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 Aug 01, 2022
Monday Aug 01, 2022
Stock Analysis
In a search for value at Wilsey Asset Management we’re always looking for companies that have gone on sale with strong fundamentals. What follows are four companies from last week that were down substantially from their 52-week highs. We have not done the research to see if they’re fundamentally strong, but they are definitely on sale. Snap which trades under the symbol SNAP fell to $9.96 last week and back in the fall of last year it was trading in the low $80s. We’ve also talked about the cannabis stocks and once again cannabis company Canopy Growth has continued to fall reaching $2.57 last week well off the high reached about a year ago of $19 a share. Back in 2018 the stock was around $50. The company trades under the symbol CGC. A company called Silver Gate Capital symbol SI which is a crypto bank, back in November was trading around $220 a share and Friday it closed at $86.50. I know cryptocurrencies have rallied lately but I don’t think investors will find any value here. And lastly Carnival Cruise lines which trades under the symbol CCL closed at $9.26 last week and if you look back to September/October of last year you will discover the stock was trading around $24-$25 a share. I do believe this company has a very weak balance sheet but maybe there is some value there if one digs deeper.
COVID-19 Vaccinations
Last week President Biden reported that he had COVID-19 along with Dr. Fauci. They also have been very cautious and have received the vaccination and the double boosters that were recommended. It seems to me that no one really cares any longer about COVID-19 and that there is no reason to get the vaccination or the boosters if you still get the virus. What I think about is how hard Pfizer, the drug company, has pushed the vaccinations and the boosters to everyone including even infants. Their stock rose on the news last year but year to date their stock has fallen over 9%. I know this company has many other drugs but I’m just thinking that less people will be getting the vaccinations and boosters going forward and that could hit them on the revenue side. The stock is not expensive trading just under 10 times forward earnings of $5.46 and has a decent dividend yield of 3%, but I worry with the fear of Covid dropping I presume the vaccinations and the booster shots worldwide will decline. What that tells me is perhaps there could be a better time to buy Pfizer over the next six months or so. It is worth watching.
Natural Gas
Natural gas has been extremely volatile this year and just about a month ago it seemed like it was heading in the right direction. That has now changed as the prices for natural gas has surged 77% in the month and is on pace for its largest monthly increase on record. Natural gas hit a high of $9.75 per million British thermal units (MMBtu) this morning which is the highest level since July 2008. This comes as Russia has said Gazprom's Nord Stream 1 pipeline will operate at just 20% of its capacity due to "turbine maintenance". This is such an important energy source and will likely lead to continued problems for inflation. Just to give you an idea how important the commodity is, natural gas is the largest source of energy for electricity generation at 38%, it's used in the industrial sector to produce chemicals, fertilizer, and hydrogen, and it's used in both the residential and commercial sectors to heat buildings and water, to cook, to dry clothes, and to operate refrigeration and cooling equipment. If we cannot get energy price inflation under control, I believe we will be unable to resolve inflation overall.
Stock Revenue
I was definitely not impressed by Microsoft's (MSFT) earnings report and was surprised to see the stock rally. I think it is just traders trying to "buy the dip" as the results were quite unimpressive. The company reported sales of $51.87 billion, vs. expectations of $52.44 billion and EPS of $2.23 vs. expectations of $2.29 per share. Revenue growth was just 12% and net income was up just 2% in the quarter. I say just because for a company trading at a forward P/E over 25x based on 2023 earnings, the growth should be much more impressive. Even cloud was a disappointment as revenue from Azure and other cloud services grew by 40% which decelerated from last quarter's 46% and missed analyst expectations of 43%. First quarter guidance of $49.25 billion to $50.25 billion in revenue also missed expectations of $51.49 billion. I continue to believe the stock is just too expensive, especially with numbers like this!
Housing Market
Rising interest rates are continuing to impact the housing market. Pending home sales just came out for the month of June and they were 20% lower than last year. Looking at the sales compared to May, sales were down 8.6% which was much wider than the 1% drop analysts were looking for. Excluding the first two months of Covid, sales came in at the slowest rate since September 2011. Mortgage applications have also remained weak as the recent report showed applications to purchase a home were down 18% compared to last year and applications to refinance were down 83% compared to last year. With a higher amount going to interest, homebuyer affordability is just too much of a problem which I continue to believe will weigh on housing prices.
Chip Bill
To be clear, I was initially excited about the CHIPs act, but now I think it is just silly. The whole point of the bill was to help with semiconductor manufacturing, but of course they snuck in a bunch of other money. The legislation includes $52B in subsidies for domestic production and a previously reported investment tax credit for chip plants that could be worth an estimated $24B over the next decade, but now it also includes $200B to boost scientific research. It's just silly that they call it a "chip bill" but close to 75% of the money is going towards "scientific research".
Gross Domestic Product (GDP)
Based on the advanced estimate for Q2 GDP we are technically in a recession which is constituted as two consecutive quarters of declining GDP. The National Bureau of Economic Research officially declares recessions and expansions, but their determination will not come for a few months. Going back to 1948 every time there were two consecutive quarters of declining GDP the economy was considered to be in a recession. Looking at current dollar GDP it actually increased 7.8% at an annualized rate, but due to inflation real GDP declined 0.9% in the quarter. The consumer portion of the report increased just 1% as spending on services accelerated during the period by 4.1%, but that was offset by declines in nondurable goods of 5.5% and durable goods of 2.6%. Gross private domestic investment weighed negatively on the report with the change in private inventories subtracting 2.01% from the headline number. Government spending also reduced the headline number by 0.33% and trade or net exports was a major surprise as it added 1.43% to the headline number. Overall, I'd say this report isn't extremely troubling, inflation has just made it harder for the economy to grow.
Solar Energy
Last week we did a post about the problems with solar energy in regard to the solar panels. Another problem with solar energy is it would take 13,000,000 acres to generate enough electricity for the US. And you can double that if you include energy storage, electric vehicle charging stations and increases in electrical infrastructure. So, you might say OK what’s the big deal let’s go ahead and do it to save the planet. Here is the problem, you already know food prices are rising and companies that want to lease land for the solar panels are turning to farmland in Texas and the Midwest. It is starting already to where some solar companies are paying $800 an acre to lease the land with high numbers being quoted at $2000 an acre. That means farmers can make a lot more money for just leasing the land than putting all the time, effort, and expense to farming the land. As you know we always talk about supply and demand, well if this were to happen there would be a drastic cut in the supply of food which would cause extremely high increases in food costs and could lead to food shortages. I don’t know about you but the more I read and learn about solar as an alternative energy the less and less I’m excited about it.
Raw Materials
Prices on raw materials are beginning to fall dramatically which will help inflation 3 to 6 months down the road. If one looks at the current price per ton of economically sensitive copper at $7000, since March that’s a decline of 32% and even since early June that’s a 26% drop.
A/C
In the United Kingdom the weather is cooler than here in the US, but they can still see days when the thermometer climbs over 100 degrees. What is shocking is that only roughly 5% of homes in the UK have air conditioning, a far lower number than the United States with 90% of homes having air-conditioning. With all the problems we have in our country we still have many things we take for granted compared to the rest of the world. Let’s remain cool on the problems that we have.
Harrison Johnson, CFP®:
Monday Jul 25, 2022
Monday Jul 25, 2022
Chip Manufacturing
I for one am glad to see positive news from the Senate regarding a bill designed to boost US semiconductor competition. After a key procedural vote that passed 64-34, the stage is now set for final passage in the chamber either late this week or early next week. It would then head to the house for passage and finally to Joe Biden to sign the bill into law. The bill would provide about $50 B in subsidies to aid chip manufacturing. Some chip companies like Nvidia, AMD, and Qualcomm aren't as pleased with the bill as they say the bill does not do enough to support them and it favors manufacturers like Intel. Personally, I do not believe we need a bill to help chip design as that has been a highly profitable business many chip companies have focused on. The manufacturing side is not as profitable and is much more capital intensive. Manufacturing is where the major issues are as we have seen 48% of chip sales come from US companies, but just 12% of the manufacturing takes place in the US. This is down from 37% in 1990. I was also glad to see the new bill was stripped down from other versions that included other areas of focus like taxes and climate policy. I hate when politicians try and bundle a bunch of crap into one bill, especially when a particular area has bipartisan support.
529 Plans
I have been getting a lot of questions about 529 plans lately and I must say for the most part I don't believe they are worth it. Looking at the tax benefits I do not think they are worth the potential risk. To begin some states, allow for a deduction on state income taxes, but here in CA there is no deduction for a contribution. The other benefit is the funds grow tax free and withdrawals are tax free if used for qualifying expenses. The downsides here are that if the funds are not used for qualifying expenses there is a 10% federal penalty, CA imposes a 2.5% penalty, and the gains are subject to income tax. Also, the investment options are limited to whichever plan you decide to pursue and if you go with a broker advised fund, watch out for the sales commissions on the funds they are recommending. For the most part I recommend building your investments which then gives you the option to pay for college down the road if that is what you would like to do and you believe your kids deserve it. I will say there are some cases the 529 plan makes sense, but for the average person I'd say building your net worth is the better option.
Solar Panels
Apparently investing for green energy is not always going to work out well in the end. There has been a boom of buying solar panels for clean energy. Well now it is coming out that solar panels only last 20 to 25 years on average. After that many of these panels are being shipped overseas or end up in landfills because it turns out that to recycle them costs more than to manufacture them. You may be thinking wait a minute silicon is recyclable which is true but also mixed in with the silicone is cadmium and lead, and that is the problem.
The department of toxic substance control from the state of California has listed solar panels under the hazard waste title as universal waste. If you have panels that were installed 20 years ago, they also lose their efficiency by about a half percent per year. So, if your panels are 20 years old, you’re only getting 90% of the energy that you were when your first bought the panels. I would not want to be holding the public solar companies (SEDG, FSLR, MAXN) as I imagine in future years they will be blamed and be hit with lawsuits and penalties to clean up the mess.
Cryptocurrency
Some people like the idea that trading cryptocurrencies is not regulated by the government, but some people trading cryptocurrencies don’t understand how much risk is involved. Let me give you a couple of examples on Wall Street that don’t exist in cryptos. On Wall Street there are market makers, stock exchanges and brokerages that are separate due to conflicts of interest. That is not the case with trading crypto, it is possible for crypto firms to trade against their own customers or do something that is known as front running which means they sell their positions before the customers to get the better price. There is no prohibition against wash trading on crypto exchanges and also there is no best execution rules, and no standardized reporting exists. If you think crypto‘s are good or bad the trading system has many holes and room for fraud.
Canned Beverages
If you walk through the beverage aisle at the grocery store you may have noticed that some cans are getting skinnier and not using the barrel type cans. Do not worry as it is still the same 12 ounces, and it is not shrunk inflation. This is done for a couple of reasons; they take up less room on the shelf and in transportation which saves some costs along with now maybe standing out from the competition. There’s also a psychological benefit that because they are slimmer it tricks the brain into thinking they are healthier with less calories. Sounds silly I know but it’s true. There is one problem, you may have noticed which I have, is they don’t work quite as well in the cupholders in cars because the car cup holders are designed for the barrel type cans.
Tort Litigation System
I was shocked to learn that back in 2016, the tort litigation system cost the US 2.3% of GDP which is roughly $429 billion a year in the United States. My guess is this has likely increased even further in recent years. This number is so high because it is estimated that there are more than 40 million lawsuits filed each year. What is also interesting is that just 57% of the money was paid as compensation to the plaintiffs, while the remaining 43% covered the cost of litigation, insurance expenses, and risk transfer costs. Part of the problem I believe is because now about 95% of pending lawsuits never make it to trial, they are settled. This avoids the aggravation of going to trial plus the added expense, but it also makes it more rewarding for people to file frivolous lawsuits in the hopes of getting some free money. And if you wondering the United States is the most litigious society in the world.
The Semiconductor Bill
Just a couple of days I said I was excited about a semiconductor bill that was making its way through congress. Today after looking at more details, I am reminded of why politics is so frustrating. On top of the spending designated for semiconductor manufacturing, it could include $81 B would go to the National Science Foundation (doubles the present budget), $9.6 B would go to the Commerce Department's National Institute of Standards and Technology, $11 B would go to the Commerce Department's regional technology hubs, $50 B would go to the Energy Department's Office of Science, $4 B would go to the national labs, and you can't forget about the $1 B for "distressed" communities and labor markets. All this fluff is exactly why nothing gets accomplished in DC. You finally have something that has bipartisan support and add a bunch of other areas that do not.
Harrison Johnson, CFP®: “Understanding Internal Rate of Return (IRR)”
Monday Jul 18, 2022
Monday Jul 18, 2022
Inflation
Another month, another extremely high inflation rate. The CPI came in today for the month of June at 9.1% which topped the estimate of 8.8% and was the highest level since November 1981. Energy inflation was top of mind yet again as gasoline prices climbed close to 60% compared to one year ago, electricity prices grew 13.7% over the same time frame, and natural gas was up 38.4%. Food prices also remained hot as they rose 10.4% over the last 12 months and the shelter index was up 5.6% which was the highest level since February 1991. One area that is seeing a "reprieve" from what I believe is more difficult comparisons is car prices. The cost for new vehicles was up 11.4% compared to last year and the used car & truck index was up 7.1% during the same time frame. Remember recently this was around 30%! With that said I still believe inflation will be lighter as we exit the year, but all lighter means is not as high! We have started to see some reduction in commodity prices which could help with input costs for companies and could slow the CPI in the months ahead. Remember it takes time for these various costs to work through supply chains and the overall economy.
Producer Price Index (PPI)
After yesterday's CPI report, the Producer Price Index (PPI) remained around historic levels. In the month of June, Headline PPI was up 1.1% compared to the month of May and increased 11.3% compared to last year (Recent all-time high was 11.6% in March). Of the month over month gain almost 90% came from a 10% increase in final demand energy. One positive note was the core PPI which excludes energy, as well as food and trade service prices was up 6.4% compared to last year. This was a deceleration from May's 6.8% gain and off the 7.1% gain we saw in March. Unfortunately, with these elevated prices, the higher costs will likely continue to be passed on to the end consumer.
Recession
There may be a recession coming but it will be the best recession we may have seen in our lifetime. There's not enough room in this post to list all the reasons so I will have to summarize some of the facts briefly. Inventory levels at many companies are low. Profit margins at companies are high around 18%. For reference, profit margins heading into recessions in 1991 and 2001 fell to single digits. Businesses are sitting on a record $4 trillion in cash. Households still have $18.5 trillion in checking accounts, savings accounts, and money market mutual funds which is about $5 trillion higher than before the pandemic. The job market is still very strong and in the 12 recessions since World War II that has never been the case. And I forgot to mention in the second quarter many commodities like soybeans, wheat and corn have dropped double digits. You may hear the media and other worry warts screaming the sky is falling like chicken little. But I believe this will not even feel like a recession. Let’s see where we stand December 31, 2022. In the meantime, I’ll be keeping my eye on the important data not the media hype!
Housing Market
Historically, slowdowns in new home construction have been a leading indicator for past recessions. In the month of May we saw new home construction drop 14% from a month earlier, but before you hit the panic button it's important to look at the lessons home builders learned from the housing crisis in 2007. During that time frame they drastically overbuilt, which does not appear to be the case this time around. In fact, in the first quarter, total US spending on home building was 22% below the pace of building at the peak of the early 2000s. I believe we have an expensive housing market set for a pullback, but by no means do I believe we have a housing crisis that led to the Great Recession in 2008 and 2009.
Mortgage Rates
People have been worrying about the increase in mortgage rates, but historically they are not out of control by any means. In fact, if you go back to 1971 the long-term average for 30-year mortgage rates is just under 8% and the record high that came about in 1981 was 16.64%! At around 6% I'd say we now have a more normalized interest rate environment and the days of getting under a 3% mortgage are in the past.
Business Ethics
I’m glad to see in what we may call these crazy times that ethics are still important. The Securities Exchange Commission (SEC) fined the accounting firm Ernst and Young $100 million for cheating on ethics exams. It is so important to keep the integrity of our businesses and our young graduates coming out from higher education good ethics result in a good long-term career.
Job Retention
As the economy slows down job retention should be on more employees' minds. A couple of things to think about. First if you switch jobs and you’re the new hire at the company and there’s a layoff you’ll probably be the first one to go. Make sure your face is seen at the office, working remotely makes you less memorable and produces less of a connection with the employer which makes it much easier to put you on the list to go first. Make sure you’re doing extra training to be more valuable to your employer and also show up to work a little early and don’t leave right at 5 o’clock. Show your boss you care. If layoffs at your firm come around in the next 6 to 12 months, you want to make sure that you’re known as a hard worker and that you're dependable.
Employers
We have been continually talking about the strong job market and how it will soften a recession. The average increase in base pay in the US so far in 2022 is 4.8%. This is what employers are coming up with to retain their employees. This is not like the past 12 recessions since World War II where employers were trying to reduce their employees pay to save money. About a third of employers are considering or planning midyear raises and many employers are giving percentage bonuses in the month of July. This is great news for consumers and the economy. The downside is inflation is eating into these gains.
Retail Sales
Retail sales came out today and I'd say it was an alright report. June retail sales were up 1% compared to May and compared to June 2021 they grew 8.4%. While that is a nice growth rate, it is important to remember inflation was 9.1% in the month which means the sales did not likely produce a real growth rate when accounting for inflation. Categories that drove the sales included gas stations which were up 49.1%, grocery stores up 8.3%, and food services and drinking places up 13.4%. Areas that were weak included electronics and appliance stores which were down 9.1%, department stores were down 2.9%, and auto & other motor vehicle dealers were down 1.1%. With the numbers now in for the full quarter I still believe it's possible GDP contracted again in Q2 as consumer spending was not able to keep up with inflation.
Food Prices
I don’t know about you, but I really like corn on the cob with a nice coating of butter. Unfortunately, corn is one of the food categories because of the Russia and Ukraine war that has shot up 27% since January. On the other side of the coin rice has fallen 17% since January so maybe I will have to switch over to fried rice. However, health wise that is probably not the healthiest decision.
Harrison Johnson, CFP®: "Tax-loss Harvesting"
Thursday Jul 14, 2022
Thursday Jul 14, 2022
Labor Market
Friday's job report will be a very important indicator for how the job market is holding up with inflation concerns and rising interest rates, but today we got the data for the JOLTs report. In May the labor market remained strong as there were still 11.25 million job openings. This far outweighed those counted as unemployed as it stood at 5.95 million people. This means there are still about 1.9 openings per available worker. The quits rate also declined but it still stood at 4.27 million for the month of May. While both data points have fallen from recent record highs, overall, I still believe the labor market remains strong. Due to the strong labor market and no signs of excessive leverage, I believe the recession being discussed will be mild.
Employment
The employment numbers did not disappoint today, and they provide further evidence for an economy that I believe will be ok. The establishment survey showed payrolls grew 372,000 in the month of June which blew past the estimate of 250,000. The previous 2 months were revised lower by a total of 74,000 jobs, but overall, I would still say it was a good gain. The establishment survey is now just 524,000 jobs lower than pre-pandemic levels and if you look at the private sector it is actually 140,000 payrolls higher than February 2020. The household survey showed unemployed persons now stood at 5.9 million, which is just slightly higher than February 2020 when it was 5.7 million. Two areas that remain troubling are the labor force participation rate and wage inflation. The labor force participation rate still stands at 62.2% which is below the February 2020 rate of 63.4%. Looking at average hourly earnings we saw an increase of 5.4% over the last 12 months, but that is still well below the 8%+ inflation rates we have been seeing.
Growth Stocks vs. Value Stocks
Numbers are in for the first six months of 2022 and for the first half of the year growth stocks fell 25% compared with value stocks falling 12%. That is a gap of 13% which is the widest in 20 years. I believe the difference in the next six months will be reduced but still expect value to outperform growth stocks.
Car Manufacturers
Normally going into a recession or a slowdown, American car makers and their stocks get hit pretty hard. So far that appears to be the case with falling stock prices, but if one looks deeper investors should be less concerned this time around. In past recessions car makers were stuck with large inventories of vehicles that they had to discount dramatically to move the inventory. This then caused them to take large losses. That is not the case this time as the demand may not even be met in a slowing environment due to extremely low inventories. Another interesting point is that generally 40% of sales come from buyers with incomes under $50,000 who are hurt the most in a slowdown in the economy. Today that number has fallen to just 25%. It appears that two car manufacturers in the US could be drastically underpriced.
Pfizer Vaccine
I am pro-business and believe in letting market forces work, but I’m very disappointed with Pfizer‘s handling of the Covid vaccination. I’m not talking about the effectiveness or non-effectiveness. I’m talking about how they just raised their price to the US government by 27%. I think it is a shame that they would take advantage of not just the US government but also taxpayers who are paying for this. I’m also disappointed that the administration did not fight this and tell Pfizer the 27% increase is not justified. And don’t forget how they have increased vaccinations all the way down to six-month-old babies which I think is uncalled for based on the minimal risk that kids face from Covid.
S&P 500
Even with the major selloff we have seen this year, I still have concerns about the S&P 500. The top 5 companies still make up close to 22% of the entire index. Those companies are Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG, GOOGL), and Tesla (TSLA). The major problem here is all these companies remain expensive as the average forward P/E for the group is over 30x. I also worry about the growth expectations for these companies. With Apple in particular I believe they are one bad iPhone cycle away from a major pullback in their stock. People like to ignore the fact the iPhone sales still make up over half of the company's revenue and if you add Mac sales to that those products account for about 60% of total sales. They have other areas of growth, but a decline in these product sales would outweigh the growth in other areas. I've questioned it before, but other than a nicer camera are the new iPhones really that much different? Could this be the year iPhone sales take a hit? Micron CEO Sanjay Mehrotra said on a recent earnings call that he expected smartphone unit volume to decline by around 5% versus last year. Analysts were expecting growth around 5%. And yes, Apple is a customer of Micron. Be careful of these companies that still remain expensive, especially with many other great opportunities now available in the market.
Harrison Johnson, CFP®: Social Security “Spousal” vs “Survivor” benefits
Wednesday Jul 06, 2022
Wednesday Jul 06, 2022
Investing
You may be feeling that this year so far is the worst year investing in a long time. I’m here to tell you, you are correct if you are investing in the indexes and not value investing. Regarding stocks this has been the worst six months to start the year since 1970 as the S&P 500 was down 21% through the first six months. And if you thought you were safe in bonds at the beginning of the year, well that hasn't been the case. For the first six months of the year, US Treasuries were down about 11% which according to Duetsche Bank would be the worst start since 1788. And yes, you read that correctly it’s been well over 100 years. And crypto, Bitcoin just lost more than 38% of its value in June which was the worst month ever. I have often said investing is simple but not easy. I think this year people who are investing in the indexes may have a little bit better understanding of what I was talking about.
GDP Report
I have been of the belief that we would not see a recession until 2023, but as more data continues to be presented, I believe we may now be in a recession. The most recent data from Q1 GDP now shows the economy contracted at an annualized rate of 1.6% which was deeper than the initial reading of 1.4%. My concern for Q2 is now that the consumer has not been able to keep up with inflation and a strengthening dollar will not bode well for our trade imbalance. The consumer is primarily what carries the economy as consumption makes up close to 70% of GDP. If we look at retail sales in April, they grew at an annual rate of 8.2%, but CPI came in at 8.3% for the month. In May retail sales grew at an annual rate of 8.1%, but inflation was 8.6%. I believe for June we will also see a similar picture. It is important to understand that GDP looks at real growth which factors in inflation. I believe that the inflation numbers may be too high for the consumer to provide real growth. I continue to hold the belief that this will not be a deep recession by any means, and this is not the time to sell strong companies that are trading at good valuations. The advance estimate for Q2 GDP is set to be released on July 28th.
Interest Rates
What is giving the markets so much indigestion over the last few days? Comments from Federal Reserve chairman Jerome Powell. He said he was more concerned about the risk of failing to stamp out high inflation than the possibility of raising interest rates too high and pushing the economy into a recession. Once again, I hate to say it, but he was late to the party to start raising rates and now I think he will stay at the party too long and raise rates too high. I’m in hopes that he will change his tune as he sees negative results going forward. I believe this will put investors on a bumpy road for the next couple of months.
Gasoline Prices
No surprise that the rising cost of gasoline is reducing the volume of gasoline sales. For the first full week of June gasoline sales declined 8.2% compared to the same week last year. This marked the 14th week in a row where sales have lagged compared to 2021 levels. With demand falling that could help ease prices going forward if we see a rise in inventories. Now all we must do is make sure that the federal and state governments do not temporally takeoff the gas tax which would artificially increase demand. Let market forces work through the problem.
Taxes
Individual taxpayers paid $2.6 trillion in taxes for the last fiscal year. This was a record of 10.6% of the economy which surpassed the 9.1% in the previous year. Where is all that money going?
Inflation Relief Checks
California will be issuing "inflation relief" checks that can total up to $1,050/family. Single taxpayers who earn less than $75,000 a year and couples who file jointly and make less than $150,000 a year will receive $350 per taxpayer. Taxpayers with dependents will receive an extra $350. There are a couple of reductions at various income levels and for couples that make over $500,000 and single taxpayers that make over $250,000 you will not receive a relief check. I have a couple of problems with this. Number 1, this does nothing to curb inflation and in fact could put even more pressure on prices as increased demand would only pressure the supply problems further. Have we not learned anything from all the stimulus the last couple of years? Number 2, the payments will not be issued until late October. Doesn't that seem like a strange time with elections coming up in November?
Shipping Costs
Part of inflation comes from shipping costs. We still receive a large amount of goods from China and the good news is since the beginning of the year the price of a container shipped from China to the United States has declined 34%. This could help in easing prices a little bit going forward.
Starbucks
I have been known to go to Starbucks once or twice a month but even with the 35% drop in the stock price this year I won’t be buying the stock anytime soon. It has gotten bad enough that once again Schultz who founded Starbucks is coming back once again for the third time to turn the company around. The company is facing rising prices on commodities of 30% and additional $200 million expenses from wages, training, and technology. The analysts are singing the old song about it was trading at 27 times earnings per share but now at 22 times it’s on sale. I don’t believe a business goes on sale until it trades around 12 times earnings. What that means is I would not become interested in Starbucks stock until it fell into the 40s which would be another 30-40% decline. I’ve also pointed out before my fear of labor unions coming into Starbucks and destroying the great service that they have.
Electric Vehicles
If you’re thinking about buying an electric vehicle to save on gas you may want to think again. In May electric vehicles were up 22% from a year earlier compared to an internal combustion vehicle which was up 14% and are $10,000 less expensive than an EV. That would buy a lot of gas even at current prices. People complain about all the money that oil companies are making but prices for lithium, nickel and cobalt used to make batteries are up almost 100% since the COVID-19 pandemic began. If you’re thinking about buying a Tesla to pick up that’s $7,500 federal tax credit, forget it, Tesla reached their sales cap of 200,000 and their vehicles no longer qualify. If you want an inexpensive option, look at the Chevy Bolt. GM cut the price $6000 to $27,000 after the largest safety recall. Now that the car is fixed and is a better car than before, it is on sale. Unfortunately, you can also forget about the federal tax credit here as well since General Motors also reached the 200,000 vehicles. But I still think one would be hard-pressed to find a better value for a car on the EV side than the $27,000 Chevy Bolt.
Tirzepatide for Obesity
I work out pretty regular, 4-5 days a week between 1 to 2 hours a day. Is it possible that there may be a quicker and easier way coming from drug company Eli Lilly trading under the stock symbol LLY which is very close to getting to market their obesity drug. The company presented proof at a diabetes conference in New Orleans that patients on the highest dosage drop 22% of their weight on average. The drug called Tirzepatide, did not reveal the timeframe of this weight loss but did reveal that side effects include nausea, diarrhea and also vomiting. The drug could be on the market within the next 12 to 24 months. With 42% of Americans now in the obese category sales of this drug are expected to be in the billions and the price tag on the drug appears to be about $20 per day. Even if this drug does help one lose weight exercise would still be needed to maintain muscle tone and cardiovascular fitness. Maybe down the road there will eventually be a pill one can take to replace the old fashion workout.
Harrison Johnson, CFP®: "Is now a good time for a Roth Conversion?"
Monday Jun 27, 2022
Monday Jun 27, 2022
Stock Market Value Index
It's important to remember how quickly the right stocks can move and it's one of the many reasons I don't try to time market bottoms. If we look back to the last time the market was spooked by the Fed raising interest rates, it was December 2018 and the Russel 1000 Value Index lost 15.7% from November's close to the low in December. This is when we had an intra-day bear market or a loss of at least 20% from the high. Fast forward about 2 months to the end of February 2019 and the Russel 1000 Value Index gained 18.5% from the low and was about flat compared to the November 2018 close. With so much bad news currently being factored into the current stock prices, I believe the right companies can still end 2022 on a positive note. As always when you invest think about where you will be 2-3 years down the road and don't try and predict the absolute bottom.
Tech Stocks
With the markets falling, people keep asking me if they should hold and wait for their investments to come back. I always say it depends on what you have, and it could be dangerous to hold the high-priced tech stocks we have talked about. If we look at the Nasdaq which is a good barometer for many of the tech stocks, it is now down about 33.4% from its 52-week high. I still would not be surprised if the Nasdaq fell 50% from it's high as valuations were out of control before the recent sell off. If this fall did occur, that would be a fall of another 24.9% from current levels. It's important that we don't forget history and that in the tech bust the Nasdaq fell close to 80% from its highs. If that were to happen again it would be a decline of 70% from today's level. This is one of the main reasons I stick to value investing as people forget how risky these high-priced tech stocks can be.
United States Supply Chain
Morgan Stanley conducted a survey of more than 400 executives from large corporations in the US, Germany, and Japan. They discovered the most important factors in supply chain decisions are geopolitical stability, skilled labor, physical infrastructure, and a developed supply chain ecosystem. I’m happy to share that the United States outranked Europe, China, and Mexico. The good news is 18% of the companies plan to significantly expand US manufacturing in the next 12 months and 36% have a three-year plan for doing the same. I also observed more than 40% of the US companies are working hard to onshore supply chains. This could be a big benefit in our economy over the next 12 to 36 months.
Harrison Johnson, CFP®: Deducting California taxes for Business Owners
Tuesday Jun 21, 2022
Tuesday Jun 21, 2022
May Retail Sales
The retail sales numbers were again disappointing in May as month over month they declined 0.3%. Comparing to May 2021 they increased 8.1%, but inflation in the month was 8.6% meaning spending adjusted for inflation likely decreased. Many areas in the report did not keep up with inflation as clothing and clothing accessory stores only increased 6.1%, non-store retailers increased 7%, and some areas like electronics and appliance stores actually decreased compared to last year. One other major highlight was gasoline stations which increased 43.2% compared to last year.
Good News on the Inflation Front
With the US increasing interest rates it has boosted the strength of the dollar especially against the Japanese yen. The dollar has now advanced 22% against the yen to a level not seen in 20 years.
Bitcoin (BTC) Falls Below $23,000.00
Bitcoin has fallen below $23,000.00 today. So much for being an inflation hedge or safety from investing in the stock market. It is acting as we expected, a speculative investment that will not end well.
Apple (AAPL) Revenue
There is no doubt that Apple is one of the world's best companies, however; even with that standing the stock has fallen almost 30% from its high of around $183/share. What I wonder with this company having total revenues of nearly $400 billion, what will keep the excitement going and grow revenues?
Harrison Johnson, CFP®: Rule 72(t)
Monday Jun 13, 2022
Monday Jun 13, 2022
Inflation numbers were released, there was no surprise to the upside or the downside with a year over year increase of 8.6% which is the highest since 1981. I believe these numbers will be in the high range for another few months because of the low numbers one year ago. Once we get into August and September, I believe we will see lower increases in inflation numbers, more around the 5 or 6% range because of the higher number they are compounding on and also the effects of higher interest rates.
U.S Fertility Rate & Our Economy
One major problem for the long-term US economic outlook is the fertility rate. It is now expected that a woman will have 1.66 children over her lifetime. Back in 1960 this rate stood at 3.65 and even as recent as 2007 it was at 2.1. The current rate poses a problem for growing the population as the replacement-level fertility rate which is the rate that would keep the population at a constant size without accounting for immigration stands at 2.1 children per woman. The problem here is this creates an aging population which puts stress on GDP growth and benefit systems like Medicare and Social Security.
Employee 401k
At my firm we have always recommended that employees contribute to their 401(k) with a 10% contribution as the goal and it seems like people are listening. Currently 70% of US retirement assets are in 401(k)s which is double the 35% the assets made up in 1980. Remember if you’re over 50 you can add an extra $6500 on top of the standard $20,500. Also, there is the bill in congress known as the Secure Act 2.0 with wording that adds an extra $10,000 for those 60 years and older. Invested properly, a 401K is one of the fastest ways to build good solid wealth over the long-term.
Signs in the Economy that the Supply Chain is Improving
There are signs in the economy that the supply chain is improving, and consumers could be cutting back a little bit with a rise in the first quarter retail inventories of 26% from a year earlier. This is not accounting for inflation, however; if there are more items on the shelves retailers must compete more for sales which benefits consumers with lower prices.
Monday Jun 06, 2022
Monday Jun 06, 2022
April Jolts Report
Although job openings declined in the recent JOLTs report they still remained elevated. The report showed job openings of 11.4 million in the month of April which was the second highest on record behind the upwardly revised 11.8 million in the month of March.
May Employment Numbers
Overall, the job numbers were good this morning as 390,000 jobs were recouped in the month of May. Leisure and hospitality continued to lead the way as there was a gain of 84,000 jobs.
A Major Reason Why We Do Not Recommend Leaving A 401k At An Old Employer
According to a recent estimate, at the end of 2021 nearly 25 million 401k accounts or about 20% of all 401k assets were counted as either lost or forgotten. This is a major reason why we do not recommend leaving a 401k at an old employer. Many times, your best option is to move the funds to an IRA rollover, so you take control and do not forget about those old accounts. If you are unsure if you had a 401k at a previous job, we highly recommend contacting your previous employer/HR to see if there are any funds in an account you may have forgotten about. If your old employer no longer exists, you do have a few different options. The National Registry of Unclaimed Retirement Benefits is a secure site that allows you to search for lost plans using your Social Security number. The National Association of Unclaimed Property Administrators operates a database that lets you search for plans by your first and last name. Your old employer may have rolled over your 401(k) into an IRA, in this case you can use FreeERISA to track it down. Finally, the Department of Labor’s abandoned plan database might offer some updated information on plans that have been or are about to be discontinued.
Harrison Johnson, CFP®: Tax Filing vs. Planning
Tuesday May 31, 2022
Tuesday May 31, 2022
Target (TGT) and Walmart (WMT)
We have seen companies like Target (TGT) and Walmart (WMT) get absolutely hammered this earnings season with WMT down close to 25% from its 52-week high and TGT down over 45% from its 52-week high. While valuations may start to appear attractive in the retail industry, be careful as inflation could weigh heavily on these companies. In an inflationary environment like this, you want to find companies that have pricing power and that can offset their cost inflation. In the retail space I am more interested in companies that own their own brands as I believe that right names can increase prices to offset rising costs.
Rising Interest Rates Impact the Real Estate Market
It appears those rising interest rates could now be impacting the real estate market. New home sales in the month of April fell 16.6% compared to March and were down 26.9% from April 2021. At an annualized rate of 591,000 units, the result greatly missed the estimate of 750,000 and was the slowest sales pace since April 2020. While new homes sales account for a smaller percentage of overall home sales it is based on signed contracts in the month which can be considered more up to date when comparing against closings. The slower sales pace resulted in a 9-month supply of newly built homes. A 6-month supply is generally considered a balanced market between buyers and sellers. One other major negative for builders is that they are starting to see an uptick in cancelation rates. This is just one indicator, but with affordability remaining difficult I am still looking for a small pullback over the next 6-12 months, which could present some buying opportunities.
Housing Supply
Could rising mortgage rates and cooling housing demand actually increase housing supply? According to Realtor.com the supply for homes increased 9% last week compared to the same time period last year. This was the largest gain since the company began tracking the metric in 2017. Redfin also announced new listings rose nearly twice as fast during the 4-week period ending May 15th compared to the same time last year. The concern of perhaps a housing peak could cause more sellers to try and lock in gains before prices fall. This comes as pending home sales dropped 4% in the month of April and were down 9% compared to April 2021. Again, I want to be clear.... I do not foresee a housing crash but rather a reasonable pullback in housing prices to increase affordability.
Supply & Demand in the Energy Market
Last week I discussed the supply issues that are causing price increases for gas and diesel. On the demand side of the equation, it is not looking positive for prices. The US Department of Transportation reported Thursday that total miles driven in the US surpassed pre-pandemic levels. Americans drove 277.4b miles in March, up from 272.4 billion miles during the same month in 2019 (+1.8%), and up from 269.4 billion miles in March 2021 (+3.0%). Higher demand and lower supply will continue to produce an imbalance and higher prices in the energy markets.
Harrison Johnson, CFP®: Tax Filing vs. Planning
Monday May 23, 2022
Monday May 23, 2022
Energy Prices
Energy prices continue to climb as regular gas prices at a national level hit a record $4.523/gallon and diesel prices hit $5.573/gallon. Last month gas prices were at $4.08/gallon and diesel prices were at $5.028/gallon. If we look at last year, gas prices were at $3.045/gallon and diesel prices were at $3.171/gallon. For us lucky CA residents, prices for regular gasoline have topped a record average of over $6/gallon.
Energy Market
You have seen a lot of rhetoric about price gouging from energy companies as the reason for higher gas prices. But realistically, the answer is much simpler and can be understood by supply and demand. To begin oil and gasoline/diesel are different. Oil is used to refine products such as gasoline and diesel and is an input cost. There is a correlation between the two, but oil does not fully account for changes in gas/diesel prices.
Retail Sales
Retail sales had a very similar report to last month as the growth was strong, but much of the growth can be attributed to inflation and price increases. The headline number shows April retail sales climbed 0.9% compared to March and were up 8.2% compared to April 2021.
Options Trading
Are the small investors getting smarter or did they get burnt so bad by options trading that they’re now backing away? The most recent data shows at the end of March, small investors made up 26% of total option activity. This was a decline from last year when it hit 30%. The good news for investors is with less option activity this could reduce the volatility in the market. That does not mean it will not continue adjusting downward, but it should mean the swings should not be as brutal if many small investors do not hold options and begin panic selling.
Apple
One of the famous investors from the Big Short, Michael Burry, has now turned his attention to Apple and is betting the stock will decline. Burry is utilizing bearish puts to hopefully profit from a decline in Apple's stock. Even with the recent pullback, Apple still trades at over 20x 2023 expected EPS of $6.54. For a company that is now looking at sales and EPS growth in the single digits I would not say this company is a value play. While we do not short or place bets against stocks, I would not be a buyer of Apple at these levels.
Harrison Johnson, CFP®: Estate Planning and Beneficiaries, New information from the IRS, Individual Retirement Account (IRA), Making sure your beneficiary is set up properly.
Other Companies Discussed:
Ready Capital Corp (RC)
Occidental Petroleum Corporation (OXY)
Global X MLP & Energy Infrastructure ETF (MLPX)
Camping World Holdings Inc (CWH)
Monday May 16, 2022
Monday May 16, 2022
U.S. Airline Bookings
I have said that I believe the economy will be held up by a shift from goods to services throughout the rest of this year. I was a bit worried with my prediction when I saw a headline that U.S. airline bookings dropped 17% last month from March.
CPI (Consumer Price Index)
I'm still sticking with my prediction that inflation likely peaked last month at 8.5%. All that means to me is that is likely the highest reading we will see. It does not mean that inflation will not remain a problem.
Coinbase stock (COIN)
Coinbase stock (COIN) has been absolutely hammered this year as it is down nearly 80% and in the last week alone it is down close to 50%. There was a recent disclosure in the company's recent 10-Q that is filed with the SEC that would absolutely spook me as an investor.
Harrison Johnson, CFP®: Series I Savings Bonds
Monday May 09, 2022
Monday May 09, 2022
- April Employment Numbers
Employment numbers came out on Friday and while unemployment rates stayed the same as last month at 3.6%, not as good as the expected 3.5%, the economy still recovered 428,000 jobs above the estimate of 391,000 jobs. - Declines in the Markets
If you’re feeling a little bit uncomfortable with declines in the markets, it is justified. - Foreign Currencies
It is no secret that inflation numbers are running high, but I do see inflation numbers cooling off over the next six months for various reasons. One of the reasons is a strong US dollar as our interest rates continue to increase.
- Special Guest: Robert Behic
Robert Behic runs Countywide Mortgage Lending which has been named one of the TOP 100 MORTGAGE COMPANIES IN AMERICA every year since 2012. He has been serving the community now for over 30 years, and has also been recognized as one of the top 1% producing loan officers in the country for multiple years. Over the course of Robert's career he has helped thousands of people experience the joy and benefits of owning a home. He enjoys helping people who thought they couldn't afford to buy a home and he even helps his clients with credit repair when needed. Coaching families and individuals through the process of buying a home for the first time, and helping seniors with new and improved reverse mortgages, are both areas of Robert's expertise. He is very active within the local community, including supporting military organizations and children's causes. Countywide Mortgage was proud to be recognized by the Better Business Bureau when they received the coveted Torch award for Ethics in the business marketplace. As they say at Countywide, "It all starts with a conversation".
- Discussed Topics: What is going on the mortgage market / Any important information to know about the mortgage market
- The Purchase market is still very strong. Where refinancing has slowed to a crawl.
- Our Belief the value of Real Estate will be the same or greater at the end of 2022 than it was at the beginning. 2023 could have a different outcome for home values.
- Investors continue to buy rentals.
- First Time Homebuyers and the population boom.
Saturday Apr 30, 2022
Saturday Apr 30, 2022
Big Tech Companies Start to Struggle
I'm quite excited to see many big tech companies start to struggle. I have been hesitant on the group the past few years as the valuations just did not fit in to a value investors strategy.
GDP Report
While the headline GDP number of a -1.4% missed the estimate of 1.0% growth, the underlying numbers still don't worry me about the start of a recession. If you look at the details, you'll see net exports subtracted 3.2% from the headline number.
College Students Starting Salary
Many college students in the class of 2022 are out of touch with reality when it comes to expectations for a starting salary. According to a recent survey, on average these students are expecting to earn $103,880 in their first job.
Bitcoin (BTC-USD)
You may think Bitcoin is going up because it’s becoming more popular, but it’s also becoming more popular with hackers. In 2021 there was $3.2 billion stolen in relation to cryptocurrencies.
Harrison Johnson, CFP® will be discussing The Augusta Rule
Sunday Apr 24, 2022
Sunday Apr 24, 2022
- Streaming Services
After Netflix's results yesterday that saw the company lose 200,000 paid subscribers and forecast a loss of 2 million subscribers in the second quarter, it is clear the streaming competition is catching up with the company. I do believe this loss of subscribers is going to be isolated to Netflix as other streamers continue to play catchup. For example, HBO & HBO Max saw subscribers climb 3 million compared to last quarter and 12.8 million compared to last year. - Bonds
I have recommended investors stay away from bonds over the last few years and now you are beginning to see why. As interest rates rise, bond prices fall. There has been no real safe place in bonds to start the year and I believe this is likely to continue.
- Harrison Johnson, CFP®: Working smart, not hard
Monday Apr 18, 2022
Monday Apr 18, 2022
Inflation
Comparisons of our current inflation to the late 70s in my opinion is not the same. From 74 to 79 the consumer price index was 8.1% however unemployment was at 7.9%. Recent unemployment just released is 3.6%.
CPI Report
The inflation problem has only gotten worse as CPI came in yesterday at 8.5%. This is the highest year over year gain since 1981. There is some good and bad news here.
March Retail Sales
I was quite disappointed with the retail sales number this morning. Although the March number climbed 0.5% compared to the previous month and rose 6.9% compared to March 2021, this number did not keep up with the inflation rate of 8.5%. Retail spending is not adjusted for inflation so this shows me cracks in the consumer confidence to spend on discretionary items may be starting to show.
General Motors, Ford, and Toyota Stock
If you’re wondering why the stocks of car makers like General Motors, Ford and Toyota have fallen off their highs, look no further than the first quarter sales reports.
Russia/Ukraine Fertilizer
We all talk about how the Russia/Ukraine situation has impacted the energy markets, but it is also having a major impact on fertilizer.
Harrison Johnson, CFP®– Tax Changes When You Get Married
Sunday Apr 10, 2022
Sunday Apr 10, 2022
Walt Disney
I held Walt Disney in the portfolio many years ago and I’ve been waiting for a correction to come to put this wonderful business back in my portfolio. I always liked it because it was a family type business. Now the company seems to be getting away from the family orientation.
Index Investors
It was not a good start for index investors in the first quarter of 2022. The S&P 500 fell 4.9%, the Dow Jones was down 4.6% and the tech heavy NASDAQ was down 9.1% in the quarter.
Nasdaq and Treasury Markets
We saw a quick reversal in the markets today and in particular the Nasdaq and treasury markets. I believe these two markets will be hit the hardest by Fed actions and rising rates. The reversal came after hawkish comments from Lael Brainard who is generally considered a dovish member.
Bitcoin Update
Here is a bitcoin update. Over the last 12 months investors in bitcoin are down over 22%. The global bitcoin industry is also continuing to really suck power for production of the cryptocurrency. Consumption by the global bitcoin industry is 135 Terawatt hours which is more than the entire country of Norway consumed at 124 Terawatt hours. One terawatt equals 1,000,000,000,000 Watts. Or put another way it is the equivalent of 10,000,000,000 100-Watt bulbs.
Harrison Johnson, CFP®– “Generalized” Financial Advice
Listen to More Episodes: THE SMARTINVESTING2000 PODCAST
Monday Apr 04, 2022
Monday Apr 04, 2022
March 2022 Jobs Report
To no surprise the job recoupment continued in the month of March as non-farm payrolls grew by 431,000. This did miss the estimate of 490,000, but the previous two months saw revisions total a gain of 95,000 which more than offset the miss.
Job Openings and Labor Turnover Survey (JOLTS)
The Job Openings and Labor Turnover Survey (JOLTS) continues to post elevated numbers. In the month of February there were 11.27 million job openings which compares to the total number of people counted as unemployed at 6.27 million. This now means that there is a record 5 million more openings than people that are unemployed!
Previous 401(k) Accounts
With the level of quits we have seen in the JOLTs report many are deeming this era of time as the Great Resignation or the Great Reshuffle as employees are changing companies at an elevated rate. One item to be cognizant of if you have changed jobs is your 401k at that old employer. As of last year, it is estimated Americans had about $1.35 trillion in old employer 401(k) plans.
Yield Curve Inversion
People are now worried about the yield curve inversion. This is when shorter term bonds offer higher yields compared to longer term bonds. While this has been a reliable indicator of recession in the past, it by no means is something to panic over.
Harrison Johnson, CFP®: Financing with Higher Interest Rates
Tuesday Mar 29, 2022
Tuesday Mar 29, 2022
- Apple’s New Phone: SE
I recently read about all the hype on Apple products from the recent product event and special notice was taken to the big push on their new phone the SE which starts at $429 versus $699 for the cheapest iPhone 13. - Would you fly in an airplane that uses only electricity?
The electric vehicle market has taken off, but there’s always the question would you fly in an airplane that uses only electricity? Most of the time the answer is no but there is another alternative for clean energy. General Electric developed the use of hydrogen to run gas turbines to generate power which generates zero carbon emissions. They are now adopting hydrogen to be used with jet engines - Energy Sources
Electric vehicles seem to receive all the hype, but I believe it would be best to have multiple sources for energy. If we become too dependent on the electric grid, outages or supply disruptions could cause major price spikes. - 10-Year Treasury and the Housing Market
The 10-year treasury crossed the 2.5% mark today. Last year I thought we would hit that level by the end of 2021, it came about three months later than I expected. This could cool the housing market as mortgage rates continue to rise pushing more and more people out of the housing market as the monthly payment becomes too expensive. - Harrison Johnson, CFP®: Financing with Higher Interest Rates
Tuesday Mar 22, 2022
Tuesday Mar 22, 2022
- Increases in the Economy: Retail sales came out today with a headline miss as they grew 0.3% compared to January below the estimate of 0.4%. A major positive in the report was January was revised upwards and compared to December, retail sales grew 4.9%. The initial January report showed a gain of just 3.8%.
- Oil Companies
If you hold in your portfolio oil companies like BP, Shell, or Exxon you may want to be prepared for a write down of assets against earnings in the next quarter or two if the Ukraine Russia war does not change course soon. - Inflation & Consumers
Many comparisons are being made to the 1970s with the current situation of inflation and rising gas prices. One big difference today versus then is that in the 70s food and energy costs consumed 20% of consumers budgets. - LA Ports
Things are improving at the ports of Long Beach and Los Angeles in regard to container ships. The number waiting for berths at the port has now dropped to 50 roughly half of the 100 at the peak back in January. This could be a positive for inflation as more goods hit the markets. - Harrison Johnson, CFP®: Early Retirement