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 Mar 27, 2023
Monday Mar 27, 2023
Retirement Investment Rule
I was disappointed to see Joe Biden veto the resolution to overturn a retirement investment rule that allows managers of retirement funds to consider the impact of climate change and other environmental, social and governance factors when picking investments. Biden says he signed the veto because "legislation passed by the Congress would put at risk the retirement savings of individuals across the country." Unfortunately, I think the veto does the opposite. You know which bank had a good ESG score? Silicon Valley Bank. I believe if fund managers want to consider ESG when investing then they can go for it, but I worry this will allow them to hide behind poor investments like a Silicon Valley Bank in the name of ESG.
Gas Prices
What is California's solution to the highest gas prices in the US? More regulation. I don't understand what these lawmakers look at. The bill will allow the state to set a maximum gross gasoline refining margin and penalize any CA based refiner that exceeds that margin. The bill will also allow for a new watchdog agency and politicians say the legislation creates new transparency over refinery shutdowns, transactions that compose the crucial spot market where retail prices are set, export, and import activity, pipeline activity, and other aspects of the industry. There will also be a new ledger that will be kept for transactions on the gasoline spot market and regulators will have to be informed of all trades. I'm not sure why these CA politicians believe that refiners are only screwing over their state, maybe they should look at the excessive regulations and taxes as a reason for higher prices. The easiest way to help prices would be to encourage supply, this bill does not do that.
Home Sales
When looking at the headline for existing home sales, some may be excited as they spiked 14.5% compared to the month of January. Looking compared to last February though, existing home sales were 22.6% lower. The median home price also saw its first year over year decline in 131 months, or nearly 11 years. It was a minor decline of just 0.2%, but I do believe that the decline will be larger in the upcoming months. Supply continues to remain problematic with just 980,000 homes for sale at the end of February. This continues to produce an imbalanced market with just 2.6 months of supply at the current sales pace. I still do not see a major decline in rates and believe the housing market will continue to struggle in 2023.
Harrison: "Home Buying vs. Renting"
Monday Mar 20, 2023
Monday Mar 20, 2023
Volatility of Stocks
It amazes me how people believe that stocks are too risky and real estate is a much safer investment. Looking back nearly 50 years the truth is stocks have more volatility than real estate, but the returns on stocks far outperform real estate. Using a nationwide real estate Index versus the S&P 500 from 1975 to 2022, a $100 investment in US real estate would be up about nine times to $928, a pretty good return. $100 invested in the S&P 500 from 1975 to 2022 would have grown to $19,351. From 1990 to 2006 there is a period known as the great moderation where real estate outperformed the S&P 500. Looking back on history and realizing how much real estate has increased because of Covid I begin to wonder if we could be in for a long-term period of slowly increasing real estate and after inflation, perhaps a negative return. People tend to look at the recent history which can fool one into making poor investment decisions. People think just because something went up in the past it will continue to do the same going forward, but they do not realize that great advancements can lead to moderation for years to come. Why do people do so poorly in stocks? They confuse the volatility with risk and many times during a short-term decline in equities they will head for the exits and miss the great long-term returns that good solid equities can provide investors.
Consumer Price Index
Inflation in the month of February continued its downward trajectory as the CPI increased 6% compared to last year. This was right in line with expectations and comes in lower than January's 6.4% reading and the peak of 9% in June of last year. Many of the normal culprits remained elevated with transportation services up 14.6% (airfares were up 26.5%), energy services were up 13.3% (electricity was up 12.9% and utility gas service was up 14.3%), and food was up 9.5%. There were some positives as gasoline was down 2.5%, citrus fruits were down 1.2%, beef & veal were down 1.4%, bacon was down 5.9%, major appliances were down 5.9%, used cars were down 13.6%, and televisions were down 14.8%. It is nice to see there are more categories in these reports showing a decline. When looking at core inflation, which backs out food and energy, it came in at 5.5%. A heavy weight in the report was shelter as costs were up 8.1%, if we backed this out from the core inflation it would have been 4%. I remain very optimistic over the trajectory of inflation especially when we consider the shelter index. It's important to remember that the index lags real time data as it takes time for leases to roll over into a new contract. Landlords typically renew leases every 12 months, which means current price dynamics won’t be reflected in new contracts for a year. I still believe CPI could end 2023 around 4%.
Producer Price Index
The Producer Price Index (PPI) came in with a huge surprise, declining 0.1% in the month of February vs the expectation for a 0.3% increase. Compared to last February, the PPI grew just 4.6% which was down from January's annual gain of 5.7% and well off the peak level of 11.7% in March 2022. This was the lowest annual increase since March 2021 when it was 4.1%. Retail sales did show a 0.4% decline in the month, which could be good news considering it indicates a slowing economy. Year-over-year retail sales were up 5.4%. Food services and drinking places remained a big destination for consumers dollars as sales were up 15.3% compared to last February. Non-store retailers were also strong, up 8.5%, and grocery stores were up 5.8%, likely benefitting from higher food prices. Areas of weakness included electronics & appliance stores down 2.8%, motor vehicles & parts dealers down 0.2%, and gas stations were down 1.9%. I continue to believe that the data is showing a softening in the economy, which is providing relief to the high inflation levels we experienced last year. I continue to believe the Fed should hold rates where they are for the time being. With that said I still do not believe they should cut rates at all in 2023.
Gas Prices
You may not be able to tell by the price of gas at the pump here in California, but oil has dropped down to under $70/barrel this week. Remember last year, about nine months ago when crude prices hit $122/barrel? I’m glad those days are gone. The reason for the decline is with the bank failures and also a big selloff in the international bank Credit Suisse some are thinking the economy is slowing down and less oil will be used. It will take a little bit of time for the big reduction in the price per barrel to flow through to the pump at the gas station, but it may not last long. We have the reopening of China's economy which could increase demand for petroleum and remember all the oil that was taken out of the strategic petroleum reserves? Well, that must be replaced. The talk was they should be buying it back anywhere between $67/barrel to $72/barrel. Let’s see if the government follows through with their plan. If they do, that would be more upward pressure on the price of oil.
Harrison’s Topic: “Where should you put your cash?”
Monday Mar 13, 2023
Monday Mar 13, 2023
Jobs Report
The headline jobs number of 311,000 easily topped the estimate of 225,000 but marks a slowdown from January's level of 504,000. Leisure and hospitality remained strong with an addition of 105,000 jobs. With this solid number, the sector is now just 2.4% or 410,000 jobs below the February 2020 level. Other areas of strength included health care and social assistance (+62,800), retail trade (+50,100), government (+46,000), professional and business services (+45,000), and construction (+24,000). Information was the weakest group as payrolls declined by 25,000 and transportation and warehousing also had a decline of 21,500. The unemployment rate came in at 3.6%, which was above the expectation of 3.4%, but the participation rate increased to 62.5%. This was the highest level since March 2020, but still remains below the pre-pandemic level of 63.3%. On the inflation front, I was happy to see the increase in average hourly earnings of 4.6% missed the estimate of 4.8%. While this is higher than last month's 4.4% gain, most of 2022 saw gains of over 5%. Overall, the report may have been too optimistic for the market and could fuel further fears of more rate increases. I do continue to believe the labor market will continue to see gains, but at a much softer rate than the last couple of years. There's nothing that really concerns me in this report.
Big Banks
Today SVB bank also known as Silicon Valley bank was closed by regulators. At first thought this sounds scary since this is the first bank closure since Washington Mutual back during the Great Recession. But when one digs under what assets this bank held, it is no surprise as they were very speculative. The assets of $212 billion pale in comparison to JP Morgan Chase with $4 trillion in assets but also the quality of assets or the lack thereof is what caused the bank's failure. Many of the assets were for either venture capitalists, or startup companies in the risky tech and life science world. The bank was also very loose with its valuations, where they would loan on the equity value before the stock would even go public. They also went as far as to loan against wineries wine inventories, which accounted for 2% of the asset value of the bank. It is important to note that when the economy slows down that is when all the speculative businesses come to light. It is important to understand that the big banks will not follow this road, because they base loans on true assets and income.
Stock Buybacks
The 1% excise tax that the government imposed this year on companies for doing stock buybacks has not seemed to change the course of companies buying back their stock. Through February 17th, $220 billion of stock buybacks were authorized by companies which was an all-time record. We continue to support stock buybacks by companies as long as they are buying their stock back at a good price and not borrowing money to implement the buyback.
Oil Companies
Oil companies have made a lot of changes over the last couple of years and are being run more as a business looking at profits and cash flow rather than just production. It was estimated in 2019 that 15% of executive bonus compensation was based on production goals. By 2022 that was just 6%. The companies are now looking more at free cash flow which 18% of the incentive will come from hitting those goals, up dramatically from 7% back in 2019. There are also more incentives now for hitting environmental, health and safety goals. This will probably hurt production going forward with estimated growth of only 3% this year. Looking at it from a business perspective, it makes more sense to run your business based on cash flow and profits, rather than just production.
Harrison: "Big tax bill? Here’s some causes and solutions.”
Monday Mar 06, 2023
Monday Mar 06, 2023
Economic News
Some people wonder why I don’t get so upset over the negative economic news that comes out. In the first half of last year, I kept saying yes it will be a difficult year but we’re not going to have a major recession. Looking back at some headlines, in March 2022 Goldman Sachs economists were forecasting a 20 to 35% chance of an economic contraction within 12 months. The CEO of JP Morgan Chase, Jamie Dimon, used the word hurricane in the economy going forward. Bank of America predicted a mild recession would hit before the year closed. Fast forward from the fourth quarter of 2021 to the fourth quarter of 2022, the US economy grew at 1%. It’s easy to be negative but one really must look at the data and say where will we be 12 to 24 months from now. I think our economy will continue to move along and inflation will continue to decline slowly. With that said I will continue to invest in good quality public companies and see what they will be worth in the next 12 to 24 months.
Apartment Rent
As I suspected, the large increase in apartments is putting downward pressure on rents. Nationwide rents have fallen about 3 1/2% since last August. It was also the first time in five years that rent fell every month over the preceding six months. If one drives almost anywhere in San Diego, you see new apartment buildings going up and nationwide, we are seeing the biggest supply of apartments delivered since 1986 with nearly a half million apartments coming online. This is good for two reasons. First is that obviously people will be spending less on rent and the second reason is this will ease some of the inflation pressure since housing is a big part of the CPI.
Capital Gains Taxes
One of the major benefits of being a long-term investor is the benefit of capital gains taxes. Rather than ordinary income rates, at the federal level gains are taxed at 0%, 15%, or 20% as long as the position is held for more than 365 days. In 2023, the standard deduction and income thresholds for capital gains increased which is a benefit for investors. In fact, you may qualify for the 0% long-term capital gains rate with taxable income of $44,625 or less for single filers and $89,250 or less for married couples filing jointly. This means you still may be able to make over $100,000 as a married couple and be in the 0% range after the standard deduction.
Crypto Market
Another hit to the crypto market! Silvergate Capital (SI), a cryptocurrency focused bank, plunged 58% in a single day of trading this past week. The reason for the massive decline was the company delayed its filing of the annual report as it needed more time to assess additional losses, regulatory scrutiny, and the big one its ability to continue as a going concern. In other words, they may not be able to operate for another 12 months, this is a major hint towards a potential bankruptcy. I've stayed away from crypto, and I'll continue to stay away from crypto. We've seen the fall of FTX and other exchanges and now the major concern from Silvergate leads me to believe there are more issues around the corner with more exchanges. This also continues to fuel my belief that the argument for wider adoption of these cryptos is fading fast.
Harrison: "Alternative Investments in Retirement Accounts”
Monday Feb 27, 2023
Monday Feb 27, 2023
Home Sales
For 12 months in a row existing home sales have been declining. Recent numbers coming out from December show a drop of 36.9% from December 2021, month over month we saw a decline of 0.7%. Not helping the situation is the median existing home sale price did increase 1.3% from a year ago to $359,000. The inventory of unsold homes has climb to 980,000 as of the end of January but that still is a low amount of supply at 2.9 months. Interest rates on a 10-year treasury continue to increase, this will put more downward pressure on the housing market throughout 2023. We will continue to see declining numbers in new and existing home sales.
Credit Card Fee’s
Running a small business is very hard, one must handle all the expenses, new accounts, and customers. But one thing that irritates me is when I go to a small business, and I use my credit card and they try to ding me for the 3% credit card fee. To me it’s just an easy out for them but it really is nothing more than a cost of doing business and is a convenient way for the customers to pay for their product. I’ve been going to the car wash place in Scripps Ranch for over 20 years and the last time I was there they charged me the 3% credit card fee, I told them that’s the last time they will see me. I’d rather see a business increase their prices and include all their expenses then try to hit me with a 3% credit card fee. What is next? Do they want us to pay their utilities? At my firm, we do allow our clients to pay for their financial planning fees by credit card and I would never think of charging them a 3% fee. I’m all for small businesses, but if you must charge a 3% credit card fee, you’re doing something wrong or you’re being greedy.
Inflation Decreasing
I continue to say that I believe we will see more of a decrease in inflation overtime because I look at the raw cost of the goods and the cost of shipping those goods. One cost is shipping a standard 40-foot container from China to California. The peak cost was in September 2021 with a cost of $12,000. Today the average cost for that same 40-foot container is $1444. That is a decline of $10,556 or 88%. Another reason why I think prices will continue to fall slowly going forward.
Short vs. Long Term Thinking
Last week’s strong economic information means we will probably see short term rates on the three- and six-month T-bill perhaps climb to 5% in the near future. Don’t get too excited about this. I want you to remember the old story about the tortoise and the hare. Do not drop your high-quality equities that are trading at reasonable valuations with decent dividends to rush into a 5% short term yield. Your short-term thinking will destroy your long-term investment results. Based on what we have in our portfolio, I would even be willing to bet that we should outperform the short-term treasuries. Remember in the fall equities are not looking where they are today but in the spring of 2024.
Tuesday Feb 21, 2023
Tuesday Feb 21, 2023
ChatGPT
More hype has come into the markets, and it reminds me of the meme stocks and the cannabis companies. This time it is AI technology, and it is particularly around ChatGPT. Even large companies like Microsoft have seen a jump of nearly 20% in their stock price. The problem is ChatGPT doesn’t have an AGI or artificial general intelligence in which machines are able to learn and think for themselves. ChatGPT derives its information from word relationships found on the Internet and we know all the information on the Internet is not reliable which has led to incorrect responses from these AI products. So, while the excitement about ChatGPT is driving up stock prices, consumers will become disappointed with the responses they receive from ChatGPT, and I believe the stock prices will fall back again. One other potential pitfall could be litigation. We know how much our country loves lawsuits. To begin with who will be liable for misinformation? Also, another question mark is copyright protection. Copyrighted works are being used to train these AI services without consent, that could create more problems. For now, I'll avoid the hype!
Retail Sales
People may complain about the economy and inflation, but they are still spending. Retail sales in the month of January increased 3% from December, which easily topped the estimate for a 1.9% gain. Compared to last year retail sales were up 6.4%, which was right in line with the CPI reading of 6.4%. Compared to January 2022, every category in the report showed a gain in sales except for electronic and appliance stores which were down 6.3%. The big winner in the report continues to be food services and drinking places as they saw a gain of 25.2% compared to January 2022. Other big gainers included grocery stores up 6.6% and clothing and clothing accessory stores up 6.3%. With higher energy prices gas stations continued to see gains with an increase of 5.7% compared to last year. This is much more muted as we are now lapping the higher energy prices in 2022. All in all, I'd say this was a very strong report showing the consumer is still active. It confirms my belief that if we see a recession, it will be very mild.
Option Contracts
There’s a lot of risk in the market, especially with the technology companies and your expensive growth stocks. One indicator is the number of option contracts that are traded on a single day. In early February, 68 million option contracts were traded in a single day, that is an all-time record. I think this could also mean we could see a big drop again in the expensive growth stocks.
2023 Inflation
The January CPI report was a disappointment today as inflation climbed 0.5% compared to December and 6.4% compared to last January. This is compared to the estimates for respective increases of 0.4% and 6.2%. The headline number also did see a small decline from December's gain of 6.5%. Food costs remain stubbornly high with prices gaining 10.1% year over year and food at home costs grew even more with an 11.3% increase. Energy also was a problem in the report as there was an 8.7% increase. Electricity was a big contributor as it was up 11.9% compared to last year. Shelter costs were up 7.9% compared to last year, and the monthly increase of 0.7% accounted for about half the monthly gain on the index as it accounts for about 1/3 of the entire index. I've talked about this in the past, but I do believe this component will soften throughout the year which would have a major impact on the overall CPI. There were some positives in the report as used cars & trucks saw an 11.6% decline compared to last year, televisions were down 13.2%, computers were down 6.2%, major appliances were down 3.9%, and bacon and related products were down 3.9%. I continue to believe that inflation will continue to decelerate as we progress through 2023, but it will likely remain a bumpy ride.
Monday Feb 13, 2023
Monday Feb 13, 2023
Short-Term Rentals
We've talked a lot about the affordability problems when buying a new home, but one area we haven't discussed as much is the real estate investor. The short-term rental craze I believe created new investors who thought it would be easy to make money in real estate. Looking at the numbers, in 2021 investors made up 24% of single-family homes and in the first half of 2022 that number was still around 22%. This compares with a range of 15-16% annually going back to 2012. Unfortunately, things have started to change in the short-term rental market. According to the Wall Street Journal, one investor in Encinitas was able to rent her 2-bedroom condo for $1,000 per night on a holiday weekend, but she has had to drop her rates to $275 per night due to waning demand. The problem is not the demand, but it comes from the oversupply in the market. In fact, nights stayed were up 21.3% in the month of October when compared to last year, but listings surged 23.3% during the same time frame with 66,000 new rental properties listed in the month of October alone. With rising interest rates and lower rental rates, it becomes a whole lot harder to justify an investment in these properties and some prior investors could become at risk of not being able to keep up with the cash flow required to maintain the house. I believe this will lead to less demand in the housing market and a potential source of supply if investors need to sell underperforming properties. These factors could help bring down home prices even more.
Young Investors
Young investors across the nation who experienced big losses in investing are now pulling away from investing in stocks. Goldman Sachs estimates households will pull as much as $100 billion in 2023 from the stock market. This will hurt companies like Robinhood who encouraged young traders to do a lot of trading. Back in March 2021 Robinhood had as many as 4 million trades per day, that has now fallen to about 1.2 million trades per day. I personally think this is a good thing, many young investors just thought they could buy anything, and it would go up. Then they started using leverage and options which magnify the risk and that ultimately cost them even more. I have said for years if you’re averaging around 10% on your money over a 7-to-10-year period you’re doing pretty good. Unfortunately, some younger investors laughed at that and now have nothing left. And worse than that, they won’t come back to investing for many years missing out on some good growth over the years to come. Investing takes a lot of work and it’s not something that can be done quickly by trading stocks. There are very few people who can invest over the long term as their impatience and lack of discipline costs them good results.
Super Bowl Betting
America is excited about Super Bowl betting this year! A record 50.4 million Americans are expected to wager bets on the big game this Sunday. This a massive 61% increase from last year's record of 31 million Americans that said they would place a bet. In terms of the dollar amount this year it is anticipated there will be $16 B worth of bets on the game, which is more than double last year's amount of $7.6 B. From the financial standpoint, I must say this is a positive for the economy as consumers clearly have enough confidence and comfort in their financial situation to place bets. Personally, I won't be partaking in any bets this year. One thing that will be missing from this year's Super Bowl is those crypto commercials, especially from FTX. As for my pick, I'm going with the Eagles!
Eurozone
Approximately 6 to 9 months ago it was thought that the Eurozone was going to have an economic downturn that would destroy the region. That was mostly based on the fact that Russia had invaded Ukraine. In a surprise turn around, the Eurozone experienced economic growth in 2022 of 3.5%. That’s not the only surprise. It also surpassed the economic growth of the United States and China.
Unemployment Rate
Last week we saw the US unemployment rate drop to 3.4%, a low not seen since 1969. Keep in mind that is the average across the country so there are states that are below the 3.4%. The state of Utah has the lowest unemployment in the nation, coming in at 2.2%. You may be asking what state has the highest unemployment in the nation? That honor would go to the state of Nevada with an unemployment rate of 5.2%.
AI & Home Prices
There is a lot of buzz around ChatGPT and Bard from Google. I'd be very careful falling into the hype around this AI trade. Just a couple of thoughts here for potential risks. At this time the chatbot can contain factual inaccuracies, one that was pointed out was inventing fictious names or books that don't exist. With all the concern around misinformation that was spread on social media, how quickly will lawmakers need to step in and regulate this AI. Also, there are potential cases that could be extremely harmful to society liking hackers using it to write malicious code or students using it to do their homework. I do see there are some potential benefits here, but I do believe we should be extremely careful with this technology, and it could be years away before it can be trusted. While there are some exciting trends we will miss as value investors, I never like to fall for the hype and get burned. Some examples of this in the past include 3-D printing, pot stocks, and blockchain.
Auto Insurance
I was listening to a conference call from one of the insurance companies that we hold in the portfolio. Their earnings were down mostly from bad returns on the auto insurance side. They stated two reasons. First, increasing used car costs which by the way are coming down and will help the insurance company. Second, were higher settlement claims. In 2022 settlement claims in the United States were over $62 billion. This ultimately is a cost that is passed on to consumers. I have talked about this before with some overzealous attorneys increasing settlement costs. Don’t get me wrong, there are some good attorneys out there, but there are some that are very greedy. What this does as I’ve been saying all along, and this was also stated from the insurance company, is they now must raise insurance premiums. The company also pointed out that they will be pulling out of five states. This is where the consumer loses because they must pay higher premiums for excess settlements from those bad attorneys and there’s less competition in those five states and auto premiums will probably be increasing in those states. More competition means lower prices, less competition, higher prices.
Movie Theaters Post Covid
Movie theaters have had a hard time since Covid returning to the pre-pandemic days when they had profits. AMC has come out with what they call Sightline for shows that start after 4 PM. You will now have assigned seats in the movie theater and pay more for prime seats which are in the middle of the theater. If you want to sit down in front and break your neck that will save you some money. I guess the days of standing in line and rushing to be the first in the movie theater to get the best seats are over. I don’t think this will do much to improve the stock price which currently trades around $5/share. If you remember, this is one of those meme stocks and back in June 2021, the stock traded as high as $62/share.
Daycare
We continue to talk about the strong job market and how there are 11 million jobs that remain open. One obstacle for potential employees, specifically moms, has been daycare. There are currently about 58,000 fewer daycare workers in the US compared to February 2020. The cost of daycare for infants has also skyrocketed ranging anywhere from $8,000/year to as high $17,000/year in major metro areas. The cost may have to go higher because the average daycare employee earns about $19.74/hour. They just can’t compete with the national average of private sector workers earning around $32.93/hour. What is starting to happen is one of the spouses may elect not to go to work and instead stay home with the kids
Harrison - "When to file your taxes"
Monday Feb 06, 2023
Monday Feb 06, 2023
Labor Market
Even with all the negative headlines, the labor market data remains resilient. The recent JOLTs report for December showed job openings increased 572,000 to a 5-month high of 11 million. This easily surpassed the estimate of 10.25 million openings and would mean there are 1.9 job openings for every available worker. Quits continued to remain elevated at 4.1 million. This is down from the peak in 2021, but if you look at the chart below you will see prior to Covid we hadn't seen a quits level above 4 million. Layoffs did climb slightly in the month to 1.5 million, but looking at the pre-Covid levels we are still below historical norms. I would continue to say we will see a reversion to normalcy rather than a crisis.
Jobs Report
The jobs report was impressive to say the least. Headline payrolls for January increased 517,000, which blew past the estimate of 187,000 and comes on top of upward revisions to November and December which netted a gain of 71,000. The household survey showed an even larger gain at 894,000 and produced an unemployment rate of 3.4%, which was the lowest level since May 1969. Job gains occurred in every major sector with leisure and hospitality leading the way with an addition of 128,000 jobs, professional and business services added 82,000 jobs, government added 74,000 helped by the end of a strike from university workers, and healthcare rose by 58,000 jobs. The leisure and hospitality sector are now just 2.9% or 495,000 jobs below is February 2020 pre-pandemic level. Wage inflation was also reasonable with a 4.4% gain compared to last year. This was a deceleration compared to December's gain of 4.6%. The only major negatives I see are the participation rate and employment to population rate as they both remain below pre-pandemic levels. The participation rate came in at 62.4% vs 63.3% pre-pandemic and the employment to population rate was 60.2% vs 61.1% pre-pandemic. Overall, I'd say this was a very strong report and it continues to provide data that makes me believe we will not have a major recession.
Tailored Shareholder Reports
Usually new regulation complicates the issue rather than clarifies it for the consumer. Recently, the SEC came out with a final rule called Tailored Shareholder Reports (TSR) which deals with mutual funds and exchange traded funds (ETFs). What I like about the rule is it mandates a 2-3-page document that will outline a fund's performance and fees, and give a brief summary along with some other information using plain English and charts. For those that invest in mutual funds and ETFs, this could be a good tool for comparison where to invest. If you’re working with a broker who is putting your investments into mutual funds, or ETF’s I’d recommend asking for the TSR on the investments they are putting you in or recommending.
Super Bowl Streaming
The Super Bowl is now less than two weeks away and if you cut your cord from cable, you may have problems watching the Super Bowl. Last year it was easy because NBC carried the game, and you could simply switch over to Peacock and pay their $9.99/month subscription to watch the game. This year the big game is on Fox, and they don’t have a streaming service. You may have to look into sites like Hulu Plus, YouTube TV, or Sling TV. These are just a few suggestions but be prepared to pay more than $9.99/month. One other option you do have is good old rabbit ears antennas, which actually have advanced pretty well over the years. Fox still broadcasts over the air so that may be a free alternative. I’d start thinking about this soon, if you wait until Super Bowl Sunday morning, you may be running around to your neighbor's house to try to catch the big game.
Harrison – “Tax planning with the new RMD age”
Wednesday Feb 01, 2023
Wednesday Feb 01, 2023
Personal Consumption Expenditures
The Personal Consumption Expenditures index (PCE) for December came in with an annual growth rate of 5.0%. This is down from the November level of 5.5%. Looking at the Core PCE, which strips out energy and food and is the indicator, the Fed closely monitors the inflation number looks even better with an annual growth rate of 4.4%. I've heard people continue to use the CPI and say that inflation is running at more than 3 times the Fed's 2.0% target. That is extremely misleading as the Core PCE is not nearly as high as the CPI. Overall, we still have work to do on inflation, but it is still decelerating at a good rate and I'm optimistic it will continue to improve as we progress towards the end of 2023. My projection is still that we will see one maybe two quarter point hikes from the Fed and then that rate would be maintained through the rest of the year. I do not see any rate cuts this year from the Fed as I believe the economy will be better than many fear.
Tesla’s Reported Earnings
Tesla reported earnings and they did very well. This sent the stock up as much as around 11% in trading. I have been against Tesla for years not because it’s a bad company but because it was too richly valued. That is now changing, the earnings for December 2024 stand at $5.79 with a price of the stock around $150 that gives a forward PE of 25.9. That's not great, but not as terrible as in the past. When the stock was at the low of $102 that would’ve been a forward PE of 17.6, much more reasonable. I’m not saying that Tesla is a buy, it still has more to drop or needs to see a larger increase in earnings for it to be considered a value. It is getting close, maybe in a year or two it could become a buy?
Home Price Affordability
Even with the recent declines in home prices, there is still a major affordability problem. In fact, looking at an affordability index from the National Association of Realtors (NAR) shows we are still out of line with pre-pandemic levels. The index is based on home prices, median family incomes and mortgage rates. Over the 12 months prior to Covid the index averaged 162 and the current estimate for January is a level of 106. The lower the number means the higher the problem is for affordability. There are a few ways the number could get back to the pre-pandemic level of 162. First, the average mortgage rate would need to fall to about 2.6%. Next, family incomes would need to increase by about 50%. Finally, prices for homes would need to fall by about another third. The most likely case is a combination of all 3 factors, but unfortunately, I don't see rates coming anywhere close to the 2.6% level nor do I see incomes spiking close to 50%. Therefore, I believe there is still more downside for home prices ahead.
Debt Ceiling
If you’ve been wondering why the yield on the 10-year treasury has been dropping it is because they have stopped issuing notes since we hit the limit. We just hit the debt ceiling, but anticipation of hitting that mark put a lot of downward pressure on the yield as demand and purchases of 10-year treasuries increased in anticipation of the debt ceiling. Once the limit is increased, then the government can go back to issuing more 10-year treasuries, and I believe the yield will increase.
Layoffs and Over-Hiring
You have heard about some major tech companies making big layoffs of 10,000 maybe 20,000 people and think, "oh my gosh this is huge." But if we go back just a few years to 2019, you will see that some companies may have over-hired. For instance, Meta-platforms back in 2019 had 44,942 employees. Now with data available for the 3rd quarter of 2022, the total headcount was at 87,314. That's an increase of 42,372 employees or over 94% in just a few years. Alphabet also over-hired with 2019 employees equaling 118,899 and as of the third quarter last year they increased their headcount by 67,882 to 186,779. The worst company with overconfidence in future growth would have to go to Amazon which had a 2019 headcount of 798,000 employees. That ballooned almost 100% to 1,544,000 employees, an increase of 746,000 employees. You may hear about more layoffs in 2023 for some tech companies, but keep in mind the 2019 numbers and realize that some companies let their hiring policies get out of control.
Stock-Based Compensation
Companies that use stock-based compensation when their stocks were rising made both employers and the employees happy. But what happens when the stock goes in reverse? No one is happy and shareholders lose the most. As a stock declines in value employees want more shares to equal what they received before, and employers need to keep the game going. They will issue more shares, but what that does is dilute future earnings even more. Be careful of investing in companies that excessively use stock-based compensation, the stocks could be flat for many years. Two companies that come to mind are Snap and Roku.
Federal Reserve
You may not know it, but the Federal Reserve has the ability to actually make profits. In 2021 the Fed earned $107.9 billion in profits but in 2022 that profit was cut in half to $58.4 billion because of rising interest rates. You may be wondering where the profits go. The Fed does not get to keep them. They send all their profits to the US treasury and if the Fed loses money, they create an IOU on the balance sheet. This is known as a deferred asset. They will carry that IOU until they once again make profits, and they will pay that IOU down before sending any more profits to the treasury.
Declining Attention Span
In a recent research study at the University of California Irvine, it was no surprise to learn that the attention span of both younger and older people has declined over the years. Back in 2004 people on average spent 150 seconds on a screen before switching. It has now declined to 47 seconds, a drop of over 2/3. The research also found that on average, people check their inboxes 77 times a day. I was surprised by that number, but it is on average. To restore our attention spans, people need to be more disciplined about when they check emails and use social media. If you only check it during certain times of the day, your attention span will increase, and your stress level will decrease. Try it. Let me know what you think.
Working From Home
Some employees working from home are still living in the Covid years thinking that they control the narrative of working from home. I remember people saying this was the new way of doing business. I said no it will go back to people going into the office. Those employees who are saying they would rather quit than go back in the office, be prepared to be unemployed. Those employees forget that if it’s so easy to work from home and not go in the office, then the employer can find someone overseas or in other places who will do the same job remotely for perhaps half the pay, and no health insurance or 401(k). I think over time we will see more employees heading back into the office because like it or not, a business is in business to make a profit not provide a social service.
Offshore Oil Drilling
There’s some good news long-term on the energy front. As of December 2022, approximately 600 rigs worldwide are available to lease for offshore oil drilling. It has been estimated that approximately 90% are working or under contract to work in the future. Looking back just five years, that number was only 63%. Another positive, based on demand, is contractors are now receiving about $400,000 a day for leasing their drill ships, that is nearly double what it was just two years ago. This is a big positive to the supply side of the equation for oil.
Q4 GDP
The headline advanced reading for Q4 GDP came in at 2.9%, which surpassed the estimate of 2.8%. Consumption (adjusted for inflation) was up 2.1% and 1.42% added to the headline number as goods were up 1.1% and services were up 2.6%. Residential investment was hit extremely hard as it was down 26.7% in the quarter and subtracted 1.29% from the headline number. Overall, private investment had a benefit of 0.27% to the headline number as the change in private inventories added 1.46% and nonresidential had a small positive contribution of 0.09% which was mainly due to an increase of 5.3% for intellectual property products. Net exports added 0.56% to the headline number as imports fell 4.6% in Q4, but exports fell at a lower rate of 1.3%. Government consumption added 0.64% to the headline number as spending grew 3.7%. A large portion of this came from federal non-defense spending which jumped 11.2% in the quarter. Overall, the report was lackluster and points to an economy that is decelerating.
Chevron Buyback
Chevron announced a $75 billion stock buyback to the shareholders. I can already hear the government and others saying how dare they do that; they should take that money and invest it in oil production to reduce prices. First off, shareholders take the risk of investing and should be rewarded when a company does well. The job of the CEO is to produce a good product and have returns for the owners of the company who are the shareholders. Why would a company invest billions of dollars into producing oil when down the road we know demand will be lower as we see more electric vehicles on the road not using oil. This is the best strategy for a company with a long-term time horizon. Remember, the government did add this year a 1% excise tax on stock buybacks which means the government will receive $750 million in extra tax from Chevron as it completes this buyback. Will that money go to something productive? Or will the government squander it away and waste it as usual on some silly programs. If you don’t like the company don’t buy their stock or gasoline.
Peloton
I keep seeing the commercial for Peloton that 92% of owners are still active on their Peloton. As the stock has now fallen to around $12-$13/share from its all-time highs of around $170/share, I’m curious how many people are still using their Peloton? I'd still rate this stock a sell and would like to see it become a profitable company before investing.
S&P 500
One of my major concerns for the S&P 500 index remains its valuation. At the end of 2022 the index was trading at a Forward P/E of 16.65. That was down from the recent highs of over 22x, but I would still not consider it an attractive valuation as the 25-year average has been 16.82. There are two ways that the S&P could grow. There could be earnings growth, or the multiple could expand. For earnings growth I have seen estimates of around 4-5% earnings growth, which I think could still be optimistic. This means if the multiple were to remain constant, the S&P would grow around 4-5% this year. As for the multiple expansion, with interest rates rising and slowing growth I do not see the case to have the multiple rise. This is why I continue to believe the right stocks will outperform the market in 2023.
Harrison : "Shared Equity Agreements"
Monday Jan 23, 2023
Monday Jan 23, 2023
Inflation
Big news on the inflation fronts today as the Producer Price Index (PPI) in December showed a monthly decline of 0.5% vs the estimate for a decline of 0.1%. Year over year the index showed an increase of 6.2% which is the lowest annual increase since March 2021 and is far from the high in March 2022 of 11.7%. This is a major positive as for over a year now I've been saying the CPI won't come down until the PPI comes down, as producers have needed to pass the higher costs onto consumers. A problem in the report is energy was a major benefit as the energy index fell 7.9% in the month and gasoline in particular was down 13.4%. Given the current landscape I do expect energy prices to increase from current levels, but not enough to make a dramatic difference to the inflation reports. Overall, this report gives me confidence in my estimate that we will see inflation in a range of 4-6% for 2023.
Consumer Spending
Retail sales for December fell 1.1% compared to the prior month, this missed the estimate of 0.8%. Looking at the results compared to last December, retail sales climbed 6.0%. This did not keep pace with the CPI increase in the month of 6.5%, which likely means most if not all of the growth in retail sales was a function of higher prices. Areas that saw good growth compared to the prior year included non-store retailers as they were up 13.7%, food services and drinking places were up 12.1%, and grocery stores were up 7.3%. With lower gas prices in the month, gas stations saw a month over month decline of 4.6% but compared to last December sales were still 5.2% higher. Areas that struggled in the month continued to be electronics & appliances as sales fell 5.6%, department stores saw a decline of 0.6%, and furniture & home furnishing stores had a small gain of just 0.3%. I would say this report wasn't good, but again it wasn't overly concerning. It appears consumers are still spending but continue to prefer experiences rather than the products they loaded up on during Covid.
Debt Ceiling
You may have seen the news about the concerns regarding the debt ceiling of $31.4T being reached. Frankly, I'm not too concerned about major problems stemming from this as it has been a recurring issue. In fact, from 1997-2022 the debt ceiling has been increased 22 times, which is essentially once per year. I do believe a deal will be reached to avoid jeopardizing the creditworthiness of the government. My concern is that we need to fix spending as we should not have to keep increasing this debt ceiling every year.
Costco Buyback Program
I saw Costco announced a stock buyback program but looking at it closely it's unimpressive to say the least. The program authorizes $4 B worth of buybacks but that is through January 2027. The previous authorization was set to expire in April of this year and was adopted in 2019 with the same $4 B limit. Interestingly, the company only repurchased $1.4 B worth of shares under the program. Looking at the market cap for Costco of about $210 B, if the $4b was fully implemented that would only represent 1.9% of the overall shares. Also, considering the shares trade at about 30x 2024 earnings I believe repurchasing shares at this level would be a waste of capital.
Harrison – “Life Insurance Review”
Monday Jan 16, 2023
Monday Jan 16, 2023
Consumer Price Index (CPI)
As anticipated, the CPI report showed a deceleration in inflation as the index gained 6.5% for the 12 months ending in December. This compares to 7.1% in the month of November and the peak of 9.1% in the month of June. Areas that remained extremely elevated included eggs up 59.9% over the last 12 months, fuel oil was up 41.5%, and airfare was up 28.5%. There are some areas that showed year-over-year declines with televisions falling 14.4%, used cars and trucks were down 8.8%, beef and veal were down 3.1%, bacon and related products were down 3.7%, and gasoline was down 2%. Gas prices have declined substantially and were a major contributor to the month over month decline of 0.1% for the CPI. I do worry energy prices could struggle to maintain these levels as China reopens and the US no longer releases oil from the SPR. Shelter continues to be a major problem as it rose 7.5% compared to the prior year. This continues to weigh heavily on the report as it occupies a weighting of around 33% with close to 8% coming from rents and 24% coming from private housing. I do believe with the affordability issues this growth rate will slow as the year progresses. I believe inflation will continue on its deceleration path and will maintain a level of around 4-6% in 2023. It is important to note the Fed prefers to use a measure known as the PCE and that will be released on January 27th. It appears this report has continued to come in lower than the CPI. As examples, in November PCE was 5.5% when CPI was 7.1%, in October PCE was 6.1% when CPI was 7.7%, and in September PCE was 6.3% when CPI was 8.2%. If that trend holds, we could see a PCE number that has 4 at the front end of it. While still a concern, I believe inflation will be a much smaller problem in 2023.
Santa Claus Rally
The Santa Claus rally did happen this year, but you may not have noticed because it was only a gain of 0.8%. This is for the official Santa Claus rally which went from December 23 to January 4, 2023. It doesn’t happen every year, but this is the seventh year in a row that we have seen the Santa Claus rally. Don't be fooled by other imitations of the Santa Claus rally, the official one going back to 1971 is the last five trading days of the year and the first two trading days in January of the new year.
Stocks
At my investment firm we like to invest in companies that pay and raise their dividends over time. We are happy to say that in 2022 the S&P 500 companies paid approximately $561 billion in dividends, up from $511 billion one year earlier. It's also worth noting that 373 companies in the S&P 500 increased their dividends in 2022 about 20 more than the 353 that increased dividends in 2021. Another benefit for shareholders is stock buybacks, which was about $960 billion in 2022. We believe this will decline somewhat because our wonderful lawmakers in Washington decided to add a 1% excise tax which will take effect in January on companies buying back their stock.
NFL
NFL ratings were down about 3% from a year earlier hurt by the Thursday Night Football games on Amazon. Nielsen ratings said viewership fell to 9.6 million viewers that streamed on Amazon during those Thursday night games. That was a large decline from the 16.2 million viewers last year when the game was on Fox, the NFL Network, and Amazon. There could be a problem with advertisers who were guaranteed by Amazon that they would average 12.6 million viewers per game as they missed that mark. Also, for comparison, normally Sunday afternoon game viewership is around 19 million viewers. Fox and CBS carried Sunday afternoon games.
Harrison Johnson, CFP®: "529 to Roth Rollover"
Monday Jan 09, 2023
Monday Jan 09, 2023
Job Market
The jobs report brought plenty of welcome news as the headline payrolls grew by 223,000 in the month of December, which easily topped the estimate of 200,000. This was a decrease from November's gain of 256,000, but it's important to remember that we've been discussing a deceleration in the jobs market for months now. Areas that remained hot included health care and social assistance at 74,400, leisure and hospitality at 67,000, and construction also grew by 28,000 jobs. Interestingly, Julia Pollack who is the chief economist at ZipRecruiter pointed out, “Health care has recovered to its pre-pandemic levels, but nowhere near its pre-pandemic trend, and hospitality is still not back to its pre-pandemic levels.” On the downside, information jobs saw a decline of 5,000 and professional and business services saw a decline of 6,000 jobs in the month. Overall, the unemployment rate fell back to 3.5%, which ties the lowest level since 1969. Part of this stems from the lower participation rate which currently stands at 62.3%, a full percentage point below where we were in February 2020 before the pandemic. Also, another measure of unemployment that takes into account discouraged workers and those holding part-time jobs for economic reasons also declined, falling to 6.5%. This is the lowest-ever reading in a data set that goes back to 1994. Probably the biggest market mover was the fact that wage inflation was up just 4.6% compared to the estimate of 5.0%.
Supply Management (ISM)
One survey that doesn't get a ton of media coverage is the Institute for Supply Management (ISM) non-manufacturing PMI. This is an economic index based on surveys of more than 400 non-manufacturing (or services) firms' purchasing and supply executives. The recent report showed a reading of 49.6 which missed the estimate of 55.0 and was down from 56.5 in November. This was the first time since May 2020 the reading was below 50. A reading below 50 indicates a contraction in the service economy. The area I thought stood out the most was new orders received by service businesses as they fell 45.2 from 56.0 in November and marked the lowest level since May 2020 and was the weakest reading since 2009, excluding the collapse during the pandemic. The reason this is so important is that Fed Chairman Powell is pointed to concerns over price increases in the service economy, but if the demand is not there it will be harder to raise prices. Hopefully they will take this into account at their next meeting.
Tech Employees
You have seen the headlines about all the laid off tech employees and may be thinking this is bad for the economy. What the media does not show you is the other side. A recent survey from ZipRecruiter shows that 79% of the laid off tech employees found a new job within three months. The job market remains strong, which I believe points to a recession that will be shorter and milder than other recessions.
Harrison Johnson, CFP®: "Secure Act 2.0"
Tuesday Dec 27, 2022
Tuesday Dec 27, 2022
In this episode, Brent and Chase discuss the education and fundamentals of investing and why long-term investing strategies work best over time. They also talk through topics like, price earnings (PE) ratio, book value, cash flow, dividend payout ratio, what to look out for on a company’s balance sheet, inventory turnover, buying strategies, and more!
Monday Dec 19, 2022
Monday Dec 19, 2022
Inflation
As expected, inflation continued to decelerate in the month of November. I was thinking there was a small possibility we might see a reading for the headline number in the high 6% range, but the headline number ended up coming in at 7.1%. This was lower than the expectation of 7.3% and below October's reading of 7.8%. As a reminder the peak came in June with a reading of 9%. Some areas that stood out were eggs which were up 49.1% compared to last year, airfare was up 36%, energy was up 13.1% as electricity was up 13.7% and unleaded gasoline was up 9.8% and shelter was up 7.2%. One item that hasn't been discussed much is that the US has had one of the worst bird flus in history, which has impacted the price of eggs. As for energy I continue to believe next year the comparisons will be much more favorable, especially considering the energy index fell 1.2% compared to last month as gas prices fell 2%. Housing costs, which make up about 1/3 of the entire index, have shown signs of cooling and I believe they will be much more muted in 2023. Also, I wanted to point out that used car prices fell 3.3% compared to last year. Remember at the beginning of the year when used car prices were up 40% in the month of February compared to the prior year? I believe like used car prices many of these categories that are extremely elevated will normalize next year also helping to reduce inflation. My expectation is that for December we will see a reading that shows at 6 at the front of it and for next year inflation will be in the range of 4-6% for the year. I believe this will bode well for the right stocks in 2023.
The Fed Report
Markets did not like what Fed Chair Jerome Powell had to say after the Fed's meeting. The decision to increase rates 50 basis points or 0.5% was widely anticipated. It brings the target level to a range of 4.25% - 4.5%, which is the highest level in 15 years. What the market did not like was the terminal rate, or the point where the Fed expects to end rate hikes as it was higher than expected at 5.1%. I continue to believe this would be too high as the Fed should give the rate hikes and quantitative tightening (QT) more time to work through the economy. The Fed has been allowing a capped total of $95 B worth of bonds to roll off the balance sheet each month and since early June the balance sheet has declined $332 B to $8.63 T. I believe that inflation will naturally continue to decelerate next year and a reduction in the terminal rate could occur in the first part of the year. A softer tone from the Fed would be beneficial for the right stocks.
Job Market
I continue to watch the jobs market looking at both past information and future information because I believe a strong job market will keep a recession very mild and it may not even be noticeable. I continue to hear from people that they are seeing all these layoffs from tech companies, but I talk about how there are many other companies that are hiring in 2023. Based on a recent survey, a nationwide staffing firm, LaSalle Network, says about 84% of companies it works with are planning to hire in 2023. This is roughly 20% higher than those planned to hire a year ago. The CEO Tom Gimbel says he has seen a 50% increase from last year in demand for salespeople and this is a positive sign because when a firm increases staff in the sales department they believe they have room to grow. So don’t just look at the headlines of 10,000 employees being laid off at some big tech firm and think the entire job market is collapsing. Look at the overall economic job market.
Harrison – “Sole proprietor or S-Corp pt. 2”
Monday Dec 12, 2022
Monday Dec 12, 2022
Producer Price Index (PPI)
Although the headline Producer Price Index (PPI) number saw a gain of 0.3% compared to last month, I actually thought the report was in line with what we’d been expecting. If you look compared to last year the PPI increased 7.4% which is a nice deceleration from the 8% level in October and the peak of 11.7% in March. Part of the reason for the deceleration is the comps are getting harder. What I mean by that is last year the PPI showed an annual gain of 10% compared to the prior year. When we lap the 11.7% number in March, I believe it will be hard to grow another 7-8% off that number, especially with the decline in many commodities from their peak levels. As a reminder we don't believe inflation will be disappearing in 2023, we believe it will be decelerating to a level of around 4-6% for the full year.
Freight Costs
More positives on the inflation front. Remember how constrained shipping was last year and how expensive it had become? Well now if you look at the prices, they have come way down. Freight costs from Asia-U.S. West Coast have fallen 90% compared to last year and now stand around $1,426/FEU (forty-foot equivalent unit). This pushed prices down by 5% when compared to 2019 levels. Freight costs from Asia-U.S. East Coast now stand around $3,723/FEU which is down 78% compared to last year and costs from Asia-Northern Europe are around $3,974/FEU which is 73% lower than last year.
Big Tech Companies
I learned a long time ago not to just read headlines and think you understand what is going on. People have been saying things are getting worse because they see the big tech companies laying off people with headlines showing numbers like 10,000 layoffs coming. We have said that’s only a small part of the big picture and if you look at the recent jobs report, you will see the information sector, which includes many tech jobs, had a net increase of 20,000 jobs. I know it takes time to read the details when information comes out but if you don’t, you won’t have a clear understanding of what is really going on.
Plant-Based Meat
Remember about three years ago the fad was no one was going to eat red meat and the company Beyond Meat was going to take over the meat aisle in the grocery store. Fast forward to today and the company has seen its grocery stores sales declining 12% even as they are cutting prices to try to boost their sales. In the most recent earnings report the revenue fell 23% year after year yielding a quarterly loss of $102 million. I still remember some people telling me I was missing out that I did not get it that people were switching over to plant-based meat. Back in the summer of 2019 the stock had peaked over $196 and is now down over 90% trading at $14 a share. When it comes to investing, I will always take strong fundamentals over the hype of the next best thing.
Harrison – “Sole proprietor or S-Corp”
Monday Dec 05, 2022
Monday Dec 05, 2022
Jobs
Job gains showed a nice increase of 263,000 in November which easily topped the estimate of 200,000. Leisure and hospitality remained a major leader with job gains totaling 88,000 in the month as the sector continues to battle back from Covid. This sector still remains 5.8% or 980,000 jobs below February 2020. Retail trade and transportation and warehousing were the standout losers in the report as both sectors saw a decline in payrolls. Retail trade fell by about 30,000 jobs as general merchandise stores saw employment decline by 32,000 jobs and electronics and appliance stores saw employment decline by 4,000 jobs in the month. Transportation and warehousing had a decline of 15,000 jobs in the month. I was somewhat surprised to see these two sectors decline considering it's the holiday season, but the excess inventory levels could be weighing on employment as retailers could be trying to focus on expenses including labor and transportation and warehousing. The item I believe weighed most on the markets was the increase of 5.1% in average hourly earnings. It surpassed the estimate of 4.6% and it could give the Fed more ammo to continue on its rate hiking path as it tries to bring down inflation. I do believe this should not be a major concern for the Fed because, like inflation overall, I think wage gains will begin to slow to a more normalized level next year as the job market decelerates.
Personal Consumption Expenditures (PCE)
The PCE, which is known as the Personal Consumption Expenditures, came out at 6% for October over the last 12 months. As we had predicted months ago these inflation indexes would show signs of easing. This is why there has been some recovery in equities. The PCE is what the Federal Reserve looks at in regard to interest rates so there probably will not be any surprises going forward. We continue to believe that inflation will slow down and if you’ve been out of the market and in particular the right equities since summer you have missed out. There are still some opportunities to get back in for quality long-term investors but sitting on the sidelines for the next 6 to 12 months based on current data will be a mistake.
National Retail Federation (NRF)
You’ve probably heard that this is not going to be a great Christmas for retail. But as we say many times in our posts and other commentary, it’s important to understand what is being said and how it is being said. The estimate by the National Retail Federation (NRF) for holiday sales is expected to be between $942 billion to $960 billion, an increase of 6-8% over the $889 billion in 2021. This was a 13.5% increase over 2020. If we look back to 2019 when the economy was pretty strong, and everyone felt good, the NRF said holiday sales were $716 billion. Comparing the low end for 2022 of $942 billion, that’s a 31.6% increase from 2019. It does appear holiday shopping has gotten off to a good start considering the record of 196.7 million shoppers from Thanksgiving Day through Cyber Monday. This topped last year's level of 176 million shoppers and easily surpassed the NRF's estimate for 166.3 million shoppers. I don’t know about you, but I think those are pretty good numbers, all things being equal.
SEC
The SEC, also known as the Securities Exchange Commission, had a busy fiscal year, which ended September 30th. Their penalties were up 67% from the previous year, hitting an all-time record of $6.4 billion. I wonder where that money will go, or will it get lost in the tangled web of government administration? The money is supposed to go to a fund that either protects investors, a fund that refunds investors who lost money, or the third option, the US treasury general fund.
Harrison – “Change for charitable donations this year”
Monday Nov 21, 2022
Monday Nov 21, 2022
Consumer Price Index
Even with all the fear, the consumer is still shopping. In October, retail sales were up 1.3% compared to September and up 8.3% compared to October 2021. This outpaced the inflation rate in the October CPI report which saw prices grow 0.4% month-over-month and 7.7% year-over-year. There were definitely areas in the retail sales report that benefited from higher prices as sales at gasoline stations were up 17.8% compared to last year and grocery stores saw sales climb 8.0% during the same time frame. For reference, the CPI showed gas prices climbed 17.5% year-over-year and food at home prices were up 12.4%. Other areas of strength in the report compared to last October were food services and drinking places up 14.1%, non-store retailers up 11.5%, and building material & garden equipment & supplies dealers up 9.2%. The only two areas that saw declines were department stores, which fell 1.6% and electronics & appliance stores, which saw a decline of 12.1%. Two potential catalysts for the report included an additional Amazon Prime day in the month and the distribution of "inflation relief checks" of up to $1,050 in California. I hope that we do not see additional stimulus like this going forward as I believe it could create even more problems with inflation as it would create artificial demand.
Inflation
Good news on the inflation fronts this morning as the October Producer Price Index (PPI) climbed 0.2% compared to last month. This was below the estimate of 0.4% and resulted in a year-over-year gain of 8%. It's crazy to think that an 8% increase is good news, but the numbers are decelerating. In September the year-over-year gain was 8.4% and back in March the report showed a gain of 11.7%. If commodity prices can stabilize/decrease even slightly and if we stop pumping money into the economy, I continue to believe inflation will be much less of a problem in 2023.
Home Sales
Mark down 9 straight monthly declines in existing home sales as there was a decline of 5.9% from September to October. With an annualized pace of 4.43 million units in the month of October, existing home sales fell 28.4% compared to October 2021 and registered the slowest pace since December 2011, excluding the brief drop that occurred during the beginning of Covid. Demand has clearly taken a drastic fall but supply still remains an issue. With just 1.22 million homes for sale at the end of the month there's still just a 3.3-month supply at the current sales pace. With prices still expensive and mortgage rates likely to remain high, I'm still expecting a weak housing market in 2023.
S&P 500 Companies
As interest rates are rising, corporations are paying off debt to reduce expenses. The S&P 500 companies have about $9.3 trillion in debt and with businesses performing well, they are sitting on about $2 trillion in cash which is close to $500 billion more than these companies had in 2019. This will strengthen the businesses even more, increasing the value of many of these companies.
Costco vs. Sam’s Club
We all feel that the price for everything is going up, but there is one thing I found that for nearly 40 years has stayed at the same price. That is a hotdog and drink at Costco. Since 1985 that price has stayed at $1.50 and also, they have not done any shrinkage to the product. If you want a better deal than that you can now head on over to Sam’s Club and get a hotdog and drink for $1.38. To keep prices low this is what the economy needs, more competition & more supply, not a reduction in demand.
Harrison Johnson (CFP) - Income Related Monthly Adjusted Amount (IRMAA)
Monday Nov 14, 2022
Monday Nov 14, 2022
CPI Report
The market rallied this morning on news inflation was not as bad as feared. The headline CPI number for October came in at 7.7% compared to last year, which was lower than the estimate of 7.9% and below last month's reading of 8.2%. Back in June the CPI hit 9.1%. I believe some investors believe this number could help lead to a Fed pivot, but I'm still not optimistic given their stance of being strong to fight inflation. With that being said, I believe they should slow down and let these rate hikes and Quantitative Tightening work through the economy. One major factor that I find interesting in the report is that rising shelter costs contributed more than half the monthly gain as it increased 0.8% compared to last month and was up 6.9% compared to last year. This was the highest annual increase since 1982, but one thing to take into consideration is that rising shelter costs don't necessarily have a large impact on the entire population. In fact, with more than 65% of the population owning their home, the monthly expense is much more fixed and shouldn't be subject to the current inflation we are seeing. I hope the Fed takes that into consideration as the report needs to be analyzed in its entirety.
Job Market
I continue to believe that the feared recession will be mild. I have talked about how the strong job market has continued but one other aspect that is continuing is a lot of liquidity in the economy through what is known as the M2. M2 is a measure of the amount of money that includes currency, deposits, and shares in retail money market mutual funds. Like the job market this is holding strong at just under $22 trillion. Compare that to about three years ago when it was well under $16 trillion. So not only do consumers have a job to provide cash flow but savings accounts are flush with cash to continue to consume.
CBDC’s (Central Bank Digital Currency)
I have talked in the past about CBDC’s which are known as Central Bank Digital Currency and said that countries are moving in that direction. No surprise that governments move slowly, but as of today more than 100 countries and monetary authorities which include the European Central Bank, and the United States Federal Reserve are looking into how to digitize their currencies. But the direction they are going is not what you would think. They are not turning to the popular cryptocurrencies like Bitcoin or Ethereum for advice, they are turning to the big tech companies like Microsoft, Alphabet and even Amazon. The reason they are turning to these big tech companies is because of their development of digital wallets and smart phone apps. I still say if the world goes in this direction of Central Bank Digital Currencies the use of crypto currencies would be worthless.
Cryptocurrency Balance Sheets
Balance sheets matter! I did a post on these crypto exchanges a few months ago questioning the assets for many of these crypto exchanges and now we are seeing the repercussions for weak balance sheets and overleverage as FTX announced solvency issues. FTX and its CEO Sam Bankman-Fried were seen as leaders in the crypto space and now it is collapsing. Bitcoin fell to under $17,000 this morning and many other cryptos are faring even worse. As a reminder, Bitcoin's all time high was close to $70,000. There is nothing in the world of crypto at this point in time that entices me, and this only adds to my concerns for the "investment" category.
Monday Nov 07, 2022
Monday Nov 07, 2022
Payroll Employment
Another good report for the labor market as payroll employment climbed by 261,000 in the month of October. This topped the estimate of 205,000 but was the slowest pace of gains we have seen since December 2020. Although this may sound concerning, after recouping the losses that were generated from Covid we have anticipated the labor market to slow. There is a big difference between slowing and declining. For a good reference point, if you go back to 1939 the average monthly gain in payrolls is around 122,700. The job growth was broad-based as every category saw gains in the month. Healthcare and social assistance led the way with a gain of 71,000 jobs. That was followed by professional & business services at a gain of 39,000, leisure and hospitality at a gain of 35,000, and manufacturing was up 32,000. The major problem within the report is that it does not provide much evidence for the Fed to let off the brakes, especially considering the wage inflation of 4.7% compared to last year.
September JOLTS
Even with the increase in interest rates, businesses have continued to remain active in the labor market. In the recent September JOLTs report there were 10.7 million job openings. This was an increase of 437,000 openings when compared to August and it easily beat the estimate of 9.85 million openings. At this level there are still 1.9 job openings per available worker. I've said it before, but I'll say it again, if the labor market remains this strong, I do not see a major recession on the horizon.
Facebook (META)
Facebook's (META) stock price has fallen through the floor from the 52-week high of $353/share as it now sits around $94/share. I’m sure some people are now thinking wow this is a steal. Before you jump you need to think about a couple of things. The most recent earnings release was the second revenue decline in a row as the company is fighting a tough macro-economic climate. This is coming from growing competition from TikTok and Apple's changes to ad tracking. On top of that, Meta’s reality labs unit had an operating loss of $3.7 billion and they expect the loss to grow even more next year. I think it’s important for an investor to have a very clear understanding of what the future holds for the metaverse. Be careful of earnings estimates for December 2023 of $9.80, I believe in the future weeks these estimates will fall dramatically.
Microsoft workers
I recently read an interesting survey from Microsoft which I think is true for the current work environment. A survey of 20,000 people at Microsoft found 87% of the employees said they were productive at work. Unfortunately, when asking the leaders at Microsoft only 12% said they have confidence that workers are being productive. There appears to be a big difference in what employees think they are doing and what employers believe they are doing. I feel perhaps maybe it’s always been that way over the last hundred years, but maybe now employees are more vocal since the job market is so strong and they feel confident that they could get another job somewhere else If they were to lose their current one.
Harrison - "Traditional and Roth IRA Income Limits"
Monday Oct 31, 2022
Monday Oct 31, 2022
Portfolio Splits
I have been investing money for clients for over 40 years and it was not long into my career that I questioned rules of thumb like the best portfolio is a 60/40 split of stocks and bonds. I’ve always felt it was better to research deeply investments that were undervalued and would do well going forward. My fear has proven to come true over the years, especially now as according to Bank of America the 60/40 split portfolio is having its worst year in 100 years as the annualized change in its recent year-to-date value was down 34.4%. Year to date we are down a little bit in our portfolio but based on what we have I still believe we can have a positive return come December 31, 2022. With a 60/40 split based on what I see going forward I don’t think that has a break even for at least 3 to 5 years. I still stand behind my statement that rules of thumb when it comes to investing don’t work long-term.
Gross Domestic Product Report
Q3 GDP produced the first positive growth of the year as it increased at an annualized rate of 2.6%. The consumer continues to remain strong enough to produce growth as the consumption category grew 1.4% in the quarter. This was entirely due to the service economy, which was up 2.8% compared to consumption of goods, which fell 1.2% in the quarter. Gross private domestic investment continued to struggle as it fell 8.5% in the quarter. This was largely attributable to the decline in residential investment which fell 26.4%. Investment in equipment and intellectual property products were positives as they grew 10.8% and 6.9% respectively. The change in private inventories continued to weigh on the report as it subtracted 0.7% from the headline number and with the heavy inventories at retailers, I believe this could remain subdued for the next quarter as well. The major highlight came from the trade component which added 2.77% to the headline number. This came as exports climbed at an annualized rate of 14.4% and imports fell at an annualized rate of 6.9%. With the likelihood of the strong dollar remaining in place through the remainder of the year I'm skeptical that we will see another major benefit to trade as we close out the year. The final component, which is Government, was also a benefit as it added 0.42% to the headline number. Overall, I'd say the GDP report was good, especially considering a lot of the fear from people at this time.
Oil Companies
You have heard all the bad news about the big profits that oil companies are making but what you don’t hear is how much they spend and what they are doing for a green future. Both Exxon and Chevron are building offshore wind farms which will supply millions of homes on the East Coast with electricity. They’re also preparing production of hundreds of millions of gallons of fuel which will come from plants, garbage and even kitchen grease. Oil giant BP just spent $4.1 billion acquiring a company that replaces fossil fuel gas from wells with natural occurring biogas from landfills. The oil companies know that the times are changing and while they are accused of paying out big dollars to the shareholders, they are investing their profits for a greener future as well.
Product Shortages
Things have really changed 180° from less than a year ago when there were shortages of products available. Inventories are now so large warehouses are bursting at the seams. The vacancy rate in warehouses in the third quarter 2020 was 5% that has now declined to 3.2%. Currently, businesses are paying more per square foot in warehouses. Last year in the third quarter it was $7.13/square foot, the average has now climbed to $8.70/square foot. What does that mean to you as a consumer? Retailers want to get rid of these items costing them money just sitting in the warehouse. Consumers could see some great sales coming up in the future, keep your eyes open.
Harrison Johnson, CFP®: "How spouses age difference affects social security"