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 Jul 24, 2023
Monday Jul 24, 2023
Stocks
When it comes to managing our half billion dollar portfolio, we always talk about how it is a market of stocks and not a stock market. With that being said, it doesn’t mean we don’t have a clue what’s going on with the indexes. We continue to feel that the indexes will fall from the rapid upward climb this year. What do we base that on? With the S&P 500 index being up more than 17% year-to-date, people should realize that the seven stocks of Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia and Tesla, which have a combined Market cap of $11 trillion, are responsible for 73% of that 17% year-to-date return. I don’t know what you think, but our thought at Wilsey Asset Management is that is not normal and it is a warning sign that the index could lose steam and begin to slide back down the hill.
Nasdaq
With the Nasdaq up over 34% this year and the S&P 500 up over 18% this year, would you be surprised to find out the Dow is actually closer to its all-time high even though it is up just over 6% this year? Many times people do not realize how hard it can be to recoup major losses like the Nasdaq saw last year when it fell more than 33%. From their respective highs, the Dow is down 4.7%, the S&P 500 is down 5.7%, and the Nasdaq is still down 12.4%. It’s important to remember that a 1% gain does not full offset a previously witnessed 1% loss, so for the Nasdaq to return to it’s all time high it would actually need a 14.2% gain. While investing in fancy growth names can be exciting it’s these potential major turns that keep me out of the growth stocks as it can take you years to recover.
Home Sales
Existing home sales in the month of June fell 18.9% compared to last year. This marked the slowest pace of home sales for June since 2009. Even with the decline in sales, the median price of $410,200 held up well falling just over 1% compared to last June’s record number. The reason for this is the inventory level has struggled immensely as it fell 13.6% to just 1.08 million homes available for sale. Affordability has really challenged the first-time home buyer as the group made up just 26% of sales. This is down from 30% last year and it is the lowest level on record since the Realtors began tracking this number. I continue to believe home prices will be in a go nowhere trend for the next couple years as affordability will limit upside potential and the lack of inventory will prevent a substantial decline.
Economy
While Retail sales grew just 0.2% in the month and were below expectations of 0.5%, the numbers continue to feed my belief that a soft landing in the economy is possible. The consumer is slowing, but it appears by not enough to create a hard landing. Looking year over year retail sales were up 1.5%, but a decline at gas stations of 22.7% weighed heavily on the report. In fact if gas stations were excluded, retail sales would have climbed 4.2% compared to last year. Grocery stores also had a much lower impact as they saw an increase of just 1.1% compared to last year and were actually down 0.7% compared to last month. The goods economy continues to get hit as furniture and home furnishing stores saw a decline of 4.6%, department stores were down 5.2%, and building material and garden equipment and supplies dealers were down 3.2%. For the first time that I can remember in many months, electronics and appliance stores saw an increase of 0.9%. I do believe many of these industries that produce goods could be near a bottom and as we lap easier comparisons they could return to growth. Areas that remained strong in the report included health and personal care stores (+6.3%), food services and drinking places (+8.4%), and nonstore retailers (+9.4%).
Monday Jul 17, 2023
Monday Jul 17, 2023
CPI
If I told you last year we would see inflation at 3%, would you believe it? In the month of June that is exactly what we saw as the CPI rose 0.2% compared to May and it was up just 3% compared to last June. Energy prices continued to be a major positive as they fell 16.7% compared to last year with unleaded regular gasoline falling 27.1%. Other areas of the economy also saw nice declines with airline fares falling 18.9%, major appliances were down 10.7%, and used cars and trucks saw a decline of 5.2%. Food still saw an increase of 5% in the month, but there was a substantial difference between food away from home as it was up 7.7% and food at home was only up 4.7%. Grocery price inflation saw a peak of around 14% last summer so prices have slowed quite substantially with products like eggs (-7.9%) and bacon (-10.1%) showing nice declines compared to last year. Core inflation which excludes food and energy still remained higher than most would like to see at 4.8%, but it did fall from last month’s reading of 5.3% and it is well below the peak last year of 6.6%. As a reminder the headline CPI reached a peak of 9% last year. It is important to understand shelter prices continued to weigh on the report as they were up nearly 8% and accounted for approximately 70% of the monthly increase. I continue to believe shelter costs will decelerate substantially which would be a major benefit to both core and headline CPI. I think as we close at 2023 inflation will be a concern of the past.
PPI
The Producer Price Index (PPI) was even better than the CPI report as it showed positive signs for cooling inflation. In the month of June, the PPI was up just 0.1% compared to last year. In June 2022, the PPI showed a huge increase of 11.2%. Energy prices provided a major benefit to the report, but even core PPI, which excludes food and energy, was up just 2.6% compared to last year. As I said after the CPI report, I just don’t see inflation being a problem as we exit this year.
Real Estate Market
In recent data from the National Association of Realtors it was found the nearly 40% of Americans between the ages of 25 and 44 who bought homes last year plan to stay in them for 16 years or more. This sounds problematic given the current lack of inventory, but over the next 5 years I believe many of these survey respondents will change their minds. This mainly stems from life changes like marriage, having kids, and even divorce. On the other side I do not believe interest rates will remain this high on mortgages and we could see rates settle around the 5% level. While I believe they will not fall back into 3% range, it is much easier to give up your 3% mortgage for a 5% mortgage instead of trading it in for a 7% mortgage, especially if you’ve outgrown your current residence. The real estate market is very strange right now, but I believe with time it will normalize.
AT&T
AT&T has seen its stock price struggle over the last few years and it could get worse. On Monday, July 10 in the Wall Street Journal there was an article from their investigative reporting team titled “Telecom Giants Left Behind Miles of Toxic Lead Cables”. It was on the front page and two full pages in the first section discussing how AT&T and other telecom giants have left behind a network of cables covered in toxic lead that stretches across the United States under the water, in the soil, and on poles overhead. Unfortunately, I know what follows which will be a number of lawsuits from legal firms across the country. We believe over the next six months or so as the company defends itself against these lawsuits it probably will have to cut the dividend and there could be a decline of at least 20% or more in the stock price. This company had such a bright future in the next six months as other expenses were falling off and their cash flow would increase. We now see the same future for AT&T as what 3M has been going through over the last couple years with their stock price cut in half and they will have to pay out billions of dollars in settlements. In today’s society, lawsuits continue to mount costing businesses of all sizes from small to large hundreds of billions of dollars in settlements and legal fees. Until there is more clarity on this situation I could not recommend a buy on this stock.
Monday Jul 10, 2023
Monday Jul 10, 2023
Employment Report
The employment report showed nonfarm payrolls increased 209,000 in the month of June which was well below the expectation for growth of 240,000. Payrolls were also revised lower by 110,000 in the months of April and May. The report marked the slowest month for job creation since December 2020 when payrolls fell by 268,000. So far this year, we have seen a 6-month average of 278,000 in monthly job creation which compares to the average of 399,000 in 2022. While this all may sound like bad news, I believe it remains positive as the labor market is softening, but it still remains strong. In fact, if we look back to 2018 job creation averaged 223,000 per month and in 2019 it was just 176,000 per month. Wage growth in the month was 4.4% compared to last year, which is in line with many readings this year and softer than last year's peak of 5.9% in March. Job growth remained strong in areas like health care and social assistance (+65,200), construction (+23,000), and professional and business services (+21,000). Growth in the leisure and hospitality sector has cooled as the group was up just 21,000 jobs in the month. It still remains 2.2% or 369,000 jobs below its February 2020 level. Government employment was a big gainer in the month as it added 60,000 jobs to the report. I generally don't like to see Government jobs leading the charge, but the sector still remains 161,000 jobs below its February 2020 level. Areas that were soft in the report included transportation and warehousing (-6,900) and retail trade (-11,200). The participation rate remains stuck at 62.6% as it has been there now for four consecutive months. In February 2020 it was at 63.3%. While some may point to the younger generation not working, I believe most of this stems from more people retiring. In fact, the prime-age participation rate which measures those between 25 and 54 years of age rose to 83.5%, its highest in 21 years. Overall, I think this report provides more evidence we could see that soft landing.
JOLTs
The Job Openings and Labor Turnover Survey (JOLTs) showed job openings fell by 496,000 in the month of May to 9.8 million. While this may sound concerning, this level still produces 1.6 jobs per available worker. It is important to understand this remains above pre-pandemic levels and I believe we can have job openings continue to decline and still have a good labor market. Layoffs also remained little changed at 1.6 million, this is also still below pre-pandemic levels.
Work From Home Productivity
You may hear some arguments from people that work from home about how productive they are, but data from the BLS, known as the Bureau of Labor Statistics, states otherwise. It was discovered that people working full-time from home put in 2 1/2 hours fewer per day than the workers who go into the office. If workers were to work at the same rate as they did back in 2019, our economy would be more productive, and the labor shortage would be less problematic. It was estimated that if workers filled up offices at the 2019 rate and worked 8.2 hours per day it would add roughly 800,000,000 weeks of more work, a nice boost to productivity. Maybe after Covid people have become used to not working and have become lazy?
Wednesday Jul 05, 2023
Wednesday Jul 05, 2023
Inflation
The Fed's preferred gauge for inflation, the Personal Consumption Expenditures (PCE) price index, showed inflation is continuing to cool. The headline number came in at 3.8%, which is below last month's reading of 4.3% and well below last May's reading of 6.5%. This was the lowest rate we have seen since April 2021. Food prices have remained high and climbed 5.8% compared to last year, but energy prices have fallen dramatically as they declined 13.4% over the same time period. With consumers still spending in the service economy, prices in the service sector increased 5.3% while the prices for goods were up only 1.1%. Core PCE, which excludes food and energy, may have disappointed some people as it remained at 4.6%. So far this year, Core PCE has registered a reading of either 4.6% or 4.7% in every report. I continue to believe that both these rates will head lower as we exit the year. Although the Fed has indicated two more rate increases, I believe they should continue to hold rates steady as inflation looks to be pulling back due to the actions that were previously implemented.
Recession
You may be waiting for the other shoe to drop and then bam we have a Recession; but I constantly see data that contradicts any chance of a major recession. 10 years ago, the annual manufacturing construction and outlay was roughly $50 billion. That’s a lot of money. Would you have guessed for 2023 that is going to be nearly 4 times that number at $200 billion? In 2020 foreign direct investment in the US was $150 billion and in 2023 it is more than double that amount coming in at $350 billion. Look around the country and you will see major construction on airports, highways, electric vehicles, and battery charging stations. I’m sure you could add a few to this list as well. Are we going to have a major Recession? I don’t see how.
Rate of Return
How is that a 20% return can be better than a 100% return? It is based on the concentration of the portfolio. Many times, I hear people discuss how happy they are with the winners in their portfolio but come to find out they might only make up 1% of the entire portfolio. When we buy companies at Wilsey Asset Management, we start with a 6% investment as we have spent hours researching the company and feel very comfortable with it. A 20% return with a 6% allocation would produce a 1.2% overall benefit to your portfolio versus a 100% return with a 1% allocation would produce an overall benefit of 1%. I would rather understand the investments in my portfolio than take a chance on several businesses I know very little about.
Short Sells
Short selling is when an investor is betting the price of a stock will drop. There’s currently about $1 trillion of short interest as those investors speculate the market will turn and head lower. The gain in the market has caused a paper loss for these short sellers of around $120 B this year. One of two things will happen. The stocks will turn around and drop and the shorts will profit, or the shorts will have to come in and cover themselves by buying the stock which will put upward pressure on stock prices. Based on valuations, I believe the short sellers will continue to be patient and wait for the drop.
Monday Jun 26, 2023
Monday Jun 26, 2023
Stock Valuations
The tech boom and bust is often referenced as an example of the dangers of high valuations in the stock market, but one that is less talked about is the Nifty-Fifty. This was a group of 50 stocks back in the early 1970s that were known as "one decision stocks" meaning you could buy and hold forever. Investors became enamored by the group and pushed valuations to extremely high levels due to the companies and their strong balance sheets, high profit margins, and double-digit growth rates. The group included names like Polaroid which traded at over 90 times earnings and Xerox which traded at close to 50 times earnings. Come the stock market decline from 1973-1974 Polaroid fell more than 90% and Xerox was down close to 70%. Today, we know these names went bankrupt and serve more as a history lesson rather than serving consumers. The Nifty-Fifty wasn't just about stocks like these though as it included companies like McDonald's and Disney. McDonald's saw a P/E of over 85 and Disney traded at a little over 81 times earnings. During the stock market fallout, McDonald's fell close to 62% and Disney was down close to 85%. Ultimately, investors need to be very careful chasing high valuation stocks as the risk to the downside can be very high.
AI
With all the talk about AI, I’m sure it’s come across people’s minds if it will replace financial advisors. I’m happy to report at this time the answer is no and as far as I can see in the future, I don’t see it. One has to remember that the information is still not 100% accurate. I also discovered from Andy Serwer, a writer Barron’s magazine, it doesn’t include content after September 2021. That’s a problem. A little over a week ago a question was asked of ChatGPT which weighs more, a pound of feathers or 5 pounds of lead. It said they weigh the same. Remember that ChatGPT scans everything that has been written, which may not be relative and can give the wrong answer. What I do think it will accomplish is to help smart advisers, who understand investing to obtain data quicker and perhaps more precisely. But whoever is reading that data still has to understand it or else it means nothing at all. I think it was a few years ago that the Robo advisor was going to replace many advisers. We see how that went, not very well. Overall, I think AI will make us smarter and it will allow us to do our jobs quicker but not replace jobs that still need the human brain to analyze the data or the human body to perform functions like a plumber or electrician.
Graduates
I just saw an unfortunate report that the percentage of high school graduates ages 16 to 24 that were enrolled in college in 2022 has fallen to 62%. That’s over a four-percentage point drop from just 2019 when it was 66.2%. It could be because our colleges and universities are slowly pricing themselves out of the market to make it worthwhile to get a college degree, or it could be younger people don’t want to wait to start earning a living or start a career. It could also be a combination of the two.
Bitcoin
I saw bitcoin was up 10% due to excitement over ETFs being launched for Bitcoin. Blackrock filed an application earlier in the week for a spot bitcoin ETF that would track bitcoin's underlying market price. This is just silly to me.... Why would somebody buy an ETF, which I'm sure Blackrock will charge a fee for, when all the ETF is doing is following the price of bitcoin. Wouldn't it just make more sense to buy bitcoin? Unfortunately, when an asset has no true fundamentals, this is the kind of news it will trade on.
Monday Jun 19, 2023
Monday Jun 19, 2023
Inflation
Inflation continues to retreat from the high levels we saw last year. May's CPI report showed headline inflation rose 4% when compared to last year. This is a nice deceleration from last month's 4.9% gain, and it is well off last June's 9% increase. Areas that remained hot in the report included motor vehicle repair (+19.7%), motor vehicle insurance (+17.1%), and food (+6.7%). Many energy costs have seen large year over year declines and gasoline in particular is down around 20%. There are also other areas in the report that are showing declines. This includes airline fares (-13.4%), used cars and trucks (-4.2%), major appliances (-10%), and televisions (-11.5%). Core inflation, which excludes food and energy, was somewhat of a disappointment as it rose 5.3% compared to last year. While core inflation has not cooled as much as the headline number, it is important to remember that the shelter index rose 8.0% compared to last year and accounted for over 60% of the gain in core inflation. We continue to believe the shelter index will decline substantially as we exit the year and will be a major help in reducing core inflation.
PPI
More positive news on the inflation front as the Producer Price Index (PPI) for the month of May came in at a gain of 1.1% compared to last year. This compares to last month's reading of 2.3% and it is the lowest reading since December 2020. It is also well-off last May's reading of 11.1%. This continues to fuel my belief that inflation will be a much smaller problem as we exit the year. Companies no longer have the need to pass on the huge increases in prices they saw last year to the consumer.
Consumers
People may continue to complain about the economy, but the consumer is still spending. Retail sales in May showed a gain of 1.6% compared to last year. There are some areas that remain negative which include furniture and home furnishing stores (-6.4%) and electronics and appliance stores (-5.0%), but the biggest negative in the report was gasoline stations which saw sales decline 20.5%. Much of this is due to the decline in gas prices. This was a big weight on the report and if it was excluded from the headline number, retail sales would have risen 4.0%. I would actually consider this a positive as consumers are able to spend in other areas of the economy rather than wasting money at the gas station. Areas that were strong in the report included non-store retailers (+6.5%), health and personal care stores (+7.8%), and food services and drinking places (+8.0%). Overall, this report shows me the consumer still feels good enough to keep spending, which I believe is positive for the economy.
Investment Choices
Have you ever showed up to a party early and were the only one there? It can be kind of boring, but you know the party will start soon and it will get better. That is happening to many investors now, unless you’re in a few tech companies that mentioned the term AI. If you hold in your portfolio healthcare companies, financials, real estate, or energy, it’s been very disheartening year-to-date with those sectors going down. Don’t give up yet, stay at the party a little longer as there is light at the end of the tunnel. We see such things as the American Association of Individual Investors shows that bears outnumber bulls by eight percentage points. Usually, the bulls outpace the bears by 6.5 points. A survey from Bank of America of managers overseeing trillions of dollars in assets shows their cash position is now nearly 6% of a portfolio. This is up from under 4% at the end of 2021. The average peak for cash is just over 6%. I believe in the second half of this year you’ll see these managers trying to play catch up and get their money invested soon. The S&P 500 has come out of the 248-trading day bear market, which was the longest since 1948. By the end of the year, I believe we will see a nice catch-up in the sectors of the S&P 500 that have been lagging. I would not expect to see much in the technology stocks, and I would say at best they'll probably be treading water. So grab a glass of wine and be a little more patient as I believe you’ll be celebrating during the holidays of 2023 if you hold the right companies.
Monday Jun 12, 2023
Monday Jun 12, 2023
Jobs Report
After analyzing the recent jobs report further, I noticed some good news that was somewhat buried. There’s been concerns in this job market about the labor force participation rate remaining flat at 62.6%, which is still below the February 2020 pre-pandemic level of 63.3%. What appears to be happening is that the aging US population is causing more workers to retire. The good news that I have not seen or read before is that for workers ages 25 to 54, the participation rate is now 83.4%. This is a level not seen since 2007.
Crypto Lawsuit
The SEC is back on the front-page news as they are fighting against cryptocurrencies. On Monday, they sued the large crypto firm Binance saying that they were operating an illegal trading platform in the United States and misused customer funds. The SEC also said they engaged in manipulative trading which made the volume of trading appear larger than it really was. It was also pointed out that they are commingling billions of dollars in customer assets and that they sent them to a third-party. The SEC has named the company and also the CEO Changpeng Zhao in the lawsuit. On Tuesday, the SEC filed a lawsuit against Coinbase, which is responsible for 53% of crypto spot trading volume in the US. The SEC pointed to the company not being registered as an exchange to trade securities. When a company is required to register with the SEC it involves giving investors financial statements and risk disclosures that have been approved by the regulators. Could these two major lawsuits bring cryptocurrencies to their knees? I would believe so. Where will the activity go if the major traders are gone? I was surprised to learn that some of the biggest shareholders of Coinbase are Vanguard, Fidelity, Blackrock, Morgan Stanley, and Goldman Sachs. In April 2021, Coinbase started trading at $381 per share, today it is trading around $53 a share. I think some of the big guys got sucked into the hype of cryptocurrencies. Unfortunately, their investors will pay the price.
Russell 3000
As individual investors and institutional investors have become somewhat shy about investing in equities, companies in the Russell 3000 show plans to buy back more than $600 billion of their shares in 2023. Buying back shares lowers the share count and this can increase the earnings per share and show a better value with a lower price to earnings ratio. In a recent report, Goldman Sachs analysts announced that over the last 25 years companies who have bought back their stock have performed better than those companies using their extra cash for capital expenditures, mergers and acquisitions. The Russell 3000 is an index of the 3000 largest corporations in the United States and it represents nearly 98% of the entire market capitalization of all US stocks.
Egg Prices
Good news on the food front if you like eggs. The bird flu, known as avian influenza, pushed egg prices up to four dollars per dozen in January. Fortunately, there now appears to be some good signs of improvements. The bird flu killed about 59 million birds in the US since February 2022, but it appears that farmers now have it under control. Average retail prices were $2.70 per dozen at the end of April, well below the four dollars just six months ago in January. Farmers are working hard to protect the flocks from infection, which means more expenses, so we may not see much more of a decline in prices for now. But if we can continue on this path and inventories rise dramatically, we could see some more price declines over the next six months or so. Time to go have yourself a nice egg and cheese omelet.
Monday Jun 05, 2023
Monday Jun 05, 2023
Jobs Report
Overall, I'd say the jobs report showed some good numbers. The headline number was strong with an addition of 339,000 new hires, easily topping the estimate of 190,000. The prior two months were also revised upwards by a total of 93,000. Payrolls were particularly strong in health care and social assistance (+74,600), professional and business services (+64,000), and government (+56,000). I generally don't like to see government being a major contributor to the jobs report, but it is important to note that government employment is still 0.9% or 209,000 jobs below the pre covid level in February 2020. On the negative side, the household survey showed the number of unemployed persons climbed to 440,000 and the unemployment rate increased from 3.4% to 3.7% with no change in the participation rate. While I do like to look at both reports, I will say I give more credence to the establishment survey as it is based on a sample of businesses rather than a survey of households. I do think the report does not provide evidence for the Fed to hike and June and I still believe a skip, or a pause makes the most sense.
JOLT’s Report
Good news/bad news in the JOLTs report. The good news is that the labor market remains extremely strong. The number of job openings climbed from 9.7 million in March to 10.1 million in April. This means that there were 1.8 job openings for each unemployed worker in the month of April. Layoffs also fell by 264,000 in the report to 1.6 million. It's important to remember in 2019, layoffs averaged 1.8 million per month. The bad news is that this does not give the Fed evidence that the economy is slowing and may give them another data point to argue for another rate increase in June.
T-Bills
I was in the restaurant last week and could overhear a conversation of two gentlemen next to us and they were talking about T-bills. It seems everybody is talking about T-bills these days and the yield and what a great investment they are. I agree with that statement if you’re looking for short term returns, but if you’re putting long term money into T-bills, you are making a big mistake. No one seems to be listening to this advice though. In January 2022, only $1.6 billion of T-bills were purchased by individual investors. In April 2023, that number has climbed nearly tenfold to $13.4 billion. Again, I encourage people not to invest your long-term money in short term instruments, even when they sound attractive around 5%.
Nvidia (NVDA)
Nvidia (NVDA) has now hit the $1 Trillion market cap club. I have said I am impressed by the company and the way it's been able to pivot into different businesses, but this valuation is just crazy. If we look at combining the market caps for Broadcom, AMD, Texas Instruments, Qualcomm, and Intel they would total $964 B. Last year's total sales for all of these chip companies combined would be over $180 B. For comparison, in 2023 Nvidia is estimated to have a little over $30 B in sales. Also, if we look at their sales compared to the other companies in the $1 Trillion market cap club, they need a lot of growth to catch up. The 2023 estimated sales for those companies: Apple $384.8 B, Microsoft $211.4 B, Alphabet $299.8 B, Amazon $559.7 B. It is likely Nvidia will continue to grow sales and earnings at a nice rate over the next few years, but at these valuations the company appears to be priced for perfection.
Tuesday May 30, 2023
Tuesday May 30, 2023
US Debt
The talk began Thursday morning about a rating downgrade for US debt. The bad news continues to make headlines and drive broader markets and value stocks lower. We took a look at the US debt versus GDP which is similar to looking at debt versus income and over the last three years the ratio has been declining. In the second quarter of 2020 the ratio was 134.8. The most recent data reported was for the fourth quarter of 2022 and the ratio has improved by over 10% to 120.2. I have said this many times before, what we should be focusing on is increasing the GDP by growing the economy. This would then reduce the burden of the debt.
Savings Rate
Even though consumers have said they are worried about a potential recession, that has not stopped them from spending. In the month of April, spending rose 0.8% compared to March. This easily topped the estimate of a 0.4% gain. There was a $151.7 B increase in expenditures with $86.9 B of it coming from services and the remaining $64.8 B coming from an increase in spending on goods. Some have highlighted a concern over a depressed saving rate which fell to 4.1% in April from 4.5% in March. This was the first decline in the savings rate since last year. This rate has been depressed since the beginning of 2022, but I believe much of this is due to the over saving that occurred during Covid. There were some months in 2020 and 2021 that the savings rate was over 20% and in April 2020 it was 33.8%. If we look at the average savings rate from March 2020 - April 2023 it would be 10.1%. For comparison, if we look at the average savings rate from January 2017 - February 2020 it was 7.9%. I believe that Covid created a lot of excess savings in the economy that people can afford to spend more of their income each month due to the savings that were built during the pandemic. As we go out over the next couple years, I would expect to see excess savings continue to fall as the savings rate normalizes and continues to climb higher.
S&P 500
The five biggest companies in the S&P 500 account for nearly 25% of the entire index with a combined market cap of about $8.7 trillion. Those five companies are about 3.2 times the Russell 2000 which has a value of $2.7 trillion. This differential is now larger than the difference between the five biggest stocks and the Rusell 2000 during the dot-com boom. The five companies we're talking about are Apple, Microsoft, Alphabet, Amazon, and Nvidia. Something just doesn’t seem right investing in these companies at these levels.
Bitcoin
You may have heard that recently there was a Bitcoin convention in Miami Beach. The excitement seems to be leaving Bitcoin based on the change in attendance. Last year, they had 26,000 attendees and this year it dropped to about 13,000 attendees. It was also noted at the entrance there was a sign that read “No bears allowed”. What does that tell you about the future of Bitcoin.
Monday May 22, 2023
Monday May 22, 2023
Consumers
Based on retail sales it looks like the consumer is softening, but I would not say to problematic levels. In the month of April retail sales rose 0.4% compared to last month and were 1.6% higher compared to last April. One problem here is these sales do not adjust for inflation and with inflation increasing 4.9% compared to last year, it appears most if not all of that gain can be attributed to higher prices for goods and services. While the headline number looks soft there are still areas where the consumer remains extremely strong. Food services and drinking places saw an increase of 9.4% compared to last year, health and personal care stores were up 7.9%, and non-store retailers had a gain of 8.0%. With grocery prices remaining high, food and beverage stores also saw an increase of 3.7% compared to last year. Areas that received a covid boom continued to struggle as furniture and home furnishing stores saw sales fall 6.4%, electronics and appliance stores saw sales decline 7.3%, and building material and garden equipment and supplies dealers saw sales decline 3.7%. The biggest negative in the report was gasoline stations as sales fell 14.6%. Overall, it appears the consumer remains in a good spot. They just aren't spending as much on goods and would rather spend money on travel and dining out.
Housing Market
Existing home sales continue to remain under pressure as in the month of April they fell 3.4% compared to March and were 23.2% lower than April 2022. There are several factors which are likely contributing to the pressure which include higher mortgage rates, challenging affordability, and an extremely tight inventory picture. At the end of April there were only 1.04 million homes for sale. This was a 1% increase compared to last April, but at the current sales rate it represents a 2.9-month supply. Generally, 6 months is considered a balanced market. The affordability challenges have really hurt the first-time homebuyer and in the month of April they made up just 29% of sales. Historically, they are around 40%.
Investing
Over the last few weeks, the markets and equities have seemed to go nowhere. They go up for a few days and then go back down for a few days. This can be very discouraging for investors who get impatient and then settle for a 5% T-bill. Over the last 12 months institutions have pulled $333.9 billion from stocks and over that same period, individual investors have pulled $28 billion. As of May 10, 2023, money-markets reached a record in total assets of $5.3 trillion. For patient investors they will be rewarded, could be next week, next month or three months from now. By the time some people realize it, they will have missed perhaps a 5 to 10% increase in their portfolio. Don’t forget what Warren Buffett said, “investors should be greedy when others are fearful." I will add to that, a good dose of patience helps as well.
Monday May 15, 2023
Monday May 15, 2023
CPI
Headline CPI of 4.9% came in below expectations of 5.0% and registered the slowest growth since April 2021. It also marked the 10th consecutive month of slower growth since the report peaked in June 2022 at 9%. Areas that continued to see a growth in prices were food (+7.7%), motor vehicle insurance (+15.5%), transportation services (+11.0%), admissions which includes concerts, movies and theaters (+6.9%), and electricity (+8.4%). There continues to be more components that are registering declines compared to last year. Energy was a big one as it was down 5.1% as gas and oil prices fell from high prices last year. Gasoline in particular was down 12.2%. Other areas that saw declines included major appliances (-10.4%), used cars and trucks (-6.6%), and even airfares (-0.9%). The Core CPI, which excludes food and energy, did come in higher than the headline number at 5.5% but over 60% of that increase came from shelter costs which grew 8.1% compared to last year. If those shelter costs were removed from the report the Core CPI would have grown at just 3.7%. Overall, I continue to see inflation heading in the right direction as costs continue to decelerate.
PPI
Big news on the Producer Price Index (PPI) as it came in with just a 2.3% increase in April. This was the lowest reading since January 2021, and it was well off the high of 11.3% in June 2022. This is so important because if businesses are not seeing costs increase as much, they should not need to increase prices as much for consumers to offset the costs. I really believe inflation will not be a problem as we exit 2023 and head into 2024.
Regional Banks
The regional banks have really caused a lot of concern in the markets lately. Unfortunately, short sellers have stepped in and are magnifying movements of stock prices beyond belief. But if an investor looks at where some of these regional banks are trading, like Western Alliance at 2.3 times forward earnings or CoAmerica at 3.9 times forward earnings, it would appear that the worst is probably over. For the big banks, they have been beaten up somewhat as well, and are currently trading at 1.2 to 1.3 times tangible book value. If you back out the non-cash impact from potential bond portfolio losses, the price to tangible book value trades closer to one. The normal for big banks is more around two times tangible book value. For an investor looking down the road two or three years I think this is a good time to add some good bank positions to the portfolio after some strong research. I would also caution investors to be prepared for a bumpy ride for the next few months but if you wait and by the time everything looks good, you would’ve missed the opportunity.
Consumer Credit
You may hear how terrifying it is that revolving consumer credit outstanding is at record highs and recently in February it was at $1.2 T. What you don't hear though is how that number relates as a percentage of disposable income. In fact, in the chart below you'll see revolving consumer credit outstanding as a percent of personal income was just 6.2% in February and is actually still below pre-covid levels. It's important to understand that when the price of assets and incomes rise so will costs and debt levels. The absolute level is not nearly as important as the relationship that the numbers have.
Monday May 08, 2023
Monday May 08, 2023
Jobs Report
The jobs report showed nonfarm payrolls increased 253,000 in the month of April, which easily topped the estimate of 180,000. On the negative side, the prior two months saw revisions to the downside that totaled 149,000. Gains continue to moderate in the report as the April gain was below the 6-month average of 290,000, but with an unemployment rate of 3.4% I can't see payroll growth accelerating at this point. Areas that were at the top of the report included professional and business services (+43,000), health care (+40,000), and leisure and hospitality (+31,000). The growth in leisure and hospitality slowed substantially considering the 6-month average has been an addition of 73,000 jobs per month. The industry remains 2.4% or 402,000 jobs below pre-pandemic levels. No major industry saw a contraction in the report, but one negative was temporary help services declined by 23,000 in the month and since its peak in March 2022 it is down 174,000. One other area that continues to remain a concern was wage inflation. Average hourly earnings in the month increased 4.4% over the last 12 months. This increased from last month's reading of 4.2%, but compared to last April's 5.8% gain it was a nice deceleration. Overall, this report continues to feed my belief that the economy is in ok shape and inflation should continue to slow.
JOLT’s
While the headline Job Openings and Labor Turnover Survey (JOLTs) shows a slowdown, it is again important to compare to pre-covid level given the strange economy over the past few years. Job openings declined 384,000 in the month of March to 9.6 million. This is down 1.6 million when compared to the end of 2022 and is the lowest level since April 2021. While this may sound negative, there are still 1.6 job openings per available worker and in February 2020 job openings stood at just 7 million. Layoffs also increased in the report by 248,000 to a level of 1.8 million. Again, while this may sound troubling, it is important to note that in February 2020 layoffs were 1.97 million.
Apple Stock
If you have made money investing in Apple, congratulations. I must say though I was not impressed with the most recent earnings from the company. The company saw sales decline 2.5% compared to last year and EPS was flat. Service revenue, which has been a nice growth catalyst for Apple in the past, saw sales grow just 5.4% compared to last year. The company also still has a huge reliance on iPhone sales with that component of the business making up over 54% of total revenue in the quarter. Some may point to excitement over Apple's $90 B stock buyback plan and its 4.3% increase to the dividend. Unfortunately, due to Apple's size the buyback plan would only amount to about 3.2% of the shares outstanding and the dividend yield would be just 0.55%. With Apple trading at about 26.5x estimated 2024 earnings the stock is just too expensive for lackluster growth.
Consumer Spending
We see different areas in the economy that appear to be slowing down, but that would definitely not be true for consumer spending on travel and entertainment. Both Visa and MasterCard stated during their earnings last week that this category continued to grow in the first quarter. Also, proving this fact is domestic airline ticket prices in the US increased to $393.85 at the end of 2022, that was an increase from $327.13 one year earlier. If you’re doing the math, that’s about a 20% increase. A recent look of people passing through the Transportation Security Administration (TSA) checkpoints on April 27 was up 11% from one year ago to 2.52 million people. The consumer is still spending. They are just spending in different areas, I guess they feel they have enough TVs and furniture in their homes now.
Monday May 01, 2023
Monday May 01, 2023
GDP Report
While the GDP report showed the economy grew at an annualized seasonally adjusted rate of just 1.1% and was below expectations of 2.0%, it showed the consumer is still spending. In total, the consumer portion of GDP grew 3.7% as goods increased 6.5% and services spending grew 2.3%. What really hurt the report was private investment as it subtracted 2.34% from the headline number. Within private investment, the change in private inventories subtracted 2.26% from the headline GDP number. Residential investment was a negative in the report as it fell 4.2% and investment in equipment was also lower by 7.3%. Positives in the private investment space included nonresidential structures which saw spending grow 11.2% and intellectual property was up 3.8%. This report continues to make me believe that while the consumer may slowdown overall the economy is still in an ok spot. Companies will also likely need to rebuild those inventories which should be a benefit to GDP in future quarters.
Inflation
Positive news on the inflation fronts as the Fed's preferred measure, PCE, registered a year-over-year increase of 4.2%. This compares to last month's reading of 5.1%. Energy costs were a major benefit in the report as they were down 9.8% compared to last year. Critics will point to the Core PCE, which excludes food and energy. It came in at 4.6%, above expectations of 4.5% and barely below last month's reading of 4.7%. With that said I continue to believe energy is a core part of costs for businesses and with a leveling off in energy prices, I believe core inflation will continue to subside through the remainder of this year. Overall, I believe this was a good report as it continues to show inflation moving lower.
Recession
I continue to say I do not see how we would have any type of meaningful recession or perhaps even a recession at all. I have pointed out how strong the job market is and that when people have a job they will not pull back dramatically on their spending. Another reason why I do not see a major recession coming is because of what’s known as the M2 money supply. The M2 money supply is virtually all the liquid money in the economy, and it includes short-term CDs, checking accounts, savings, and money markets. It has pulled back from the peak one year ago of $21.6 trillion to a current level of $21.1 trillion. I continue to compare data to the great economy that we had back in 2019 before Covid and on December 31st of 2019 the M2 money supply was $15.3 trillion. So here we sit with anybody that wants a job can get one and liquid money in the economy (roughly $6 trillion more than back during the good economy in 2019). I have to ask how in the world could we have a major recession with so many people working and so much available money?
Diet Drugs
Maybe the pandemic is to blame or maybe it is the availability of too much food, but according to the Federal Centers for Disease Control and Prevention obesity has risen from 31% in 1999 to 42% in 2020. This is despite the fact that in 2020 there were $76 billion in sales for weight loss, medical programs, diet soda, low calorie frozen food and gym memberships. This all could be changing because of three diet drugs that have hit the market: Ozempic, Wegovy and Mounjaro. These new drugs don’t come cheap ranging from $900-$1400 for a one-month supply. Some side effects include nausea and diarrhea. I do question if it is different this time? I remember back in the 1990s the diet drug fen-phen was pulled from the shelves because users developed heart issues. Another over-the-counter diet drug Dexatrim was also linked to increased risk of strokes. Both drug companies, Novo Nordisk and Eli Lilly are hot now, but in this litigious society that we live in I just wonder how long it will be before the major billion-dollar lawsuits come out against these companies.
Monday Apr 24, 2023
Monday Apr 24, 2023
Remote Work
Another sign that workers will be coming back to the office was a report that showed tech companies over-hired and that working from home did not prove to be that effective. Year to date, tech companies have laid off approximately 168,000 people and the layoffs are occurring for a couple reasons. First, they discovered that people were working only 4 to 5 hours a day logging in at 11 o’clock in the morning and wrapping up and logging off by 4:30 that same day. It was also discovered that some tech companies did become overzealous and looked at hiring more people as an ego boost and an indication that they felt business was going to grow rapidly in the future and they would need a lot of employees. Part of the hiring was done to keep talented employees from going to the competition, a hoarding of employee talent so to speak. No matter how you slice it, this is not a problem with the economy, but more with tech companies and people working from home.
Special Purpose Acquisition Companies
Another year has passed, and more data is in on what a bad investment Special Purpose Acquisition Companies, also known as SPACs, were. I hate to tell people I told you so but back when these blind investment pools were hot, we warned people. In 2022 the total write downs amounted to $11.6 billion a huge increase from $2.7 billion in 2021. The reason for the write downs is based on what is known as goodwill. This comes about when a business is acquired for more than the value of its assets. Accounting rules require the measurement of fair value to the assets annually. If that figure is less than the amount recorded in the books, the value of goodwill must be reduced. I have been in the investment world for 40 years, and I continue to see these hype investments that make Wall Street a lot of money. Unfortunately, in many cases the average investor loses money. This is why I continue to be a value investor and invest in a company when it’s on sale and sell it when it’s overpriced.
Value Stocks
I know people are fearful about investing now and when I tell them I expect to have a very good year come December 31st, I think they question my thoughts. Currently value stocks are very inexpensive compared to growth stocks. They are discounted more than they have been for four-fifths of the time in the history of the stock market. Another study also showed when inflation runs between 4% and 8% per year value stocks outperform growth stocks by 6 to 8%. People may be afraid of inflation, but it actually is a benefit to value stocks. I will keep investing!
Monday Apr 17, 2023
Monday Apr 17, 2023
CPI
Headline CPI came in at 5% compared to last year, which was the lowest level since the May 2021 report and well off the June 2022 high of 9%. Some reasons for the slower gain include gasoline which was down 17.4%, used cars and trucks down 11.2%, televisions down 14%, and uncooked beef roasts down 4.4%. Areas that remain elevated include transportation services up 13.9% (Airfare was up 17.7%), electricity up 10.2%, and food was up 8.5%. The big problem in the report continues to be the shelter index which accounts for about 1/3 of CPI and rose 8.2%. Some people may point to a concern over core CPI, which takes out the volatile food and energy components, as it rose 5.6% compared to last year and was higher than February's reading of 5.5%. But looking closer at the numbers, the shelter index accounted for about 60% of the increase in core CPI. Excluding shelter, the CPI rose just 3.4% from a year ago. I continue to believe the shelter index will level off as we progress through the year and have a much smaller impact on CPI. Overall, I would say this inflation report was a major positive and should provide evidence to the Fed that a pause in rate hikes could make sense.
PPI
Huge news on the inflation fronts as the Producer Price Index (PPI) showed a month over month decline of 0.5% in the month of March. This was well below estimates for the index to be flat in the month. Looking at the 12-month change, the index showed an increase of just 2.7%. This was the smallest increase since January 2021 and is well off the high from last March of 11.7%. The Fed has pointed to concerns over services pricing, but this report also indicated that prices for services fell 0.3% in the month which was the largest decline since April 2020. With a report like this I really believe the Fed should consider not raising rates at the next meeting.
Retail Sales
The headline retail sales numbers may concern some, but digging through the numbers they indicate exactly what we've been anticipating, a slowing economy not a troubled economy. The headlines read that retail sales fell 1% in the month, more than the estimate of a 0.5% decline but looking at the numbers compared to last March sales increased 2.9%. It's important to point out that this is not adjusted for inflation, which was 5% in the month of March. The biggest negative weight on the numbers was the decline of 14.2% at gas stations largely due to the decline in gas prices. If we exclude gas stations from retail sales, they would have been up 4.8% compared to March 2022. Other negatives included electronics and appliance stores which were down 10.3%, building material & garden equipment & supplies dealers were down 3.5%, furniture and home furnishings stores were down 2.4%, and clothing and clothing accessory stores were down 1.8%. The major gainers in the report were food services and drinking places which were up 13%, non-store retailers were up 12.3%, health and personal care stores were up 7.1%, and food and beverage stores were up 5.0%.
Real Estate
Real estate transactions remain on the low side as housing prices are beginning to weaken. With the higher prices of homes and the higher interest rates many first-time buyers have been locked out of the housing market. The movement of the real estate market generally happens where people will trade up to perhaps a larger or more expensive home opening the lower priced homes for first time buyers. But with many of these homes the homeowners locked in mortgage rates in the 3% range, and they don’t see the benefit of buying a more expensive home with mortgage rates double what they’re paying now. I believe it will take years for the real estate market to adjust to a more normal market.
Monday Apr 10, 2023
Monday Apr 10, 2023
Jobs Report
Given the concerns around the economy, I'd say the jobs report was a positive one. It wasn't too hot which would've provided evidence for the Fed to increase rates more than anticipated, but it also wasn't too far below expectations and overall, it showed a softening labor market not a bad labor market. Headline payrolls grew by 236,000 compared to the estimate of 238,000, but the big highlight came from the average hourly earnings which increased just 4.2% on an annual basis and was the smallest increase since June 2021. For most of 2022 the annual gains were over 5% with March being the peak at 5.9%. This is more evidence that inflation is becoming a much smaller problem. Also, another highlight was the labor force participation rate again ticked higher to 62.6% which was the highest level since pre-covid levels. For comparison, in February 2020 the labor force participation rate was 63.3%. Areas that led the way in job gains were leisure & hospitality at 72,000, healthcare and social assistance at 50,800, and the Government at 47,000. Leisure & hospitality still remains 2.2% or 368,000 jobs below pre-covid levels and Government employment is still lower by 314,000 jobs, or 1.4 percent. There were 4 declining groups in the report as retail trade was down 14,600, construction was down 9,000, and manufacturing and financial activities were both down 1,000 jobs.
Labor Market
The Job Openings and Labor Turnover Survey showed that job openings in February came in at 9.93 million. This was a fall of 632,000 job openings when compared to the month of January and it missed the estimate of 10.4 million openings. This was the first time since May 2021 that job openings fell below 10 million and while this may sound concerning, there are still about 1.7 jobs available for every available worker. Also, if we look back to January 2016-February 2020, the job openings ranged from 5.59 million - 7.59 million. Layoffs were also positive as they declined 215,000 from January to a level of 1.5 million. If we again look at January 2016-February 2020, layoffs ranged from 1.59 million - 1.97 million. Overall, I'd say this is a softening labor market but by no means is it a weak labor market.
Mutual Fund Managers
I knew there were a lot of mutual funds out there, but I was shocked to see how few managers actually participate in their fund. According to Morningstar, some 4,643 out of a total of 7,108 funds have zero manager investment. I think this is just crazy and as much as people talk about different objectives and risk tolerance, I have always been a big believer that a good investment for me should be a good investment for my clients. Ultimately, I believe that everyone shares the same main objective when it comes to investing and that is to make money. This is why I invest in the same companies as my clients when we manage money.
Fact Checkers
I continue to worry about people's overreliance on the internet/technology and even more so the so-called independent fact checkers. We recently did a post on the JOLTs report, and it was flagged for false information. When clicking on the reason for the false information, Facebook indicated it flagged the post because there is no record of Martin Luther King Jr saying, “Our lives begin to end the day we become silent about things that matter.” This was according to AAP FactCheck. Our post did not contain that quote or mention Martin Luther King. As a society, I believe we need to really emphasize critical thinking and doing more than just surface level research that relies on algorithms.
Tik Tok Statistics
The numbers are staggering when it comes to TikTok. It is estimated that about 95 million Americans use TikTok for about 90 minutes a day. It is estimated the company will generate about $14.2 billion in revenue which is an increase of 43% compared to 2022 and 10 times what it was just three years ago. The biggest users of TikTok are coming from Generation Z who were born from 1997 to 2012. What is concerning is that these 11- to 26-year-olds could be having their minds and ideals twisted in ways that no one could foresee. It was also pointed out about 26% of adults under age 30 are getting their news from TikTok on a regular basis which is up dramatically from 9% back in 2020. At first thought, I’m a hard liner that we ban TikTok because of the backing from the Chinese government and what it could be doing to the young minds of our country. Then there’s the other side of the coin if we do ban TikTok did we just throw out our freedom of speech? Also, there could be repercussions for American companies operating in China, who generate billions of dollars benefiting US businesses and shareholders. One thing is for certain, this will not be resolved for years to come and there’s no doubt in my mind that it will not be resolved before the presidential election in 2024, because if it were banned now, politicians would lose many Gen Z voters.
ISM Services
There has been some concern about economic data this week, but I believe this is exactly what we need for a healthy economy. Looking at the ISM Services PMI it registered 51.2 which was 3.9 percentage points below February's reading of 55.1. The reason this is important is because the economy is slowing, but a reading above 50 still indicates expansion. One of the most important components of the report was the Price index. It registered 59.5 which was 6.1 percentage points below the 65.6 recorded in February. It marked the 70th consecutive month of price increases, but it was the index's lowest reading since July 2020. This also marked a ninth consecutive reading near or below 70 which follows 10 straight months of readings near or above 80. I continue to believe that we can get a soft landing, or a small recession paired with a reduction in the massive inflation we have been seeing.
In the Office
There is more evidence that people are coming back to the office. One was a recent survey where it says 72% of business employees are now in the office full-time or work at home very little. In 2021 the same survey showed 60.1% were coming into the office. My own personal observation agrees with the survey as I have noticed when I call different businesses, I hear fewer barking dogs in the background or kids running around screaming.
Money Movement
The Silicon Valley Bank failure caused movements of dollars that has never been seen before. This is mostly because of the ease of transferring money from one institution to another. Banks below the top 25 banks experienced withdrawals of $108 billion, which is an all-time record.
OPEC and Oil Prices
In a surprise move OPEC cut their production which caused a big rally in oil prices today. It appears the Biden administration missed an opportunity to buy back oil for the Strategic Petroleum Reserve which would’ve helped to stabilize oil at a higher price. Since the administration did not do that OPEC took it upon themselves to cut production to support oil prices. Oil rose 6% today crossing the $80 per barrel level.
Wells Notice to Coinbase
The SEC recently issued a “Wells Notice” to Coinbase, which is saying a lawsuit is coming be prepared. What the SEC is saying is that Coinbase is trading tokens as an unregistered security and that they are not tokens but a security. If the SEC wins this suit against Coinbase it will virtually shut down all trading of most tokens in the US (imagine the price of Bitcoin if this happens) because they would have to register with the SEC as brokerages and exchanges, and they would also have to issue the tokens as securities. I do take the side of the SEC on this because more people buy and sell Bitcoin and other cryptocurrencies as a way to make a profit and not use it as a currency for exchange of goods and services. To me, it is the same as penny stocks, which really have no value and trade up and down on a daily basis.
Federal Reserve Raising Rates
You may be feeling the pinch on your credit from rising interest rates, but you are not the only one. The Federal Reserve, who is raising rates, is also feeling the pinch. How is that you may ask? The Federal Reserve has over $5 trillion that it has borrowed from financial institutions and money market funds at short term rates. Now that those short-term rates have risen the Fed is now paying 4 to 5% on that $5 trillion. The Federal Reserve makes profits off securities that it owns. In 2021, they made almost $108 billion which they sent to the Treasury. But now because of the amount they are paying on the $5 trillion that they owe, it looks like in 2023 the Treasury will not be receiving any money from the Federal Reserve.
Monday Apr 03, 2023
Monday Apr 03, 2023
Consumer Confidence
I was happy to see the consumer confidence number come in today at 104.2 for March which was up from February’s 103.4. For me this is another positive sign that we will not have a major recession, and that consumers will continue to spend on goods and services. I want to emphasize this is a good number not a great number. The reason I say that was from 2008 to 2012 the confidence number was below 60 but in 2019 it rose to nearly 140. So, I am happy with the current number for now.
Apple and Disney
There is talk today, that Apple may be buying Disney. No numbers have been released yet but I do not believe this will take place or that it would make any sense for Apple. Apple may be looking for the media side to help grow Apple TV but if you buy Disney, you also must take care of the theme parks and the cruise lines which Apple has no experience or I feel no desire to do. They could spin those off, but I think if they are going down that path, they would be far better to buy either a Warner Bros. or Paramount, which are pure media plays. Also keep in mind Apple has not done any major purchases in recent years and its largest came in 2014 when it bought Beats for $3 billion. To buy Disney the current market cap is nearly $180 billion, versus Warner Bros. at nearly $37 billion and Paramount is just over $14 billion.
Binance
This has been quite the week for Binance which is the world’s largest crypto exchange. You wouldn’t know it from the price of Bitcoin, which has now climbed to over $28,000. It defies logic, and I’m sure more people will get burned once again. The CFTC known as the Commodity Futures Trading Commission has charged Binance with operating illegally in the US and violating rules to prevent illicit financial activity. Billions of dollars have been walking out the door from the company, and as I said months ago, Binance would be the next crypto company to fall. As these crypto companies continue to fall, I don’t know how Bitcoin can stay at these levels.
Money Market Funds
I was surprised to learn that roughly $120 billion flowed into money market funds in mid-March bringing the total assets to $5 trillion. The reason I was surprised is that money market funds are not insured, and if consumers were leaving the bank for safety the money was insured at the bank. Sometimes fear causes consumers to do silly things. One should stop and think before making financial moves.
Banking Industry
Our banking industry has gone through major changes compared to just 15 years ago when the big banks were viewed as bad. They have now become the safest place to keep your money, or so people feel. In 2008 the feeling was we don’t want big banks, but that has shifted as the share of total banking assets controlled by the 25 largest banks is now at 68% which is more than double what it was 30 years ago. The number of US banks hit an all-time high of 30,456 banks in 1921 and as of 2021 there were just 4,236 FDIC insured banks. There is an ongoing consolidation of banks and I believe it will continue going forward.
LA Real Estate Tax
Starting April 1st, LA will begin implementing a large tax on real estate valued over $5 million. I think this is a terrible idea especially since it applies to not just mansions, but multifamily and commercial property as well. Sellers of property will have to pay 4% of the total sales price for properties between $5 and $10 million and for properties over $10 million the tax will be 5.5%. The tax is on top of the current 0.45% transfer tax. I don't know who in their right mind would buy in LA when you can buy in surrounding markets and avoid the tax. I believe this will make the supply problem even worse and reduce demand in the higher market in LA. Unfortunately, I don't believe this will fix the affordable housing/homeless problem in LA like the bill was intended.
Pending Home Sales
Pending home sales showed a small month over month increase of 0.8% in the month of February, but compared to last year sales were 21.1% lower. Pending home sales look at contracts that were signed in the month. I believe these sales will continue to have difficult year-over-year comparisons. There has been a slight increase in mortgage demand from recent weeks as rates have fluctuated, but compared to last year the demand for purchase applications was 35% lower. As for prices we did get data from the S&P CoreLogic Case-Shiller U.S. National Home Price index, and it marked the 7th straight month of declines. In January prices fell 0.5% compared to the prior month. They were still 3.8% higher than the previous year. Here in San Diego though prices were 1.4% lower compared to January 2022. I will say, be careful comparing this index against other ones as it does lag by a month. We are now getting data for the month of February in many cases, but this index is for the month of January. My expectation is that this index will turn negative on an annual basis in the coming months.
Buy Now Pay Later
Apple has entered the buy now pay later arena, which I believe will put a lot of downward pressure on the stock prices of some of those companies like PayPal. It makes it very convenient for consumers who use apple since it’s already on their phone. It is a simple concept, buy now up to $1000 and make four easy payments with no interest or fees. I do always worry about consumers loading themselves buy now pay later debt and becoming over extended, but for Apple, this is just another service that they provide to their customers for convenience.
Global Trade
In a recent trade agreement with China and Brazil, the deal was done using China’s currency the Yuan. You may be hearing that the dollar is not the strong currency any longer that is used in trade deals, but that is still far from true. Currently when it comes to global trade, the Yuan accounts for 3% of trade deals and the United States dollar accounts for 87%. We still have a very comfortable lead, but you must be aware that China is doing everything it can to get rid of using the dollar. Currently one Yuan trades for $.15.
Store Pricing
I’ve always been a little suspect of going up to the checkout register as a person scans very quickly multiple items, wondering am I really getting the right price? Unfortunately, my fears have been verified from multiple states that retailer Dollar General is charging a higher price at the checkout register than the advertised price. Examples include a six pack of soda and a frozen pizza which were $1.25 higher than the shelf price, disposable cups were $1.70 higher and chicken strips were $2.80 higher. I was also disappointed to learn that state regulators on average allow up to a 2% failure rate on pricing. Dollar General has the highest penalties in states for over pricing the items, but it does happen at Walmart and even Circle K but to a lower degree. What I also thought was concerning was all the miss priced items that I read about were always priced higher, not one was priced lower. I guess this would be a good argument for self-scanning so you can verify the price, but now I’m thinking the price is not even listed on the item and you would have to write down each price you saw on the shelf for the product. Sometimes technology has its downfall.
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.”