroll taxes, which in California is a flat tax of 8.75%, and some of your retirement income may be partially or fully tax-free. For many this is a period of low taxation which means you don’t need as much total income to produce your after-tax cash flow. Then in your 70’s, you may see your taxes increase again due to required distributions from retirement accounts and extra premiums for Medicare. By understanding these different tax phases over time, you can take advantage of your tax situation and create a plan to save taxes over your lifetime.
Monday Feb 05, 2024
Monday Feb 05, 2024
Employment Situation
The numbers for nonfarm payrolls blew away expectations as they expanded by 353,000 in the month of January. This easily topped the estimate for 185,000. Job growth was widespread as it grew in every major category except for mining and logging which saw a decline of 6k in the month. Two areas that remained extremely strong were health care and social assistance (+100.4k) and professional and business services (+74k). Other areas of strength included retail trade (+45.2k), government (+36k), and manufacturing (+23k). The previous two months also saw upward revisions with an upward revision of 117k in December and 9k in November. There was some concern that maybe this report was too strong and that it could impact the Fed’s rate cut path. The major concern on the inflation front came from average hourly wages which jumped 4.5% and easily exceeded the forecast of 4.1%. While this could have an impact on inflation, it is important to remember that data doesn’t always move in a straight line. Also, the average hours worked fell to 34.1 which was 0.2 hours lower than the previous month and would have an impact on total labor cost. I was also happy to see in a separate report that the Employment Cost Index increase by just 0.9%, which was the smallest quarterly gain since the second quarter of 2021. Looking at year-on-year, labor costs increased 4.2% in Q4 which marked the smallest rise since Q4 of 2021. Overall, I think this report shouldn’t throw a wrench in the idea of the Fed cutting rates in the back half of the year.
Job Openings
It is looking like the economy could navigate a pretty remarkable feat with decelerating inflation rates, growth in the economy (albeit limited), and a resilient labor market. In the month of December, job openings rose to 9.0 million which easily topped the estimate of 8.7 million and marked a three-month high. This is well off the high of around 12 million that was achieved in 2022, but it still is a healthy level considering pre pandemic job openings were around 7 million.
Investment Grade Debt
I was surprised to learn that the amount of investment grade debt was $168 billion so far in the month of January. One would think that these corporations would do everything they could to hold off until the second half of the year when rates should be lower. Investors would have to go back 34 years to find this much debt issued in January. It makes one wonder do they know something we don’t know and maybe rates won’t be falling? I still remain very confident we will see rates fall in the second half of the year.
Liquid Cash
As of the third quarter of 2023, cash in money markets and CDs has reached an all-time high of $8.8 trillion. The last peak for CDs and money markets was reached in 2008 when it climbed above $6 trillion. At US lenders, total deposits fell to $17.4 trillion from the peak of $18.2 trillion, but when you combine the two you have around $26 trillion of liquid money. The question is, as rates fall where will this money go and how much will be transferred to longer term investments like real estate and equities? I don’t believe we will see much action here until probably the last quarter of 2024 and even more likely happening in 2025. However, as an investor, I would rather be investing early than late because that will hurt your long-term returns. I think investing in the right equities on sale over the next six months will provide good returns when you look at December 31st, 2025.
Financial Planning: Tax Filing Review
With tax season coming up, it is helpful to review your tax return before filing to catch any mistakes. Some of the most common errors include misreporting 1099-Rs, missing rental expenses, incorrectly reporting capital gains, and missing IRA contributions. Any time money leaves a retirement account a 1099-R is generated, even with Roth accounts. However just because a 1099-R is generated, does not mean the distribution is taxable. Roth withdrawals and more commonly rollovers to other retirement accounts are not taxable. We have seen cases where a non-taxable distribution is reported as income due to the receipt of a 1099-R, so if you had retirement account distributions in 2023, make sure you’re only paying for taxable withdrawals. With rental properties it is common to have insurance, property taxes, interest, HOA or management fees, and depreciation all listed as expenses. If any of these are missing or seem low after reviewing the Schedule E, it may be necessary to go back and recount all your rental expenses to confirm you are receiving all possible deductions. When selling assets like a business or property there is no 1099 generated, so it is helpful to double check how a taxable sale is reported on the Schedule D. We’ve seen sales reported as a short-term gain instead of a long-term gain which can result in substantially more taxes. Lastly if you made any contributions to pre-tax retirement accounts like an IRA or SEP, be sure these contributions are reported and deductible. When making a contribution to an IRA, a Form 5498 is generated, but this form isn’t available until after taxes are due. This means you have to remember to report the contribution because there will be no tax form showing it. There’s many possible errors or omissions when filing a tax return, but these are some of the more common ones to keep an eye out for.
Monday Jan 29, 2024
Monday Jan 29, 2024
GDP Report
I would say the GDP report was an extremely strong indicator that the economy is progressing in the right direction. While the growth number in Q4 of 3.3% was impressive compared to the estimate for a 2% gain, I believe the inflation numbers were even more important. The PCE price index increased just 1.7% in the fourth quarter and when looking at the “core” PCE, which excludes food and energy it increased just 2.0%. I believe this points to the possibility that barring any major shocks, inflation should continue to decline towards the Fed’s 2% target on an annual basis as we progress through this year. When looking at the growth in the GDP, it was interesting to see that all components produced positive benefits for the report. With growth of 3.8% in goods spending and 2.4% in services spending, overall consumer spending grew 2.8% and added 1.91% to the headline number. Private investment also grew 2.1% and added 0.38% to the headline number. Within private investment I was happy to see a mild impact from the change in private inventories as it added just 0.07% after a large impact in Q3 when it added 1.27% to GDP. Trade added 0.43% to the headline number as exports grew an impressive 6.3%. Lastly, government spending rose 3.3% which added 0.56% to the headline GDP number. Overall, I believe this report puts the economy in a great spot as we progress through 2024 as the potential for the soft landing is looking more and more realistic.
PCE
More good news on the inflation front as the Personal Consumption Expenditures Price Index (PCE) showed an annual increase of just 2.6% in the month of December. More importantly, core PCE, which removes food and energy and is the Fed’s primary gauge, showed an annual increase of just 2.9%. This was a decline from 3.2% in the month of November and was the lowest 12-month rate since March 2021. This gives me even more confidence that we could come very close to the Fed’s 2% target by the end of the year and that my estimation for 3-4 rate hikes remains in likely. I believe as we exit the year the talk around inflation and the Fed will no longer be as newsworthy as investors move on from the inflation concerns.
Interest Rates
At Wilsey Asset Management, we do expect to see the Federal Reserve to begin reducing interest rates with 3 to 4 cuts starting around the middle of the year. I have heard some estimates as high as six, but I think those are too aggressive. At our firm, we are value investors and we think this will be a positive as the cost of capital could decline for the equities that we hold in the portfolio, which would lead to a nice investment return. If you’re a growth investor, you may not experience the same type of return on your equities. I based this on when the Federal Reserve reduced interest rates in 2001 it did not help growth stocks go up in price and they actually underperformed. So as always be careful on the expensive growth stocks, they don’t always perform as you may hope.
Federal Reserve Balance Sheets
The mainstream media loves to talk about all the negative news they can find, but never seem to want to talk about positive news. I remember the Federal Reserve’s balance sheet assets rising to nearly $9 trillion when they were at their high. They have been quietly reducing the assets on their balance sheet and as of early January they had fallen to $7.74 trillion. When compared to January 2023, that is a decline of nearly $850 billion. I do believe at the current pace and with the current economy by January 2025 perhaps we could see the assets on the Federal Reserve’s balance sheet under $7 trillion. The Fed is currently allowing $60bn of maturing Treasuries and $35bn of agency mortgage-backed securities to run off its balance sheet each month. For reference, before the pandemic the Fed’s balance sheet stood around $4 trillion.
Financial Planning: Rule Changes for Inherited IRAs
The SECURE ACT passed in 2019 but one of the major provisions has not been enforced until now. Beginning in 2020, beneficiaries who inherit a retirement account can no longer stretch distributions out over their life expectancy and instead must deplete the account within 10 years. For accounts with pre-tax funds like traditional IRAs, this can result in a large amount of additional taxable income. This has been the case since 2020, but now in situations where the original account owner was old enough to be taking Required Minimum Distributions, meaning they were in their 70’s or older when they died which will be most people, the inheriting beneficiary now must also take a required distribution each year starting in 2024 in addition to depleting the account in 10 years. This beneficiary RMD has not been enforced in 2020-2023 due to the lack of clarity surrounding this rule, but the grace period is now over. There’s a bunch of people out there who have inherited retirement accounts in the last 4 years and haven’t done anything with them, however if they don’t take their distributions going forward, they will be subject to a 25% penalty. So, people with inherited IRAs need to make sure they take that distribution this year and be prepared for the tax impact of it. Keep in mind this applies to non-spouse beneficiaries who inherited accounts in 2020 or later. For accounts inherited before 2020, beneficiaries will see no change and may continue stretching distributions. Also, spousal beneficiaries may still treat retirement accounts as their own and are not subject to any special distribution rules.
Monday Jan 22, 2024
Monday Jan 22, 2024
Banks and the Economy
Each quarter we get very excited to see what the major banks have to say about the consumer and the economy. Last Friday, JPMorgan, Wells Fargo, Bank of America and Citigroup all reported earnings. The overall comments were the consumer is still strong. The CEO of Wells Fargo said average deposit balances per customer remain above 2019 levels and loans to businesses were up in the quarter. There were some write-offs on commercial office buildings with Bank of America charging off the most at $100 million. In total the four banks charged off $6.6 billion of all loans which was double what it was one year ago. Profits for the four banks in the fourth quarter were up 11% from one year ago coming in at $104 billion. JP Morgan Chase accounted for roughly half of that profit with $50 billion in the quarter. These profits are pretty amazing because in addition to the $6.6 billion charge off for loans, they also had to set aside $9 billion to pay a special Federal Deposit Insurance Corporation (FDIC) fee which was related to the failures of Silicon Valley Bank and Signature Bank. So, I’m happy with the report and do continue to believe 2024 will be a good year for the economy and the consumer, but as always, we will receive our bumps and bruises as the year progresses.
Office Space
It was reported that 19.6% of office space in major US cities was sitting empty in the fourth quarter of 2023. That is the highest number on record which goes back to 1979. The problem is twofold. First, there are still some people working exclusively from home, which I still say as time passes more people will be coming into the office as businesses need to increase their profits and productivity. Second, overbuilding occurred for years with commercial buildings. It was noted that the bulk of the vacant space in buildings were built from the 1950s through the 1980s. If you’re going to get an employee to come back to the office, they don’t want to go back to some rundown building. They are asking for beautiful buildings with coffee bars, gyms, and Pickleball courts. There are some good opportunities for investments in class A commercial buildings that are in booming areas, but investors have to be wary that they are not investing in lower grade class B or C buildings in run down cities.
Consumer Spending
I think someone forgot to tell consumers to slow down on spending. Retail sales were strong in December as they grew 0.6% for the month, which topped the estimate of 0.4%. Looking compared to last year, December sales were up an impressive 5.6%. Areas of strength included food services and drinking places (+11.1%), non-store retailers (+9.7%), and electronics and appliance stores (+10.7%). Areas that weighed on the report included gas stations (-6.6%), furniture and home furnishing stores (-4.7%), and building material & garden equipment & supplies dealers (-2.3%). While this is good news and shows the consumer is still strong, it is leading to concern around the Fed’s rate cut path. I’m still optimistic the Fed can balance the economy and rate cuts to navigate a soft landing.
Financial Planning: Taxes When Selling a Home
A house is considered a capital asset, and when a capital asset is sold for a profit, a capital gain is produced which can result in a tax bill. For homes that have been the primary residence of the seller for at least two years out of the last 5 years, a home sale exclusion applies which reduces the amount of capital gain by up to $500k for a married couple or $250k for a single person. For example, if a home was purchased for $250k then sold years later for $1,250,000, there would be a capital gain of $1,000,000. This gain may then be reduced by the $500k exclusion, resulting in a taxable capital gain on the remaining $500k. If the home was instead sold for $700k after purchasing for $250k, the gain would only be $450k, which the exclusion would completely cover resulting in no taxes on the sale. If there is a taxable capital gain after the exclusion, it will be taxable at the lower capital gain rate as opposed to ordinary income rates on the federal side. On the state side the gain will be taxed as ordinary income as most states don’t have separate capital gain tax brackets. For married couples with an adjusted gross income of about $125k or less, including any taxable gains from a home sale, the federal capital gain tax rate is 0%. So, if a residence is going to be sold, it would be best to sell during a year with low income such as the first year of retirement so that the 0% tax bracket would absorb some of the gain. Once income goes above $125k, the next capital gain bracket is 15% up to an income level of about $615k at which point the tax rate increases to 20%. It is also important to keep a record of any home improvements or selling costs as these can be deducted against the taxable gain. Due to appreciation in the housing market, it is getting more common for home sales to result in taxes, so be diligent about keeping records and be careful when you sell a home so you don’t pay more taxes than necessary.
Monday Jan 15, 2024
Monday Jan 15, 2024
Inflation Numbers
While the headline inflation numbers were above estimates, I wouldn’t say there were really any surprises in the Consumer Price Index (CPI) report. Headline CPI rose 3.4% vs the estimate of 3.2% and core CPI rose 3.9% vs the estimate of 3.8%. Although it was slightly higher than anticipated, progress is still being made on the inflation fight and core CPI registered its lowest reading since May 2021. As it has been the case for many months, the shelter index was the major contributor as the annual increase of 6.2% accounted for about two-thirds of the rise in inflation. Other areas that remained problematic included motor vehicle insurance (+20.3%), admission to sporting events (+14.9%), and motor vehicle repair (+10.3%). One area I found interesting was food, the entire index increased just 2.7% from last year but the divide between at home and away from home has widened substantially. The at home index showed an increase of just 1.3% compared to the away from home index which grew 5.2%. I believe this divide will remain due to the demand for dining out and the wage pressure restaurants and bars are facing. Overall, I don’t think this report moves the needle one way or another for the Fed and I believe rate cuts will start in the back half of the year.
PPI
More good news on the inflation front, as the Producer Price Index (PPI) showed an increase of just 1.0% compared to last year. Core PPI, which excludes food and energy, was up just 2.5% compared to last year. This points to more good news ahead on the inflation front as the PPI is normally a leading indicator.
REITs
With what I believe was the last rate hike of the cycle in the books, one area to evaluate is real estate. I’m not talking about single family homes or private investments, but rather looking at public Real Estate Investment Trusts (REITs). These trade on the stock exchange, but instead of owning a business you will own the real estate that is bought within the trust. I believe there are many great values in the public real estate market at this time when analyzing the cash flows that an investor receives and historically REITs have outperformed the S&P 500 index by approximately 4.5 percentage points in the 12 months following the last interest-rate hike in a cycle. Looking at the last three hiking cycles, REITs have had an average total return of 19% in the 12 months following the last hike in a cycle. I believe the right real estate in the portfolio is a great area to look for value as we look down the road 2-3 years, not to mention many of these REITs have great dividend yields.
Bitcoin ETF
The hype for the bitcoin ETF is at all-time highs, as the SEC has now approved them for investments. We still don’t understand why people would want to buy an ETF that holds just one product like bitcoin. But for those who do, the fees are out and Fidelity has disclosed they will charge .39% annually for holding bitcoin. Their ETF competitors Invesco and crypto firm galaxy will charge 0.59% for holding bitcoin. I’m sure you’ve heard of the Grayscale bitcoin trust which charged an annual fee of 2% on the assets, they have now reduced that fee to 1.5% since it is now an ETF. I still believe this is hype, where the rumor will be far better than the news. I would not be surprised that for 2024 bitcoin is currently trading around its highs for the year.
Financial Planning: Social Security Spousal Benefits
Social Security spousal benefits come into play when one spouse has little to no earnings history. In this case their own social security benefits would be low, so they can claim a spousal benefit from the spouse that did work. There’s a common misconception that it’s ½ of the higher earning spouse’s amount, but the actual calculation is ½ of the working spouse’s full retirement age amount and the non-working spouse would need to apply at their own full retirement age. The working spouse may apply at any point between age 62 and 70 and the spousal benefit is still ½ of their age 67 amount. The non-working spouse may collect as early as age 62, but they will receive a reduced benefit for every month they collect before age 67. Upon reaching age 67, they do not receive a larger benefit by waiting any longer. The only other caveat is the working spouse must be collecting social security for the non-working spouse to collect a spousal benefit. In situations where the higher earning spouse is not collecting social security because they are still working or they are waiting until age 70, this prevents the non-working spouse from collecting. If the non-working spouse has reached age 67, benefits are being permanently lost. This is compounded by the fact that the spousal benefits will only last until the death of either spouse because only the higher social security benefit is retained by a surviving spouse. This is one of several instances where it is better to collect Social Security sooner rather than later.
Wednesday Jan 10, 2024
Wednesday Jan 10, 2024
Jobs Report
There was initial concern that the jobs report was too strong and could point to inflationary concerns. After digging into the report, I believe it is still in line with our belief that the economy is in a good enough spot to have a soft landing and avoid further inflationary pressures. The initial concern stemmed from the fact that headline employment grew by 216,000 in the month of December, which easily topped the estimate of 170,000. While this may sound extremely strong, the previous two months were revised lower by a total of 71,000 jobs. Also, Government was a major contributor in the report as the sector added 52,000 jobs in the month of December. With such a large contribution from the public sector, this shows me the private sector is continuing to soften. Areas of the private sector that were strong included health care and social assistance (+58,900), leisure and hospitality (+40,000), and construction (+17,000). Even after many months of positive gains, the leisure and hospitality sector still remains 1% or 163,000 below pre-pandemic levels. Overall, the jobs market softened in 2023 as monthly gains averaged 225,000 for the year compared to 399,000 in 2022. I believe that those monthly gains will soften even further in 2024. The only concern I had about the report was wage inflation as average hourly earnings increased 4.1% compared to December 2022. This was above expectations for 3.9% and last month’s reading of 4%. Ideally, we would like to see this continue to soften as wage inflation generally pressures overall inflation, but data does always move in a straight line. It is something to keep an eye on, but I do believe wage inflation will also soften in 2024.
JOLTs
According to the Job Openings and Labor Turnover Survey (JOLTs), the labor market is continuing to soften. The report showed that job openings fell to 8.79 million in November. This was right in line with the estimate of 8.8 million, but it was lower than October’s upwardly revised report by 62,000 openings. If it stands, the report produced the lowest level of openings since March 2021. While this continues to sound negative, there are still 1.4 openings for every available worker. While this is lower than the 2 to 1 ratio, we saw for much of 2022, it is still well above historical levels and shows we have a good labor market that is softening from historic levels.
Dividends & Buybacks
Dividends and buybacks for 2023 came in with dividends holding strong at $588 billion which was an increase of 4.2% compared to 2022. Buybacks were still higher than dividends at $780 billion, but company executives in 2023 cut back 15.4% on stock buybacks for the year. Don’t think dividends at 2% or 3% are not worth putting your investment dollars into, going back 100 years dividends as a percent of the total return still account for 38%. For the long-term, investors should have equities in their portfolio that not only grow the stock price but also pay a dividend that the company increases overtime.
Federal Debt
In the first part of January, it was announced that the federal debt for the first time surpassed $34 trillion. Yes, a very large number, but it is important to understand the debt to GDP. Debt to GDP is like looking at your own personal situation where your income is rising and you can take on more debt to either buy a home, a car, or some other asset that you want to finance because you can afford the payments. The debt to GDP peaked at the end of 2020 touching 126% and the most recent data shows debt to GDP has now fallen to under 120% of GDP. If the economy can continue to grow faster than the increase in the debt, the percent of debt versus GDP will go down and put the country in a better financial position.
Financial Planning: Structuring Income for 2024
With the new year comes a fresh slate for your taxes, so now is the time to plan out your income for 2024. If you are withdrawing money from investment accounts, you’ll probably want to take another look at it as tax brackets and RMD’s have changed. Withdrawals from pre-tax accounts are considered ordinary income, Roth withdrawals are tax-free, and withdrawals from taxable accounts are tax-free. Taxable accounts contain capital gains and dividends which are taxable even if you don’t withdraw anything, but they are taxed at lower rates. Depending how you structure where your income comes from will determine how much you have to pay to the government. Ordinary income is taxed the highest, and it’s okay to have ordinary income as long as it only fills up the lower tax brackets. Tax-free income is obviously preferred, but you don’t need to only have tax-free income because then you’re missing out on the benefit of the lower tax brackets. Ideally you want to have the right amount coming from each source to satisfy your living expenses while keeping your income on paper at the most efficient thresholds. For those with lower expense needs, a threshold to plan around is an adjusted gross income of $30,000. At this level there would be no tax because the standard deduction would reduce taxable income down to nothing. $30,000 might seem low, but at that level social security is largely tax-free and if there is some Roth income, it is possible to have $5,000, $6,000, or even $7,000 of monthly cash flow while keeping that annual AGI at $30k. The next threshold is an income level of about $125,000. This is the point where ordinary income moves from the 12% tax bracket to the 22% tax bracket and where capital gain and dividend income moves from the 0% bracket to the 15% bracket. You really have to be careful here because a little extra ordinary income might fall in the 12% bracket but that can push some capital gain income up to 15% so your marginal rate temporarily is 27%. Next is an income level of about $210,000 for those 63 and older. This is when Medicare premiums start to increase based on higher income levels and since there is a 2-year gap between income and premiums, you need to be aware of this at 63 and not 65. Lastly for those with higher incomes, the threshold to watch out for is income of about $415,000 which is where the tax rate increases from 24% to 32%. No matter your income needs, it will help to plan it out because ultimately the goal is to be able to retire sooner with more income and pay less tax on that income.
Tuesday Jan 02, 2024
Tuesday Jan 02, 2024
Santa Claus Rally
If you felt disappointed in your gifts from Santa this year, there is still hope he brings your investments some nice returns. We are currently in the middle of the Santa Claus rally which is the period of time that includes the last five trading days of the current year and the first two trading days of the new year. Historically these seven days have had higher stock prices 79.2% of the time and since 1950 the average gain was about 1.4
Cryptocurrencies
Bitcoin and cryptocurrencies have been rising in 2023. We all know that criminals use cryptocurrencies for kidnapping, drugs and ransom. I was surprised to learn since 2017 hackers have used $2.7 billion for ransom payments. Over the last couple of years, it has approached a half billion dollars per year for crypto payments, perhaps helping push up the price of bitcoin. This has been a major problem considering the ease for the cyber gangs to transfer bitcoin and remain anonymous. Think about this, if you enjoy buying and trading bitcoin, you’re helping the gangs that do these ransom attacks make money off their illegal activities that are crushing companies such as Clorox, MGM Resorts, Caesars entertainment, and even the U.S. Marshals Service just to name a few. And guess who’s paying, yes you the consumer. I have hated cryptocurrencies since their invention because I said they have no real use. I guess unfortunately I was wrong, the criminals seem to love cryptocurrencies. Other than that, they really have no other use and I do believe one day they will be worthless. In the meantime, people continue to help out criminals by buying and holding cryptocurrencies.
Banks
We have had some good returns on our banks in our portfolio this year as some banks have returned over 20%. This is in-spite of the fact that a couple times this year we were in the negative column for returns on these big banks. We believed that since the fundamentals were very strong these banks were worth holding onto. Now with 2023 coming to a close, the big question is what to do in 2024 as interest rates decline as this could be a problem for the big banks. A mistake that small investors make is to not understand the full business of the bank. While loans produce big profits for banks there are other ways a bank can profit than just loans. If rates decline as we think they will, that could accelerate banks operations on the equity side, with more companies paying them to do initial public offerings. Another thing that people probably have no idea about is as rates become lower the banks unrealized paper loss on the bank security portfolio will boost the value of fixed rate securities that they bought when rates were much lower. If this paper loss drops back down, that can help a bank with capital levels and the banks could be open to bigger stock buybacks in 2024. So if you have the right banks in your portfolio at the end of 2023, it looks like next year could be another winner for the big banks. As always at Wilsey Asset Management, we will continue to do our Monday numbers on these companies, along with digging through the quarterly conference calls and financial statements. If things were to change, we could end up selling out of the big banks.
Magnificent Seven
I’m looking for a good return in the right stocks next year. I believe the market will broaden out considering much of the gain this year came from the Magnificent Seven (Apple, Microsoft, Amazon, Alphabet, Meta, Tesla, & Nvidia). One reason I am optimistic is there is still a lot of money held in money-market funds that I believe will be redeployed next year as the rates on cash become less attractive. Total assets held in money-market funds is near record levels at about $6.1 trillion. This is about 29% higher than just before Covid. The pros may even have excess cash to deploy next year. According to a Bank of America survey, the average portfolio manager holds about 4.5% in cash which is down from a multidecade peak of over 6% last year but still substantially higher than the lows of just over 3%. With interest rates likely to fall next year cash will be less attractive which should be a major benefit to stocks.
Monday Dec 18, 2023
Monday Dec 18, 2023
CPI
The Consumer Price Index (CPI) did not show us much new news and I believe it will be enough for the Fed to keep rates steady and put an end to their hiking cycle. The headline number showed just a 3.1% increase compared to last year and the core CPI, which excludes food and energy showed an increase of 4%. The headline number saw a nice benefit from falling energy prices as the energy index declined 5.4% compared to last year and gasoline prices were down 8.9% compared to last year. Although the annual increases showed little to no change compared to last month, it’s important to understand the progress that has been made from the peak inflation levels. In June 2022, headline CPI hit a cycle high of 9% and in September 2022, core CPI hit it’s cycle high of 6.6%. Progress continues to be made in many areas including food at home which showed an increase of just 1.7% compared to last year, but remains stubbornly high in areas like motor vehicle insurance which was up 19.2% compared to last year and motor vehicle repair which was up 12.7% compared to last year. Shelter continues to be the big headwind in the report as the index was up 6.5% compared to last year and accounted for nearly 70% of the total annual increase in the core CPI. While this has taken longer than I anticipated, I still believe this shelter index will see subsiding price increases which should continue to bode well for the overall inflation report.
Government Debt
Many times I’m asked or hear concerns by people about the government debt and I tell them I don’t like where it is, but it’s not a major problem at this point. Currently the debt to GDP stands at 119.47%. Compare that to another developed nation like Japan, who has a debt to GDP of 263%. I do not wish to see the US get into that situation, but you have to notice that Japan has not fallen and it has continued to move forward. One problem with our government debt being so high is that there is only a certain number of buyers looking for debt and if the government is absorbing more debt to cover their bills, it takes money out of the private sector debt market, which can slow down our economy. In summary, we are not in danger territory, but to improve our growth going forward we need to get a handle on our debt and or grow our GDP much more. I still believe there is no need to panic for years to come.
Apple
In the future, the next iPhone you purchase may not come from China and instead it may come from India. Within two to three years, Apple is expecting to build over 50 million iPhones in India. If Apple reaches this goal, that would mean India would make up about 25% of global iPhone production. Currently global iPhone shipments are around 220 million per year, which means China will still continue to account for over 50% of the iPhone production. It does appear that relationships with Apple and the Chinese government are a little strained since the Chinese government banned some officials from using iPhones at work. Apple responded saying any iPhones sold in China will be produced in China. There are unions in India that do put up some barriers for Apple, but so far, they have been able to work with the unions to get things done like having the ability to do a 12-hour workday if production increases are needed. Even with Apple’s popularity here in the US, Samsung is still the global smartphone leader.
Accident Repair
People who own EV’s may be saving money on gas, but they lose that benefit when it comes to repairs if you get in an accident. This is because of such things as how the cars are built and special storage may be required because of lithium batteries to prevent fires. Last year the average cost for a crash of an electric vehicle was $6,587 which was 55% higher than on all vehicles which was $4,215. You may be thinking that’s ok, I don’t have to pay for accidents as my insurance will cover them. Unfortunately, the insurance companies know they pay more for electric vehicle repairs so you’ll pay 44% more for car insurance on an electric vehicle or about $357 per month compared to $248 per month for normal vehicles. You may still love your electric vehicle, but they’ve only really been around for a few years. As time passes, we are finding out more about some downsides that we did not know before.
Financial Planning: The Season of Giving
Whether it’s to charity, church, or family, people tend to be in a more giving spirit during the holidays. If you happen to be in the giving mood, there are a few stipulations to be aware of. When giving to family or friends, there is an annual gift limit that applies. In 2023 it is $17,000 per person and next year it increases to $18,000. This limit is stackable so a married couple may gift $34,000 to as many people as they want and may repeat this for as many years as they want. This gift is not deductible to the giver and does not count as income to the recipient. For extra generous givers, a 529 account may be used to gift 5 years’ worth of gifts at a single time, meaning a married couple could give $170,000 to as many beneficiaries as they want. This applies to beneficiaries of any age and they do not need to use the funds for education as long as they withdraw the entire gift from the 529 before it has a chance to accumulate earnings. Givers may also gift appreciated shares of stock to avoid paying taxes on the gains. In this case, the recipient inherits the gain and will realize income if the shares are sold, which may be at a lower tax rate than the giver. When making charitable gifts, it is important to verify if the donation will be deductible to you. In order to receive a tax benefit, you must itemize your deductions which means you need the total amount of your deductions to exceed the standard deduction. This applies to both federal and state taxes so even if you do not itemize federally, you may still itemize on the state side and receive a tax benefit. Givers may also donate appreciated shares of stock when donating to charity to receive the tax deduction and avoid the capital gains tax. If you liked the investment, you could repurchase the stock which essentially resets your cost basis while you receive the tax benefit from the donation. Keep in mind, when you give to charity, the dollar amount of the tax benefit does not outweigh the amount of the donation so it is still costing you money. In other words, you are still being charitable! Lastly, for people who are over the age of 70.5, have an IRA, and who would like to make a charitable donation, they should heavily consider using the IRA to make the donation directly to the charity. This is called a Qualified Charitable Distribution (QCD) and will offer the same tax benefit as an outright donation, but with a bunch of extra perks. With a QCD, the giver receives the full tax benefit whether they itemize or claim the standard deduction. Since the donation is coming from an IRA, this will reduce the amount of future required distributions and therefore reduces taxable income. Also, a QCD is not included in either the adjusted gross income or taxable income (regular donations only reduce taxable income) which means the donation may also reduce Medicare premiums in addition to taxes. If you plan to give this season, doing it in the most efficient way will give some tax savings or even allow you to give more.
Monday Dec 11, 2023
Monday Dec 11, 2023
Employment
While the headline numbers for the jobs report showed results that beat expectations, when you look closely at the report it shows a softening labor market which is exactly what the Fed wants to see. Nonfarm payrolls in the month of November showed a gain of 199,000 which topped the estimate of 190,000 and the unemployment rate fell to 3.7% which was better than the forecast for 3.9%. The growth of 199,000 is below the average monthly gain of 240,000 and it is also important to point out that some of the gain in November was attributed to the end of the UAW and actors strikes. In fact, while employment in manufacturing increased 28,000 in November there was a 30,000 person increase in motor vehicles and parts as workers returned from strike. The employment in information also had a gain of 10,000 in the month, but motion picture and sound recording industries added 17,000 jobs as the resolution of labor disputes came to an end in the industry. The strikes have created volatility in the numbers over the last few months and that can also be seen in the revision to September where total nonfarm payroll employment was revised lower by 35,000. With these major strikes now behind us, we should be able to see a better reading in these job numbers moving forward. Another major area the Fed likely has their eye on is the change in average hourly earnings, which points to wage inflation. In the month of November average hourly earnings increased by 4.0%, which was the lowest reading since May 2021. Overall, this report points to the concept that a soft landing is still a real possibility. I believe the labor market will continue to soften, which should be good news for inflation and our economy.
JOLTs Report
While it may not look like good news when reading the headline number, the JOLTs report showed exactly what the Fed is looking for. Job openings of 8.73 million in the month of October were below the estimate of 9.4 million and showed a decline of 617,000 or 6.6% compared to the previous month. This also marked the lowest number since March 2021. While this all sounds troubling, it shows the labor market is softening which is what the Fed has wanted to see. It also shows that the labor market is still doing alright considering there are still 1.3 job openings to every available worker. Pre-pandemic this ratio stood at 1.2.
Drug Companies
The Biden administration has opened the door to seize the patents of certain costly medications from drugmakers. The administration has unveiled framework that outlines the factors federal agencies should consider in deciding whether to use march-in rights, which take patents for drugs and shares them with other pharmaceutical companies if the public cannot reasonably access the medications. Officials can now factor in the price of a medication in deciding to break a patent. While this may sound like a nice practice, I do worry about the long-term ramifications. While drug companies often do have nice margins on drugs that succeed, people generally do not discuss the billions of dollars that is spent on research and development for drugs that do not succeed. If drug companies cannot offset those costs with high margins on successful drugs, the industry could have major problems. Also, what would the incentive be to spend billions of dollars on research and development for a new drug, when you could just potentially wait for another company to come up with the solution and then use their patent that has been taken from them by the government? This could ultimately stifle innovation in the industry.
Magnificent Seven
Remember a few years ago the FANG stocks? They have now been replaced by what is known as the Magnificent Seven which are Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta. People still believe index investing is a great way to invest and diversify your portfolio, but when you look at the S&P 500 you should realize that the Magnificent Seven have carried the index to a year-to-date return of around 20%. If you look at that equal weight index it is actually only up around 6% this year. Also, in the index 44% of stocks are showing negative results. You may think you had diversification with the S&P 500 but currently the seven stocks account for close to 30% of the index. These companies stock prices have continued to perform, but history has proven time and time again that any equity trading at such high valuations eventually comes back to reality. When that happens investors in these seven stocks, and also the index will have disappointing returns. Unfortunately, I cannot tell you when it will happen, only that history has proven itself to be right 100% of the time.
Financial Planning: Reviewing Income at the End of the Year
As we get closer to the end of the year, it is getting more important to review income levels and make any necessary adjustments before December 31st. When analyzing income, it is helpful to identify the expected level of adjusted gross income (AGI), the number of itemized deductions (if any), the amount of total taxable income, and the amount of taxable income subject to ordinary income rates. Adjusted gross income is the sum of all reportable income which could be wages, capital gains, interest, IRA distributions, and Social Security to name a few. After tallying AGI, next is the itemized deductions which include mortgage interest, state income and property taxes, charitable donations, and medical expenses. Taxpayers can claim the larger of the itemized deductions or the standard deduction which is $27,700 for a married couple in 2023. These deductions act as an expense which reduces the adjusted gross income and results in taxable income (AGI – deduction = taxable income). From there the long-term capital gain and qualified dividend portion of income can be separated from the other ordinary taxable income as capital gains and dividends are taxed at a lower rate (taxable income = ordinary + capital gains and dividends). From this point a taxpayer can determine what tax bracket they will be in, the tax rate of their capital gains and dividends, and whether their income will trigger any additional net investment income tax or Medicare premiums. Finally, action can be taken such as Roth conversions, realizing gains or losses, charitable donations, or retirement contributions to push income in a more efficient direction.
Monday Dec 04, 2023
Monday Dec 04, 2023
Annual Home Sales
The higher interest rates have put a damper on home sales, which is no surprise. The seasonally adjusted annual sales came in at 3.8 million for October. Not only is that a decline of 4.1% from September, it is the lowest seasonally adjusted annual home sales since August 2010 which was over 13 years ago. As interest rates pull back somewhat going forward, we could see some better homes sales but I do not believe we’ll see any type of boom that will cause home prices to increase substantially.
Delinquencies
You may be hearing about the increase in delinquencies for Americans, but at the end of September just 3% of outstanding debt was in some stage of delinquency. What you won’t hear is back in 2009 delinquency rates hit a record 12% and going back to a more normal economy in 2019, delinquency rates were 4.7%. Here is another fact for you that shows things are not as bad as the media wants you to believe. As a whole, consumers used an average of only 24.1% of their credit card allowance which is still below 2019 when it was 24.6% of the outstanding allowance.
Core PCE
The Fed’s preferred measure known as core PCE rose just 3.5% year over year in the month of October, which was down from 3.7% in September and marked the lowest reading since April 2021. Core PCE excludes food and energy from the headline number. If we look at headline PCE, it was even more impressive due to lower energy prices as it rose just 3% compared to last year, which was down from 3.4% in September. This report is further evidence that inflation is continuing to decelerate and reinforces my belief that the Fed’s interest rate hiking cycle has ended.
Real Estate Market
Just how strange is the current real estate market? Pending home sales, which looks at signed contracts in the month of October dropped 8.5% compared to last year and registered the lowest reading since the National Association of Realtors began tracking them in 2001. This means that home sales are worse now than the Great Recession in 2008/2009. The main issues in the month were high interest rates, which shot above 8% in the month and the limited amount of supply. Given the wild swing in interest rates, I still believe it will take a few years for the real estate market to normalize.