The cryptocurrency gained 12.7% last month, marking its best performance since April 2025. Interestingly, according to CryptoQuant, the 30-day change in outright Bitcoin purchases remained negative throughout April. That suggests the rally wasn’t driven by strong spot demand.

Instead, much of the momentum came from something called perpetual futures. Until recently, I wasn’t very familiar with this product, but at its core, it’s another tool that increases risk. Unlike traditional options, these derivative contracts have no expiration date and are designed to let traders speculate on the price movements of an underlying asset.

Perpetual futures have grown rapidly in popularity within the crypto space, largely because they allow for significantly higher leverage—sometimes as much as 100x. That kind of leverage can amplify gains, but it also increases the risk of sharp reversals.

Historically, when there’s a divergence between the spot market and the futures market like this, price gains tend not to last once leveraged positions begin to unwind. Where crypto goes from here is anyone’s guess, but piling more leverage onto an already risky asset doesn’t seem like a good idea to me.

When Will We See Gas Prices Come Back Down?

No one can predict exactly when gas prices will decline, but many are aware the current prices are being driven higher by the situation with Iran. At this point, the bombing appears to have ended, but much of the country remains heavily damaged. Estimates suggest it could cost Iran nearly $300 billion to rebuild what has been destroyed.

The situation has shifted to one in which Iran is slowly being weakened economically because little to no oil is being exported from the country, resulting in a major loss of revenue. Reports estimate these losses at roughly $200 million per day — approximately $6 billion per month or $12 billion over two months.

Inflation in Iran is currently estimated to be above 60% and continues to rise as economic conditions worsen. Based on these developments, I still believe we could begin to see oil prices decline sometime around the end of June. If that happens, prices may fall at a fairly rapid pace, and by the end of July consumers could see more normal prices at the gas pump.

Lower energy costs would likely help improve overall economic conditions, potentially putting the economy back on track and supporting GDP growth by the end of the year.

The April jobs report just threw cold water on the “imminent Fed cuts” narrative.

The U.S. economy added 115,000 jobs in April, well above expectations of 55,000, while unemployment held steady at 4.3%. Given little growth in the labor force, only modest job creation is needed to keep the rate steady. Wage growth also remained relatively firm at 3.6% on an annual basis. In short: the labor market is slowing from the breakneck pace of the post-COVID boom, but it is not breaking.

That matters because the Federal Reserve has a dual mandate: keep inflation under control & maintain maximum employment.

Right now, the jobs side of the equation is giving the Fed room to stay patient. A few months ago, markets were pricing in aggressive rate cuts based on fears that the labor market was deteriorating. This report makes that much harder to justify. Hiring remains positive & layoffs are still relatively contained. Sectors that were strong in the month were healthcare, up 37k jobs; transportation & warehousing, up 30k jobs; and retail trade was up 22k jobs. Areas of weakness were information, down 13k jobs; and federal government, down another 9k jobs.

The bigger issue for the Fed now is inflation. Energy prices remain elevated, tariffs are feeding through supply chains, and policymakers are increasingly worried that inflation could stay sticky longer than expected. Chicago Fed President Austan Goolsbee acknowledged on Friday that inflation has been “going the wrong way lately.”

As long as the labor market remains stable, it appears the Fed has little urgency to cut rates.

The key takeaway: This wasn’t a “Goldilocks” report for dovish investors hoping for rapid cuts. It was a reminder that the economy is still strong enough for the Fed to prioritize inflation over stimulus. And until unemployment starts rising meaningfully or inflation decelerates, the Fed may have a hard time justifying rate cuts.

Financial Planning: When Permanent Life Insurance isn’t Permanent

Cash value life insurance policies should be reviewed regularly because the long-term performance of the policy often changes significantly over time. In many policies, the internal cost of insurance increases every year as the insured ages because the probability of death rises with age. In addition, policies also have other internal expenses such as administrative fees, rider costs, premium loads, and investment management expenses. While policies are commonly illustrated using attractive hypothetical growth rates, those returns can be misleading because they are shown before many of these internal deductions are applied. As the insured gets older and the insurance costs rise, the total internal charges can eventually exceed the policy’s earnings, causing the net growth rate of the cash value to become very low or even negative. When this happens, the policy may begin consuming its own cash value to stay in force. If the cash value becomes depleted, the policy can lapse unless substantially higher premiums are paid later in life. Reviewing these policies proactively is important so there is time to determine whether additional funding is needed, whether benefits should be adjusted, or whether surrendering the policy and accessing any remaining cash value may be the better option before the policy becomes unsustainable.

Companies Discussed: GE HealthCare Technologies Inc. (GEHC), JetBlue Airways Corporation (JBLU), The Clorox Company (CLX) & Corning Incorporated (GLW)

The bad news just keeps coming for the private credit industry. If you’re not sure what private credit is, it is mostly middle market business loans extended by asset managers. People often don’t realize that these asset managers don’t have the same strict supervision that banks have on their loans. Investors may be starting to realize the risk because in the first quarter of 2026, private credit investors requested $20 billion from some of the private credit funds. Unfortunately, they only got a little bit over 50% of what they requested or about $11 billion. This could lead to higher redemption requests above $20 billion in the second quarter as more investors become disenchanted with private loan funds. The Securities Exchange Commission over the past few months has opened several enforcement investigations of large private credit managers. The Treasury department is also requesting information from private fund managers and insurance firms to understand their businesses more. The Securities Exchange Commission is the primary regulator for the private credit industry, but the private funds don’t regularly disclose holdings and don’t reveal much about private credit on the forms that are used by the SEC. It is quite the dilemma for these private credit funds, and I do believe it will continue to get worse because I am confident that the SEC and the Treasury department will find areas that could really hurt the individual investor due to the lack of disclosures. 

Could prediction markets be available in your IRA soon?  

Bitwise, Roundhill, and GraniteShares have filed applications with the SEC to launch exchange-traded funds tied to event contracts. If approved, these products could potentially be held in self-directed IRAs. The initial proposals appear relatively narrow in scope, focusing on outcomes like which party wins the White House in 2028 and which party controls the House and Senate after this year’s midterm elections. While these types of products can sound appealing—and successful bets could generate strong returns—they also carry a clear risk: if you’re wrong, you lose your entire investment. 

One of the main concerns is how complex and speculative these instruments are, especially in the context of retirement accounts. Event contracts are fundamentally different from traditional investments like stocks or bonds, and their all-or-nothing nature makes them more like betting rather than than long-term investing. Are we going to soon allow withdrawals from retirement assets in Vegas so people can blay blackjack? The odds may be better there than on some of these “event contracts.” 

There are also broader legal and regulatory questions still being debated. Some states argue that certain event contracts—particularly those tied to sports outcomes—should be classified as sports gambling, which would place them under state jurisdiction rather than the Commodity Futures Trading Commission. Tribal groups have also raised concerns, arguing that such products could infringe on their sovereign rights to regulate gambling on tribal lands. 

At the moment, sports-related event contract ETFs are not part of these filings, but that could evolve depending on how the legal landscape develops. If courts ultimately allow these types of products and current applications move forward, it’s possible that similar filings tied to sports outcomes could follow. 

Regardless of how regulation unfolds, it’s important to understand the nature of these products. While they may be packaged as ETFs, their structure and risk profile differ significantly from traditional investments. Anyone considering them should be clear on one point: this is not investing in the conventional sense—it’s a high-risk, all-or-nothing proposition that is really just gambling. 

Who offers a better reward program? The big gas stations or Costco? 

When I pull into a Shell gas station, I always see a pitch on the screen about getting up to $0.30 back per gallon. Other stations like Chevron run similar promos, which got me wondering: how many people actually sign up—and are these deals better than Costco’s credit card with 4% cashback on gas? 

Right off the bat, gas station rewards programs feel overly complicated. Once you dig in, you’ll find caps, conditions, and purchase limits that make it tough to consistently get the maximum benefit. In the best-case scenario, you might get around $0.35 off per gallon. If gas is $6 per gallon, that works out to roughly a 5.8% discount. Not bad—but actually hitting that number regularly is another story. 

Costco’s credit card, on the other hand, offers a straightforward 5% cashback at Costco gas stations and 4% cashback at other gas stations (up to $7,000 per year). At $6 per gallon, that’s about $0.24 back per gallon; at $5 per gallon, it’s $0.20. To hit the annual cap, you’d need to buy around 22.4 gallons per week at $6 per gallon, or about 26.9 gallons per week at $5. 

If you’re filling up at a Costco station, the math can tilt even more in your favor. Gas there is often $0.10–$0.30 cheaper per gallon to begin with. Pair that with 5% cashback, and your effective savings climb even further: about $0.25 per gallon at $5 gas, or $0.30 at $6. 

So, when you’re standing at the pump at Shell or Chevron and see an offer for a flashy rewards program, it’s worth pausing. The headline numbers can look appealing, but the real-world value often depends on how much you drive and how closely you follow the program’s rules. For many people, a simple, consistent cashback card—especially one tied to already lower fuel prices—may end up being the better, less stressful option. 

Is there a bubble in sports teams? 

We’ve spent plenty of time talking about stretched valuations in stocks, the frenzy in crypto, and the rise of prediction markets—but sports teams may deserve a spot in that conversation too. Valuations across major leagues are climbing at a remarkable pace. 

The NFL is leading the charge, with the average team now valued at $7.65 billion, up from roughly $1 billion in 2010. NBA franchises tell a similar story: the average team is worth $5.52 billion, an 18% jump from just last year. Go back 15 years, and the average NBA team was valued around $369 million—an increase of 1,396%. By comparison, the S&P 500’s roughly 425% return over that same period looks modest. 

Major League Baseball is seeing it too, with the San Diego Padres reportedly finalizing a record sale at $3.9 billion. As prices climb, fewer buyers can afford entry into the top leagues, pushing capital into smaller or emerging sports that may carry more risk. 

Rick Horrow, CEO of Horrow Sports Ventures, highlighted this trend: “Major League Cricket was at $5 million. Now the value’s at $30 million and going higher. Major League Pickleball two years ago was at $5 million. Now the value is at $15 million or higher.”  

Women’s sports are also experiencing rapid growth. The National Women’s Soccer League recently awarded an expansion franchise in Columbus, Ohio for $205 million—a $40 million increase over the fee paid by Arthur Blank (The Falcon’s owner) for Atlanta’s team in November. That deal itself was a sharp jump from the $110 million paid by Denver in January of last year. For perspective, expansion fees were around $2 million as recently as 2022. 

The key question is whether these valuations are supported by underlying fundamentals. While interest is rising—about 1.2 million people watched the NWSL final, up 22% year over year—it still trails far behind the audiences of major leagues. Game 7 of the NBA Finals drew 16.4 million viewers, the World Series drew 25.9 million, and the Super Bowl surpassed 127 million. 

Media rights are central to this dynamic. The NFL signed an 11-year, $111 billion deal in 2021 and is already eyeing further increases. The NBA followed with its own 11-year, $77 billion agreement starting in 2025. If these massive contracts continue to absorb the bulk of media spending, smaller leagues may struggle to sustain their current growth trajectories. 

Most people will never be in a position to buy a sports franchise, but the broader trend is still worth watching and I believe is just yet another example of excessive valuations in today’s markets.  

Financial Planning: Understanding the Relative Cost of IRMAA 

IRMAA (Income-Related Monthly Adjustment Amount) is best understood not as a flat cost, but as an additional marginal tax rate layered on top of federal and state income taxes. When your income exceeds certain thresholds, your Medicare Part B and Part D premiums increase, and because the adjustment applies for the entire year once you cross the threshold, even by $1, it creates a “tax cliff.” For example, in 2026 the first IRMAA tier for married couples begins at $218,000 of income. At that point, Part B premiums increase from $202.90 to $284.10 and Part D increases $14.50, resulting in an additional annual cost of $2,296.80. Since this tier spans $56,000 of income (from $218,000 to $274,000), that cost translates to roughly a 4.1% marginal “tax” on income within that range, but only if you fully utilize the entire bracket. If you only exceed the threshold by a small amount, you still incur the full $2,296.80 cost, which means the effective marginal rate on those extra dollars can be extremely high. When layered on top of a 22% federal bracket and 9.3% California tax rate, the true marginal rate is about 35.4% if the bracket is filled, but can be significantly higher if it is not. This framing is critical when evaluating strategies like Roth conversions or large withdrawals, because it highlights that the decision isn’t just about stated tax brackets, it’s about the all-in marginal rate including IRMAA. In practice, this means it is often beneficial to either stay below an IRMAA threshold or intentionally “fill up” the bracket once crossed, ensuring the additional premium cost is spread across the full income range rather than concentrated on just a few dollars. 

Companies Discussed: Tractor Supply Company (TSCO), Intel Corporation (INTC) & The Procter & Gamble Company (PG)

I’ve talked a lot about the shelter index being misleading when it comes to inflation, especially when looking at the CPI, but the PCE has its flaws as well. The Federal Reserve has a 2% inflation target and uses monetary policy, which includes adjusting the Fed Funds rate, to tackle its dual mandate of maximum employment and stable prices. A big problem I see with the PCE is that healthcare now accounts for roughly 16% to 17% of index. This comes as an aging population led healthcare spending to be the single largest contributor to consumer spending in 2025. It surpassed housing and utilities in early 2023 as the fastest growing category in the PCE and by Q3 of 2025, it contributed nearly a full percentage point to overall economic expansion and accounted for nearly half of all spending growth. While it’s important to keep an eye on healthcare inflation, the Fed’s tools won’t be able to have a major impact on the sector like let’s say the housing sector. So, let’s say inflation stays around 3%, but a large reason for that is healthcare inflation. If the Fed hikes rates, it will have little impact on inflation and in fact it could have a huge negative consequence on other areas of the economy and push us into a recession. A big reason I remain worried about healthcare inflation is labor costs. It doesn’t appear we have enough workers to meet the demand for these jobs. On the positive side, the sector has provided stability and growth when looking at payroll data. In 2025, it added 686,000 jobs, which was more than all the gains in nonfarm payrolls. The question is though, can this continue without substantial wage inflation considering by 2030, we will have more people over the age of 65 than we do that are under18. I’m not sure how exactly we can rein in healthcare inflation, but I don’t believe monetary policy would provide a meaningful solution.

Even with all the noise, the consumer remains strong

March retail sales showed a nice increase of 4.0% compared to last year and while gas stations were a large contributor growing 18.1% due to higher gas prices, excluding them from the report still would have resulted in a good increase of 2.9%. The only areas that saw declines in the report were motor vehicle and parts dealers, which were down 2.1%, and furniture and home furnishing stores, which were down 0.8%. Areas of strength included nonstore retailers, which were up 10.1%, electronics and appliance stores, which were up 5.2%, and clothing and clothing accessories stories, which were up 7.2%. Food services and drinking places saw growth slow, but there was still a positive increase of 2.4%. It’s not just the retail sales report that showed strength, Bank of America pointed out debit and credit card spending climbed 4.3% in March, the most in more than three years. While a 16.5% jump in spending at gas stations was a large reason for the increase, there was still “healthy growth” of 3.6% excluding gas. We also heard from Wells Fargo CEO, Charlie Scharf, in an interview with Bloomberg Television and he said the U.S. economy remains “extremely strong” and that loan demand is solid, consumer delinquencies are well controlled, and businesses entered this period in strong financial shape. He also said consumer spending continues to grow between 5% and 7% year-over-year. Even with all the noise, the consumer is what drives the US economy, and it appears people remain resilient in their spending, which is a major reason why I believe the economy remains healthy.

Can the new Apple CEO keep the stock gains coming?

With the stock trading at a forward price/earnings ratio of around 32 times, I’ve got to say it’s going to be a very difficult task. Keep in mind over the last 50 years the average forward P/E ratio for the S&P 500 has been between around 15 to 19 times, nowhere near 32. I’m also reminded of a similar situation where a prominent company with such great stock success was taken over by a new CEO and the 16-year return was only 27% including dividends. That company I’m referring to is General Electric when Jack Welch retired and the new CEO Jeffrey Immelt who was handpicked by Jack Welch took over. Things could be different this time when the new CEO of Apple takes over on September 1st but again given the current valuation it will be difficult. John Ternus is a mechanical engineer and was head of the hardware division. An engineering degree now represents the highest percentage of degrees among Fortune 500 CEOs, exceeding the number of CEOs with an MBA. I do have some question marks around the choice though as there have not been that many new successful products that have come out of Apple. We’ve had the AirPods and the Apple Watch, but they’ve had some major failures with the Vision Pro headset and are trying to build a self-driving car that they lost billions of dollars on. Mr. Ternus, who is 50 years old, is well liked and is said to have a friendly demeanor along with the engineering confidence, but will he have the magic that Tim Cook had finding ways to squeeze more value out of supply chain? Mr. Cook was also a great political negotiator working with President Barack Obama to President Trump and even made deals with China’s president that has kept the company going. Mr. Ternus does have has some big shoes to fill and a large mountain to climb. I just don’t believe Apple will see returns anywhere near the past returns they saw under Cook when he took over in 2011 and the stock grew by roughly 20 times.

Your annuity may not be as safe as you think!

Many people that are sold annuities are told by the broker that they are 100% safe and to be frank they would probably say almost anything to collect their big 7% or 8% commission. But the Treasury department has concerns and is talking to state insurance regulators about the large amount of private loans that insurance companies are using in their portfolios. Back in 2024 even the National Association of Insurance Commissioners, which is also known as the NAIC and is the organizing body for regulators for every state in the US, had stated ratings that insurers had on private credit and investments were consistently overinflated. They have since pulled the report from the website. Large redemption requests from individual investors that want to pull their money out of many private loan funds are starting to show up in other areas like pension funds and insurance companies. The insurance industry holds about $6 trillion in invested assets and roughly $1 trillion or about 17% is now in private credit investments. The insurance industry uses what is known as private letter ratings and can also assign a risk score to the investment. In a study that examined 109 private letter ratings that NAIC officials received in 2023, in 106 of those cases the private rating was higher than the NAIC. To make matters worse, 17 of the cases gave an investment grade private letter rating to assets that the NAIC considered junk or below investment grade. It is especially important to look out for the smaller firms that use smaller rating agencies like Eagan – Jones as opposed to your bigger rating agencies. The smaller firms tend to rate things much higher than the NAIC, sometimes as much as three notches higher, which really disguises the risk of what the annuity you hold is invested in. I’ve said for years that we will someday see an insurance company file for bankruptcy and those investors who invested blindly into annuities because of a salesperson’s recommendation will probably be disappointed to see that they lost all their earnings and perhaps even some of the principal. I unfortunately think it’s too late for some of these insurance companies that have invested into risky assets to turn the situation around quickly. 

Financial Planning: Traditional or Roth

Choosing between traditional and Roth contributions comes down to one key question: will you be able to withdraw or convert that money at a lower tax rate than your rate today? Traditional contributions work best if the answer is yes, since you get a tax break now and pay less later, while Roth contributions are better if your future tax rate will be the same or higher. Many people enter a lower tax bracket starting at retirement and lasting until required minimum distributions (RMDs) begin at age 75, but this low-tax window is limited. There’s only so much pre-tax money you can withdraw or convert each year before moving into a higher bracket. For example, while working someone may be in the 22% bracket and will drop to the 12% bracket in retirement, giving them some room to access that tax-deferred money at a lower rate. However, the threshold between the 12% and 22% brackets is about $100k of taxable income for joint filers, and other income sources like Social Security and pensions will take up some of that room. If those sources result in taxable income of $50k, then only another $50k can be withdrawn or converted from retirement accounts before being pushed from the 12% bracket back up to the 22% bracket.  If there is $1 million in pre-tax retirement accounts growing at 10%/year, that annual appreciation of $100k is much more than can be converted meaning the account balances would continue to grow. When RMDs begin, the taxable distributions would push income into the 22% bracket or higher and potentially trigger IRMAA. Situations like this are common when retirement account balances are large, and Roth contributions should be heavily considered while working unless the taxpayer is in the highest brackets (32% or above).

Companies Discussed: Abbott Laboratories (ABT), PepsiCo, Inc. (PEP) & Avis Budget Group, Inc. (CAR)

It used to be easy to watch a football game as you generally had maybe two different networks it would be on and it was easy to find. Well, now the promise of streaming, reducing costs and making it easier for people to watch the shows and sports they want when they want has really missed the mark. The list can go on and on of where to watch the football game or sports you want to watch. Maybe the game will be on ESPN, Paramount+, TNT, NBC’s Peacock, CBS or maybe you’ll have to go to Amazon prime or the YouTube channel. It can be very frustrating trying to find the game you want and then you find out you don’t have the right subscription, and you have to pay extra to sign up for it. Well, maybe the justice department is coming to your rescue. Last week it was reported that the justice department is investigating whether the NFL is engaging in anti-competitive tactics that harm consumers. The investigation involves whether having many outlets for sports viewing is costing consumers far more and the NFL is taking advantage of its behemoth size and demand. There is no doubt that sports are getting out of control and just recently the NBA signed a record payday for their media rights. This has opened the door for many other sports, including the NFL, which apparently because of the change in ownership of CBS they may have to negotiate a new contract with the NFL. No doubt in my mind it will be a far higher contract than before. I’m not sure when the last straw will break the camel’s back, but it seems to be getting close as advertisers are starting to back away from the large amount that networks are asking for advertising during the games. It is possible that sports could eventually go to a cost per game because even subscription rates are getting so high that people are not keeping them long-term.

To increase your stock price, just mention AI

I’m of course being facetious, but in many cases, it appears that way. This past week, Allbirds, which was a popular shoe company just a few years ago, announced it was pivoting from shoes to artificial intelligence and the stock at one point spiked by more than 700%. A large reason for the craziness is the market cap of the company was tiny at just about $21 million as of Tuesday’s close. When companies are this small there is more room for manipulation and wild swings as fewer capital inflows are needed to drive the stock higher. What is even crazier about this stock is that just a few years ago it was a hot company valued above $4 billion and that was because of excitement around its shoes. The company introduced its debut shoe in 2016 and went public in 2021. As I said they are now making the switch to AI as they closed all their U.S. full-priced stores in February and will be focusing on AI compute infrastructure. Allbirds will be called NewBird AI and in a recent statement they said, “The Company will initially seek to acquire high-performance, low-latency AI compute hardware and provide access under long-term lease arrangements, meeting customer demand that spot markets and hyperscalers are unable to reliably service.” This is just crazy to me, and you must ask what qualifications this company has to make such a drastic shift. I know I will not be investing in this stock!

It looks like Meta will become the digital ad king

Meta has been very patient growing its ad sales by establishing substantial user habits with their products like Reels, the microblogging site Threads, and even WhatsApp. All have been very slow to introduce advertisements to their users, but that patience has paid off as worldwide ad growth for Meta increased around 22.1% in 2025 and it’s estimated it will increase another 24.1% in 2026. Because of how large Meta is, it was expected that growth would slow, but that has not happened. Their growth is far higher than Google’s growth, which is projected to be around 11.9%, about the same as last year. The ad revenue numbers are staggering with Meta expected to reach $243.46 billion, about $4 billion more than Google’s $239.54 billion. That growth has not been cheap for Meta as the company uses AI to enhance performance and capital spending is now estimated to be around $135 billion this year. I was also surprised to learn that Google’s share of the US search ad market is expected to only be 48.5%. This would be the first time it’s fallen below 50% in over a decade. There is so much competition out there from AI companies, like OpenAI, and other social media companies, like TikTok, that the ad market is continually changing. When companies compete, consumers generally win, but I’m not sure about investors as the cost of spending on technology has become a very heavy weight for many of these big tech companies. 

Financial Planning: Beware of Income Taxes when Gifting

When parents give assets to their children, the income tax impact depends on what’s being gifted. Cash is usually the easiest and most tax-friendly option because there’s no built-in gain. There is no direct income tax to the giver or receiver, but if parents gift things like appreciated stock or real estate, the child receives the original cost basis as well. This means they will owe capital gains tax on all the appreciation when they sell it. In contrast, if the child inherits those same assets after the parents pass away, the basis typically steps up to current market value, wiping out that taxable gain. Because of this, it’s often smarter to gift cash or assets with little appreciation and hold onto highly appreciated assets to pass on at death.

Companies Discussed: Levi Strauss & Co. (LEVI), American Airlines Group Inc. (AAL), HP Inc. (HPQ) & Caterpillar Inc. (CAT)

If you’re like me, you probably remember the failure of Google Glass, which ended in 2015. Google may have exited the space early considering in 2025 global shipments of smart glasses hit 8.7 million units, which quadrupled 2024’s level. Meta currently holds 85% of the market but realize that Apple, Alphabet/ Google, and Samsung are expected to launch AI equipped eyewear soon. I do wonder if this will hurt or help Apple since people may be buying more smart glasses and less high-end iPhones? There are concerns about privacy and data collection. Currently Meta is facing a lawsuit in the US that is seeking class action status. Seems like Meta can’t get out of the news or the courtroom, but they do state that what the glasses collect stays on the user’s device unless they choose to share it with the company. The smart glasses can see what you see and hear what you hear. You can have a conversation with the glasses the same as if you’re talking to a person. Which means you may look like a crazy person standing there talking to yourself if people don’t realize you have smart glasses on. Companies that would benefit from an increase in manufacturing of smart glasses, excluding the big companies I already mentioned, would include companies such as EssilorLuxottica, which is the owner of Ray-Ban and Meta’s manufacturing partner, Qualcomm, which provides the central processor or the brains of the glasses, and Global Foundries. which takes care of the display technology. It appears this time; smart glasses may become as common as a smart phone in the next few years.

Is the market too expensive to buy the dip this time?

With the increasing cost of oil and the turmoil in Iran the markets did see a correction, which is a drop of 10% or more from the peak. People have become so accustomed to just buying the dips without knowing the valuations of what they’re buying, and many will probably do the same thing this time. Unfortunately, dip buying does not always work and given the current valuations, investors could be in for a bad surprise. Even with the recent pull back, the forward price/earnings ratio for the S&P 500 sits at 20 and is still 20% higher than the 20-year average. So even with the dip you’re not buying companies on sale at these levels. Earnings can be adjusted and moved around with accounting rules, which means you’re probably paying more than you believe if you don’t understand accounting. Another indicator to look at is the forward price to free cash flow. This indicator takes out all the accounting craziness of how much some tech companies are spending on capital expenditures for artificial intelligence. Often, I find these two measures converge once the accounting catches up to the heavy capex spending and understanding both earnings and free cash flow is an important balance. The index currently has a forward price to free cash flow of 27.4 and that is nearly 40% above the 20-year average. Smart investors really should stop and think. They should realize they’re paying a lot more for the S&P 500 than they thought. Free cash flow is not an accounting measure, and companies are not required to compute it for you. It’s not that hard to calculate though as you start with cash from operations and then deduct all the capital expenditures. This is where the devil is in the details because this is where you will see how overvalued many tech companies are because of the billions of dollars they’re spending. The big risk here is the return on investment will likely not come very quickly and maybe not at all. This doesn’t mean you shouldn’t invest in stocks as you can still find good quality equities that are generating very good cash flow and that you’re not overpaying for the earnings or the free cash flow. Personally, those are the types of businesses I’m looking for when investing for myself and my clients.

Consumer prices spike in March due to Iran war

While it was in line with expectations, the headline CPI rose 3.3% compared to last year. This was the highest annual rate since April 2024, and it was substantially higher than February’s reading of 2.4%. The obvious reason for the increase was the change in oil prices. Energy showed an increase of 12.5%, largely due to a spike of 18.9% in gasoline prices. Month over month gasoline prices climbed 21.2%, which was the largest monthly increase since 1967 when the series was first published. Outside of the energy spike, prices did not look problematic considering core CPI, which excludes food and energy, saw an increase of 2.6% on an annual basis. This was relatively in line with recent months and was 0.1% below the forecast. While the Fed may be able to look through these inflation numbers, if energy remains elevated the concern is it will start to impact core CPI as well. Companies will need to start raising prices to offset their higher expenses due to energy costs. For example, airline fares, which rose 14.9% over the past 12 months would see further pressure. Deutsche Bank estimates that if jet fuel prices stay near current levels for a full year, airlines would have to increase ticket prices by about 17% to offset those cost pressures. Transportation would also be problematic with companies like Amazon, UPS, and FedEx needing to pay more to move goods around the economy. We have already seen the introduction of fuel and logistics surcharges and those will likely climb further if problems persist. On a positive note, the shelter index rose just 3.0% on an annual basis, which was tied for its lowest level since August 2021. As I have mentioned before, I anticipate shelter inflation will continue to decline as the year progresses. Overall, the main takeaway is if this Iran war can be contained and energy prices start to decline, which I think they will, inflation should not be a problem in 2026.  

Financial Planning: Reporting a Backdoor Roth IRA

Normally when income is above $236k for joint filers or $150k for single filers, the ability to make Roth IRA contributions is phased out.  A backdoor Roth IRA is a strategy that allows high-income taxpayers to fund Roth IRAs, but it needs to be done correctly.  It is a two-step process that involves making a traditional IRA contribution and then converting that contribution into a Roth IRA.  This can only be done if the account holder does not have any other pre-tax IRAs.  When the initial contribution is made to the traditional IRA, it needs to be reported as a non-deductible contribution.  When the funds are converted, a 1099-r is generated, and as long as the initial contribution was reported correctly, the conversion is not taxable.  The end result is a Roth IRA that can grow tax-free.  While this can be a benefit, it is crucial that everything is reported correctly to prevent filing errors, overcontributions, and amended tax returns.

Companies Discussed: ServiceNow, Inc. (NOW), NIKE, Inc. (NKE), RH (RH) & Invesco Ltd. (IVZ)

It is hard to know exactly how much the increase will be, but we do know it will be increasing because since the Iran war started February 28th, a barrel of oil has increased from around $70 a barrel to around $100 a barrel depending on the day. Economists estimate that the March CPI inflation number could be around 3.4% and may hit 4% in April. If the conflict continues through summer and into the fall, we could see inflation hit 5%. While this is a possibility, fortunately, it does not appear that will happen. One would have to go back 20 years to see this type of rapid increase in gas prices. The Fed has been trying for five years to get inflation down to 2% with no success, and it does not appear that it will happen this year, which means interest rate rates will probably remain around the current level for the remainder of this year. This will be tough on the economy because mortgage rates won’t be coming down as we expected, and people may not be doing that remodel on their home because home equity lines will still be high. Some may just say I want to get this done and just go ahead and accept the higher interest rate, but I believe most will choose to continue deferring the project. The good news is, I don’t believe this will last much past May or June because the President knows this would be very tough on the economy and the midterm elections are approaching quickly. So, currently we’re still saying this is a short-term problem and any pullback in good quality businesses that don’t have high valuations is a good buying opportunity.

You may finally be able to invest in SpaceX!

Bloomberg and CNBC’s David Faber reported that SpaceX has confidentially filed for an IPO with the Securities and Exchange Commission, also known as the SEC. It’s estimated the company could see a listing around June and that it is seeking a valuation of $1.75 trillion, which would lead to a record public offering. Don’t forget that SpaceX merged with Musk’s X AI, which also owns X and used to be Twitter, back in February. At that time the combined entity was valued at $1.25 trillion. Following a SpaceX IPO, Musk will become the first person to sit atop two separate trillion-dollar public companies. This IPO would also likely help increase Musk’s net worth, which is estimated to be close to $840 billion. Most of Musk’s net worth comes from his estimated 43%stake in SpaceX and 13% ownership of Tesla. I would have to assume this IPO would be well received given all the excitement around space, AI, and Elon Musk. This company is not just built around hype given its contracts with NASA, the Air Force, and Space Force. It also conducted 165 orbital flights over the course of 2025 and operates the Starlink satellite internet service, which runs on a constellation of around 10,000 satellites in lower-earth orbit. With that said, my guess is the stock would push higher in the public markets to lofty levels that would make it dangerous as a long-term investment. There’s also speculation that we could see IPOs for Anthropic and OpenAI this year. I do believe these mega IPOs could cause problems for stocks like Tesla, Nvidia, and Microsoft as there is only so much available capital and investors may sell those positions to a get a piece of these new exciting stocks. This should be an exciting year for the IPO market. 

Maybe the labor market isn’t as bad as people think

Coming off a weak February report where payrolls declined by 133k, March showed a nice increase of 178k jobs. Part of the volatility was due to a strike at Kaiser that led to job losses in February, but then a surge of 76k jobs in the health care space in March. Health care continues to be the driving force for the labor market, but construction was strong in the month as the sector added 26k jobs and transportation and warehousing saw a nice increase of 21k jobs. The government sector continues to weigh negatively on the headline number as federal government employment declined by 18k jobs in March. Since reaching a peak in October 2024, federal government employment is down 11.8% or 355k jobs. Financial activities also saw a decline of 15k jobs in the month and the other major sectors like manufacturing, information, and leisure and hospitality saw little change in the month. While I wouldn’t say the labor market is booming, considering the unemployment rate is sitting at 4.3%, which was down from 4.4% last month, I’d say maintaining the labor market at these levels would be extremely healthy for our economy. I remain optimistic that both the labor market and economy will remain in a good spot for the rest of 2026.

Financial Planning: Setting Up 2026 Tax Payments

With Tax Day approaching, it’s important to think not just about your 2025 tax return, but also about planning for 2026. In the U.S., taxes must be paid throughout the year either through withholding or quarterly estimated payments, and while your 2025 balance is due April 15, the first estimated tax payment for 2026 is also due on that same day. This matters especially for income like interest, dividends, capital gains, business income, and rental income, which typically don’t have automatic withholding and therefore require estimated payments. If you don’t pay enough during the year, the IRS will charge both interest and underpayment penalties on the shortfall. To avoid interest and penalties, you generally need to pay at least 90% of your current-year tax, 100% of last year’s tax, or 110% of last year’s tax if your AGI is over $150,000.  Since projecting the current year tax can be unreliable when income is variable, a simple way to stay on track is to use last year’s tax as a baseline since it’s known and easy, and if you fall behind, you can catch up by increasing withholdings from wages, pensions, or retirement withdrawals since withholdings are treated as if they were made evenly throughout the year, regardless of timing. 

Companies Discussed: Snowflake Inc. (SNOW), Snap Inc. (SNAP), Alcoa Corporation (AA) & Boston Scientific Corporation (BSX)

The term stagflation was first used in 1965 by a British politician. A quick definition for an economy with stagflation is when there is slow economic growth, high unemployment, and high inflation. A scenario like that would put a strain on banks because as people lose their jobs one of the first things they stop paying on are consumer loans like credit cards and personal loans. Banks can also get squeezed because they may have locked in long-term loans at lower rates and because of high inflation, the Federal Reserve could increase short-term interest rates, which would compress margins. The banks also need meet certain liquidity requirements, which could hurt margins even more. On the bright side, this could be a buying opportunity to invest in banks since they are down roughly 9 to 10% since the beginning of the year. The reason I think this could be a good opportunity is manyfold. First off, the high oil prices that are currently causing inflation concerns appear to be a short-term problem and I believe they should start reversing by May or June. Second, employers have slowed down on hiring new people but are reluctant to let employees go because it’s very costly to hire new employees. Third, the economy appears to still be doing well and consumers have already started receiving part of the $50-$60 billion in tax refunds from the Big Beautiful Bill, which should help with consumer spending. This is also the year where agreements from other countries to invest trillions of dollars into our economy should start taking place. In regard to the banks themselves, they’re sitting in a pretty good situation with diversified businesses as your mega banks like JPMorgan and Bank of America have trading houses and global markets that are growing in the low double digits. Some banks expect mid-teens growth in the trading business. Some of the bankers have also said that demand for traditional commercial loans has been improving so far this year. In its most recent data, the Federal Reserve showed commercial industrial loans were up 5% year over a year, which is the largest increase since 2023. As always with investing, you should be looking out at least 2 to 3 years. One other perk is many banks pay a decent dividend around 2% to 2.5% 

Meta and YouTube get screwed in court

I was very disappointed to see that a 20-year-old woman, who won in a California court, is set to receive a total of $6 million from Meta and YouTube. Her claim was she was addicted to social media, and it dominated her life for years, which caused mental health issues like anxiety and depression. I’m really getting tired of the legal system in California and the theatrics played by attorneys such as her attorney having a jar of 415 M&M’s saying each M&M represented $1 billion of the near $400 billion in total stockholder equity when looking at Alphabets value. He began to remove one M&M at a time and demonstrated how taking out a few M&Ms did not change the weight of the jar. My feeling is this attorney should go to Hollywood and try to get an acting job. It is disappointing to see how no one wants to take accountability for their actions any longer. They want to blame somebody else and not take responsibility for the fact that she uploaded more than 200 YouTube videos before the age of 10 and had 15 Instagram accounts before she was 15. I do have to ask where were the parents? This could just be the beginning as there are 3000 other similar lawsuits against social media companies that are pending in California courts. I do believe there should be some changes made to the regulatory framework around social media, but this goes too far and is just in my opinion greed from attorneys and people trying to get a free ride. I was glad to see that both companies are appealing the decision, and this will likely continue to move up the court system and may land in the Supreme Court. Meta also lost a case in New Mexico this past week as jurors found that Meta willfully violated the state’s unfair practices. The state’s Attorney General claimed the company failed to properly safeguard its apps from online predators targeting children. It is disappointing to see the number of lawsuits that are going on in our country. Our country was not built on attorneys and lawsuits; it was built on people working hard and taking responsibility for their own actions. I do fear for my grandkids if we continue on this path and wonder what our country will look like in 30 or 40 years. When it comes to investing, I would be very careful in this space, as these cases could set a dangerous precedent for trials to come. There is also a federal trial set to begin this summer in the Northern District of California involving claims by school districts and parents nationwide that apps from Meta, YouTube, TikTok and Snap helped foster detrimental mental health-related harms to young users.

Will higher gas prices hurt strong US car sales? Current US car sales are around 16 million on an annual basis, which is down from 2019 when they were 17 million, but overall, they are still very healthy. The car business has changed from low margin vehicles to more luxury vehicles with higher profit margins and the average price on a new car is now over $50,000. The car buyers themselves have changed with the average new vehicle buyer around 50 years old. This is seven years older than in the year 2000. It’s no surprise, but because of the higher prices for cars, people earning over $150,000 a year account for 42% of the sales. Six years ago, it was just 29%. It was also reported that buyers who have incomes of $75,000 or less are no longer buying new cars because of the affordability. The higher gas prices do not seem to be affecting car sales at this point and according to the manufacturers, they are still saying the buyers remain resilient. However, if gas and oil prices remain at current levels that would then likely put a strain on car sales. Fortunately, at this time, based on many factors, I think by May or June we will start to see the easing of prices at the pump. Also helping US manufacturers is the deductible interest on cars made in the US. There are restrictions on this, but that does also help ease the pain with a little tax deduction. Also, since the President ended the tax credits for electric vehicles, US car manufacturers were able to scrap the losing endeavor of trying to build profitable EVs. With the stock prices for car manufacturers down around 9 to 10%, I believe the investment clouds should be clearing in the next couple of months and investors may have an opportunity to invest in a good US car manufacturer. It’s important to remember that if you step in and buy here, you own a small piece of a large company and don’t worry about the day to day volatility, you should be focusing on where that business will be at least 2-3 years down the road.

Should crypto companies be allowed into the United States banking system?

Unfortunately, Jonathan Gould, who is Comptroller of the Currency and is one of the country’s most powerful bank regulators, believes so. He thinks it’s a good idea to let firms like Ripple, Crypto.com and others in this area to become a trust bank. A trust bank is a little bit different than a normal bank because they don’t take deposits or make loans and instead offer other services like safekeeping of various assets. An example of trust banks would be insurance companies and payroll processors. My concern is what the average consumer may think as they could believe that because it’s a trust bank it is automatically insured by the federal government. This is a gray area as some trust banks can have insurance from the federal government, but they do not insure investments like stocks bonds, and cryptocurrencies. The Bank Policy Institute and other banks are against this because it is unclear what these crypto companies would do with bank charters. There is talk that some applicants may want access to the Federal Reserve payment rails, which would allow them to move money between digital currencies and the banking system. My concern is this could jeopardize the strength of our banking system and cause our federal government to be on the hook for some big financial liability in the years to come as some cryptocurrency drops dramatically or fails.

Companies Discussed: DICK'S Sporting Goods, Inc. (DKS), Best Buy Co., Inc. (BBY), Signet Jewelers Limited (SIG) & CF Industries Holdings, Inc. (CF)

You may have noticed that the bank stock index is down about 10%, which is more than the S&P 500’s decline of 3% at the beginning of the year. It is estimated that banks made roughly 10% of their total loans to non-depository financial institutions known as NDFIs, which includes private credit companies. It’s also estimated that these types of loans in the past three years have grown from $1.1 trillion to $1.9 trillion. The banking stocks may struggle for a few more months, but the good news is a recent study from the Office of Financial Research found that private funds and BDCs, which are Business Development Corporations, use lines of credit and currently they’ve only used about 50 to 65% of the buying capacity. The tough decision for the banks is do they cut off the line of credit now or do they take on more risk and let those lines of credit increase to 70 or 80%? I feel I hope they stop it now because the risk I think is too great going forward on these private loans. We do hold two banks in our portfolio, which means we may see little to no gain in those stocks in 2026 due to the concerns around private lending. However, we do invest in companies for the long term and understand that difficulties can arise and cause a down year for any company. Long-term I don’t believe this will have a major impact on the financial situation for most of the bigger banks.

The big business of youth sports

I remember growing up and wishing for a baseball or maybe a football for Christmas so I could go down the street and play with my friends. Fast forward to today and youth sports are a multibillion-dollar business for companies. The average American family spends $1,000 on sports per child. Whenever there’s an opportunity someone or some business will step in and fill the void, Dick’s Sporting Goods has helped fill this void. Dicks opened back in the 1940s by a gentleman name Richard Stack, who had the nickname, Dick. His grandmother had $300 cash in her cookie jar and that is what Dick used to start a fishing supply shop in Binghamton, New York. There are now more than 700 stores across the country and their newest concept known as Dick’s House of Sport is expected to have around 100 stores by the end of next year. These are mega stores that are 150,000 square feet, which is three times the size of a normal store. In these mega stores you will find batting cages, climbing walls, golf simulators, and even fields to run around to test out your new cleats. Dicks have been doing well considering it saw revenue skyrocket to $14.1 billion last year. This was twice what it was 10 years ago, not a bad feat for any company.

It’s not just oil; aluminum prices have been surging!

With the recent war in Iran, the rising price of oil and gasoline has been quite noticeable and has been discussed heavily by various news outlets. One lesser-known impact from the difficulties within the Strait of Hormuz is the price for aluminum has surged. People may not notice it since they don’t necessarily buy aluminum directly, but if the problem persists you could see price increases for your favorite six pack of soda or beer. Outside of packaging, aluminum is also used across electronics, construction, transportation, and solar panels. In 2025, the Middle East accounted for roughly 21% of unwrought aluminum imports, which is the raw, unprocessed metal, and 13% of wrought aluminum imports, which is aluminum that has been mechanically shaped into sheets, rods, or other finished forms. Due to supply concerns, the price of aluminum has now increased to 4-year highs and there are concerns it could push even closer to $4,000 per ton from the current price around $3,400 per ton. Aluminum is the most abundant metal on earth, but production has slowed with locations like Bahrain’s Alba cutting production by 19%, this location is home to the world’s largest smelter. Unlike oil, China could have a huge impact when it comes to producing aluminum. China is already the biggest producer of aluminum, but to try and reduce emissions and prevent overcapacity they keep production constrained. They currently have several idle smelters that could be restarted if they feel aluminum prices are too high. Like we have said with the price of oil, I don’t see this as a long-term problem, but the longer supply is constrained for these input costs, the more problematic it is for inflation.

Surprise, US oil inventories actually increased

I know what you’re thinking with the price of gasoline and oil increasing, oil inventories must be declining. Fortunately, that is not the case. If the inventories were decreasing the price of oil and gasoline at the pump would probably be even higher. For the week ending March 13th, crude oil inventories rose by 6.2 million barrels to 449.3 million barrels. This does not include the Strategic Petroleum Reserve (SPR). Everyone including the analysts thought for sure there would be a decline and the estimate was for a decline of around 40,000 barrels. Gasoline inventories did fall by 5.4 million barrels to 244.1 million barrels as of March 13th, but that inventory level is still 3% above the five-year average for gasoline inventories. If the inventories remain high, we could see the price of oil and gasoline begin to decline in another couple weeks or so. It will not go back to where it was a month or so ago, but we should hopefully start seeing a decline back to more normal levels soon.

Financial Planning: How to Create a Tax-Free Account for a Child

A powerful way to build tax-free wealth for a child is by strategically using the kiddie tax rules with investments that generate qualified dividends and long-term capital gains. Under the kiddie tax, the first $1,350 of investment income is tax-free, and the next $1,350 is taxed at the child’s rate, which for capital gains and qualified dividends is typically also 0%. This means a child can receive up to $2,700 of investment income each year with no federal tax. Income above this level is taxed at the parent’s rate, which may be 15% or 20%. While $2,700 may not seem like much, it can support a surprisingly large portfolio because dividend yields are typically low and capital gains are only recognized when assets are sold. For example, a portfolio with a 2% dividend yield would not generate $2,700 of dividends until it reaches about $135,000. While the account is below that level, capital gain harvesting can be used each year to bring total income up to $2,700, allowing gains to be realized tax-free while increasing the cost basis. Because this involves realizing gains (not losses), there are no wash sale restrictions, and investments can be immediately repurchased. By consistently harvesting gains over time, the child can build a portfolio with minimal tax drag and potentially access those funds later with little to no capital gains tax, especially if they continue the strategy after they are no longer subject to the kiddie tax.

Companies Discussed: Super Micro Computer, Inc. (SMCI), SL Green Realty Corp. (SLG), Public Storage (PSA) & The Campbell's Company (CPB)

Investors continue to worry about the private credit market and this week has been filled with troubling news from the sector. According to the Financial Times, Glendon Capital Management said private credit funds run by Blue Owl (OWL) and several of its peers may have understated loss rates in their portfolios, suggesting actual losses could be higher than reported. This has led to concerns around the “true valuation” of these assets. This wouldn’t be surprising given the little clarity that we have for these loans. We also saw JPMorgan Chase take a conservative approach and mark down the value of some loans tied to private credit vehicles. All the negativity has now caused investors to question the long-term viability of this investment, and many are now wanting to redeem their shares. The problem is these companies don’t have to give you all your money back when you ask for it. Blackrock, Morgan Stanley, and Cliffwater all had to curb withdrawals as requests exceeded the pre-existing limit, which normally looks to be around 5%. Looking at Morgan Stanley’s North Haven Private Income fund in particular, redemption requests totaled 10.9% of shares outstanding in Q1 and the fund said it would honor 5% of those requests, which is roughly just 45.8% of each investor’s tender request. This now means those investors have to continue holding the fund until next quarter and can try again at that time to sell additional shares. I also recently learned of a term in the private credit space called Paid in Kind interest, also referred to as PIK. It is essentially an IOU that borrowers give to lenders instead of cash. When this occurs, the borrower’s debt just increases by the interest due rather than the borrower needing to make an interest payment. The crazy thing is that these PIK receipts are still counted as interest income and it counts towards the management fee. An analyst by the name of Ron Kahn, who runs a unit at the Chicago investment bank Lincoln International that does valuations for about a third of all U.S. private credit loans, wondered why private credit companies were showing such few defaults. What he found was lenders were proactively amending loan agreements by allowing PIK interest rather than cash payment so they could avoid default. Lincoln International saw private credit loans with PIK interest rise to 11% at the end of 2025, which was up from 5% in early 2022. There are many concerns in this space right now and I’m sure glad I don’t have any assets in this space!

Prediction markets are hitting college campuses to find gamblers Prediction markets have something FanDuel and DraftKings don’t, access to the 18 to 21-year-olds in college. Gambling is generally limited to adults 21 years or older, however, prediction markets that are run by companies like Polymarket and Kalshi are trades that are regulated as financial derivative contracts by the Commodity Future Trading Commission. This allows anyone 18 years or older to gamble using these prediction markets. Both Kalshi and Polymarket are hitting college campuses across the country and throwing cash around to lure in 18 to 21-year-old students to place bets via the prediction market. They are doing this by using fraternities and even campus clubs to promote their platforms and in some cases, they pay them $10 per each new account they sign up. There was one fraternity who received $30,510 in two weeks which the fraternity used for parties and new furniture. They are also using student influencers as brand representatives to sell other students on the prediction market. These two companies have no shame as they have even used college athletes to influence others to bet on sports with prediction markets.

Don’t pay attention to the price of oil on a daily basis I say that because there’s so much speculation out there and likely the information you receive on the price of oil is useless when you look forward to a few months and maybe even just a few weeks from now. Last week the price of oil surged around 35%, but on Monday after comments from the President that this will not last long in the Middle East, crude oil fell back down to under $85 a barrel. Why is this volatility in the price of oil happening?  Roughly 20% of global oil consumption is exported through the Strait of Hormuz and about 20% liquefied natural gas exports worldwide also pass through the narrow waterway. The United States over the years along with other allies have spent billions of dollars making sure the waterway remains open. At the smallest part it is only 21 miles across and to the northeast there sits, Iran. Officially the waterway is not closed or blocked physically, but there are concerns of going through the strait for fear of being hit by a missile shot from Iran. The other concern is how long this will go on because storage facilities for oil have pretty much reached full capacity and when that happens the producers need to turn off the well in a process known as “shutting in” occurs. When this happens, there can be problems and delays turning the wells back on and some may not regain the original flow. As you can tell, it is not a simple process and it’s not just oil that’s goes through the strait but also liquified natural gas and even large amounts of fertilizer flow through the area as well. I would not recommend making any investment decisions during this time around anything that has to do with oil or even energy for that matter.

The International Energy Agency (IEA) agrees to historic oil release

The IEA, which is an organization of 32 member countries primarily with advanced economies in Europe, North America and northeast Asia, agreed to release 400 million barrels of oil from strategic reserves. Currently, IEA members hold more than 1.2 billion barrels of public emergency oil stocks, with a further 600 million barrels of industry stocks held under government obligation. While the strategic release is helpful, it is only a temporary fix considering nearly 20 million barrels passes through the Strait of Hormuz per day in normal times. China also could help with oil prices if it reduced its purchasing or released some of its stockpile. Ahead of the war China was buying oil at an elevated rate and in the first two months of the year, crude imports soared 15.8% compared to a year earlier. It's estimated as of January China had a stockpile of 1.2 billion barrels as well. China has also been continuing to receive oil from Iran and since the war began it's estimated they've received close to 12 million barrels from the country. 

Surprise.... Gen Z is going to the mall for in-person shopping! You may be hearing that younger people don’t go to the mall any longer, but that is not true, it’s just a little bit different than when people went 20 years ago. Gen Z, the generation consisting of 14 to 29-year-olds, shops at the mall but first they check online sources like Instagram and TikTok to see what's in style. According to Nielsen IQ, the global annual retail spending by this generation is expected to be over $12 trillion by 2030. Shoppers between 18 and 24 years old made 62% of their general merchandise purchases in stores last year, but shoppers 25 and older made just 52% of their purchases in person. Some of the reasons given for the in-person preference was that Gen Z does not like to pay the shipping fees along with common sense things like they want to touch the item and see it in person especially if it’s clothing, they want to see how it looks on them. Malls understand this, and many of them have actually set up areas so that the young shoppers can take their selfies in fitting rooms and other areas that are social media friendly. If you’re a salesperson in a retail store and if you’re talking to this generation, you’d better be up to date when it comes to what’s going on in social media. Some salespeople even have a tablet to show shoppers how influencers are styling different items. It is a misconception that this generation is averse to talking to people, but how you talk to them is different. They’d rather get their advice from an influencer or a friend rather than a salesperson.

Companies Discussed: The Gap, Inc. (GAP), StubHub Holdings, Inc. (STUB), Delta Air Lines, Inc. (DAL) & Uber Technologies, Inc. (UBER)

The numbers are exciting when companies like Meta or OpenAI announce they'll be purchasing billions of dollars in chips or computing power from companies like Nvidia or AMD, but there always seems to be a catch. Most recently, Meta announced that it entered a multiyear deal with AMD to deploy up to 6 gigawatts of the company’s graphics processing units for artificial intelligence data centers and includes use of AI-optimized central processing units, or CPUs. This deal comes a week after Meta committed to using millions of Nvidia's processors to power its AI expansion. While I have my concerns with all the money Meta is spending, my bigger concern with this new AMD deal is the use of stock warrants. Full details for the deal weren't announced, but we did see the deal includes a performance-based warrant for Meta to acquire 160 million AMD shares, about 10% of the company. The first tranche vests when the first 1GW of Instinct GPUs are shipped. Other tranches vest as Meta, makes purchases to 6GW. Vesting is also tied to stock price thresholds for AMD and technical and commercial milestones for Meta. AMD also struck a similar deal with OpenAI where they received warrants to acquire 160 million shares of AMD and it was tied to deployment and stock price benchmarks. The reason this is concerning is because of the potential dilution and again the circular nature of these deals. Essentially these companies are saying they will spend $30 B buying our products and we will give you $30 B in stock warrants back. Stock warrants give holders the right but not the obligation to buy or sell shares at specific strike price before an expiration date. If they are exercised, it creates new stock, which would dilute current shareholders. Based on what I have seen, the exercise price for these warrants is $0.01. Ultimately, I just don't believe this will end well for all players in this space, and I think there is a lot of money that will be lost by investors. 

2025 trade deficit looks deceiving

Some people are saying that the tariffs didn't work because the trade deficit in 2025 only fell to about $901.5 B from just over $903 B in 2024. However, if you break down the numbers quarter by a quarter, it tells a different story. The first three months of the year, there was a $400 billion trade deficit, but each quarter after that it began to decline. In the second quarter, it fell drastically to $180 billion. There wasn't much of a change in the third quarter with a slight drop to $175 billion and then in the fourth quarter there was a drop to $145 billion. We try to explain to people that the US economy at $31.5 trillion is like a big ship in the ocean; it cannot turn quickly. If people would be patient, I think they would see by the end of 2026 there would be further progress and I believe it's possible the trade deficit could see a decline to somewhere around $600-$700 billion based on the fourth quarter of 2025. I know there’s a snafu with the Supreme Court ruling that the International Emergency Economic Powers Act, which was used in the first quarter last year to implement many of the tariffs, was ruled illegal. But there are other ways to impose tariffs such as section 122 of the Trade Act of 1974 or section 301 of the Trade Act that the president used in his first term. Also available is section 232 of the Trade Expansion Act of 1962. I don't believe the Supreme Court ruling will lead to an end of tariffs as the Administration will look at these other avenues. One major positive from these tariffs has been the announcements of various trade deals that have resulted in trillions of dollars promised by other countries to build manufacturing and other things in our economy.

Why is automobile insurance so high?

Your first thought may be the insurance companies are gouging their customers just to make big profits. First off, insurance companies are generally public companies that have shareholders who would not be investing in their company if it was losing money and not paying dividends. The high cost of premiums is not the insurance companies' fault as in recent years things have really changed. Over the past five years, physical damage costs have increased by 47%. This is because of the higher price of cars and all the extra bells and whistles that add up when there’s damage to a vehicle. Bodily injury claims are up 52% over the last five years because of the vast amount of new personal injury lawyers who have come on the scene and are pushing for higher settlements, even on small fender benders. Around 95% of these cases are settled and do not go to court. Many of your less reputable attorneys know this and hold the insurance companies’ hostage. Either settle up with us now or go to court and spend a lot more money and time. Unfortunately, if you’re a responsible driver that makes your premium payments, you are helping absorb the cost of uninsured and underinsured motorists which is up 72%. I’m not a big person for government regulation, but I do believe governments need to step in and verify that all people on the road have auto insurance and a reasonable amount. There’s a trend starting in Florida, which is tort reform that has reduced litigation, and the top five insurance companies in the state have requested rate reductions of 5.9%. There is something in the auto insurance industry called fender bender litigation and this tort reform would help states like New York, California and other states to prevent insurance companies from having to pay ridiculous settlements for little dings and dents and fake injuries. Wouldn’t it be nice if the state of California passed laws to help consumers to pay less for auto insurance?

Financial Planning: What Is the Goal of Tax Planning?

Most people would assume the goal of tax planning is simply to reduce taxes, or even to reduce lifetime taxes, but that should not be the focus.  The true purpose of tax planning is to increase the level of after-tax income by intentionally managing assets and income sources. If the objective were merely to pay less in taxes, the solution would be simple: stop earning money. But earning less would also leave you with fewer resources and less freedom. What people ultimately want is more net income, more access to money, because that provides flexibility, security, and the ability to live life on their terms. Effective tax planning achieves this by building assets and income streams and structuring them in a way that allows you to access them efficiently. This means investing in the right types of assets, placing them in the right types of accounts, adjusting the strategy over time as income and tax laws change, and withdrawing funds at the right time and in the right manner. When you understand that the true purpose of tax planning is to maximize after-tax access to wealth, not merely minimize taxes, you make better decisions that improve your financial life.

Companies Discussed: Vulcan Materials Company (VMC), Leidos Holdings, Inc. (LDOS), Packaging Corporation of America (PKG) & Caesars Entertainment, Inc. (CZR)

Big expenses are coming for companies that invest in AI We have talked about this in the past couple years and now after the companies spent roughly $500 billion in 2025 it's estimated they will spend another $3 trillion by the end of the decade. As the companies spend more money on data centers, chips and other items for AI, their depreciation expense will rise each year, which will reduce their income. The big tech companies are kind of sneaky currently with depreciation. Many companies like railroads and other companies report depreciation as a standalone operating expense on their income statement. The reason depreciation is important for investors to understand is that eventually equipment becomes obsolete or worn out and must be replaced. But the big tech companies currently don’t have to break out depreciation until 2028 after new rule changes take effect. Currently, they include depreciation in the cost of goods sold or sometimes in research and development or general and administrative expenses. This makes it very difficult for investors and analysts to understand the true numbers. The big tech companies defense is they currently include it in the footnotes. However, companies like Microsoft have as many as 15-20 footnotes, which are generally not seen by investors or analysts. Perhaps the big tech companies will continue to hold onto their lofty valuations for now, but at some point, the real earnings will come through, and the stocks could take a major beating. Don’t blame the restaurant or the grocery store for the high price of meat I’m sure you’ve noticed that if you want to go out and have a good steak, you’re probably going to spend somewhere in the neighborhood of $45-$50, depending on the restaurant and how big the steak is. There’s a big shortage of cattle in the United States and the numbers are staggering. In January, there were only 86.2 million cattle and calves, which is down from a peak of more than 130 million in the mid 1970s. The number of people in the United States far surpasses the number of cattle and supply/demand being what it is, it is pushing the price of cattle to higher levels. The 86.2 million heads of cattle may sound like a lot, but when you look at the numbers it is the smallest herd since 1951 and that’s when the population in the United States was 157 million. The population now stands around 344 million people, which is an increase of 119%. All things being equal, there should be around 188 million heads of cattle available. There are three main reasons why the price of meat is high and the number of cattle is low. We used to receive about 5% of our beef supply from Mexico, but a parasitic fly larvae called screwworm has destroyed that supply. Another problem is a lack of rain in Texas, which is the largest producer of our beef supply with 12.5 million cows. If ranchers don’t get enough rain, they produce smaller herds because the cost of feed increases. You may be thinking there’s a lot of cows in California as you drive up 15 and you are right because California is the fourth largest producing state for cows at 5 million, but 1.7 million of those cows are dairy cows. The third reason is simply being a rancher is hard work, and it is generally passed down from generation to generation. Most kids when they’re growing up do not dream about working on a ranch in the hot sun in the dirt all day long. Also, with the price of land some ranchers realize they’re better off selling the ranch for a big profit than continuing to work the land. Fortunately, many ranchers love what they do and despite the hard work continue to do it generation after generation. If you know any young kids that like riding horses, maybe they should consider going to work on a ranch and save all that college money?

Financial Planning: Do Commission-Free Annuities Make Annuities More Attractive?

One of the primary downsides of annuities has always been the layers of fees that drag on returns, along with upfront commissions that create conflicts of interest in how they’re recommended. Commission-free annuities attempt to address these concerns by eliminating the embedded commission and often lowering internal product expenses, which in theory should improve transparency and net performance. However, these products are typically sold by fee-based advisors who charge ongoing advisory fees, meaning that while the conflict of interest may be reduced, the cost savings inside the annuity can be offset by the advisor’s separate fee. Even with improved pricing structures, the fundamental challenge remains, annuities generally offer lower expected long-term internal rates of return compared to investing directly in diversified market portfolios. While annuities provide guarantees such as downside protection and lifetime income, those guarantees come at a cost that often outweighs their benefit. In many cases, investors can generate greater long-term growth and higher income from a well-diversified portfolio. The returns may not be technically guaranteed, but it can still be done in a conservative and sustainable way.

Companies Discussed: Mattel, Inc. (MAT), DraftKings Inc. (DKNG), Ferrari N.V. (RACE) & Restaurant Brands International Inc. (QSR)

It's not a stock market, it's a market of stocks

I have often made this claim when things get crazy in the stock market. What I mean by this is you don't just have to buy the stock market and instead can look for good companies within the market. The reason this is so important to understand is because individual stocks can still do well even when the broader market struggles, especially when the market gets heavily concentrated like it is today. I often reference the tech boom and bust as an example investors should study and in times like this, I believe it is even more applicable. From the tech-stock peak on March 27th, 2000, through the end of that year, the S&P 500 fell 13.4%. It is important to remember that the S&P 500 is a market-cap weighted index, which means the larger the company the more it makes up of the index. If we instead look at the equal-weighted S&P 500, where every company has essentially the same weighting, it actually gained 10.7% from March 27th through the end of 2000. Looking at specific sectors during that period, utilities, healthcare, and consumer staples were actually up about 40% to 45%, while tech fell 51.8%. It has been nice for many investors to enjoy the easy ride in the S&P 500 for the last decade plus, but I continue to believe that over the next 10 years the returns will be much more subdued in the index than investors have become accustomed to. 

Inflation report comes in better than expected

The Consumer Price Index, also known as CPI, showed headline January inflation was just 2.4%. This compares to an estimate of 2.5% and last month's reading of 2.7%. Core CPI, which excludes food and energy, came in line with expectations at 2.5%, but it was also lower than December's reading of 2.6% and the smallest increase since March 2021 when it climbed by just 1.6%. Food prices put a little pressure on the headline number as they were up 2.9% compared to last year. Most of this came from food away from home where prices were up 4.0%. Food at home on the other hand only saw prices climb 2.1%. Energy prices helped the headline number as prices declined 0.1% as gasoline prices fell 7.3%. Offsetting this benefit was utility prices where electricity was up 6.3% and utility gas service was up 9.8%. Many other areas saw muted price changes, and shelter continued to add pressure to both the headline and core CPI numbers. Even though the annual rate of 3.0% was lower than December's level of 3.2%, it is still above both the headline and core numbers. As a reminder, this is a huge weight at around 34-35% of headline CPI and over 40% of core CPI. If all else remains the same and shelter declines this year, I believe we could see that 2% target achieved. I was surprised to learn the Owner's Equivalent Rent (OER), which essentially measures the rate homeowners believe they could rent their house out for, carries most of the weight at over 70% of the shelter category. In January, the OER was up 3.3% while the actual rent of primary residence category was only up 2.8%. 

Financial Planning: You May Be Receiving a Larger Refund New tax rules could help many filers see larger refunds this year, with some benefits happening automatically and others requiring careful reporting. The standard deduction increased for everyone, with taxpayers aged 65 or older receiving an additional $6,000 boost. The state and local tax (SALT) cap rose from $10,000 to $40,000 for those who itemize, and the child tax credit increased by $200, from $2,000 to $2,200. These automatic changes may lower tax liability without any special reporting. However, other deductions such as those for auto loan interest, overtime pay, and tip income must be properly reported to receive the full benefit. Taxpayers should review their returns carefully to ensure all available deductions and credits are captured. If a larger refund does show up, it may be a good time to update 2026 withholding elections to increase monthly take-home pay instead of waiting all year for next year’s refund.

Companies Discussed: C.H. Robinson Worldwide, Inc. (CHRW), Cushman & Wakefield Limited (CWK), QUALCOMM Incorporated (QCOM) & PayPal Holdings, Inc. (PYPL)

18% of US adults have taken GLP-1 drugs. What’s the concern? The price of GLP –1 drugs have come down and roughly 18% of adults in the US are using them. But there are other considerations outside of just weight loss. These drugs came out to treat type 2 diabetes and obesity not as a lifestyle change to lose 20 or 30 pounds. It is estimated that about half of people will stop taking the drug after one year and will probably be very disappointed with their future weight management. Studies have shown that when people stop taking the drug within about a year and a half, they regain most of the weight they lost. Studies also show that the weight gain comes four times faster than those who lost weight through normal dieting. While on these drugs, people see their blood pressure, cholesterol, and blood glucose levels improved, but when they’re off the drug in a little over a year, those levels go back to where they were. Kevin Hall is a former senior investigator at the National Institute of Health and a specialist in nutrition. He says once you’re off the drugs, your appetite will be much higher than it was and you could end up overeating, which leads to taking in too many calories. Another study shows people who gain weight back and decide to go back on the medication that it’s not as successful the second or third time. People also don’t realize a thing called weight cycling or gaining and losing weight and how that can affect the percent of fat to muscle. It is estimated that when you lose weight about 25 to 30% of it is muscle. But the sad part is when you have the weight gain after you’re off the drugs, it is unfortunately more fat than muscle. So, as you can see, this is not a good cycle or a good plan for 10 to 20 years. If one thinks it is a good idea to just stay on these drugs for life, there are long-term risks such as gallbladder diseases, pancreatitis, and kidney damage. The kidney damage is one that would really worry me because as you get older and you have more pain you may want to take a pain reliever like Advil or ibuprofen, but doctors now look at people’s kidneys to see if they can handle Advil or ibuprofen, which is another strain on your kidneys. Being concerned with how you look and taking the easy way to look better by popping a pill or taking an injection may cause you to have regrets when you’re older.   Is the US housing market becoming a buyer's market? From 2020 to about 2022 it was definitely a seller's market and people could ask whatever they wanted for their home and if you didn’t take it, there would be 10 people behind you that would. Well now things are changing back to where buyers can negotiate and sometimes even get a price below the asking price. Nationwide, about 62% of homebuyers purchased their home under the listing price. The discount of 8% was also the largest since 2012. Buyers are also obtaining concessions from sellers which could be things like cash for closing costs or buying down the mortgage. As recently as December, there were 600,000 more sellers than buyers and that’s the biggest gap going back to 2013. What is helping the housing market is mortgage rates have declined a little bit, which has made homes somewhat more affordable for some buyers along with the cool-off in prices that we have seen. The best place to buy a home currently is Florida and Texas because new home construction has created a big supply of homes for sale. It can really depend on the local market you are looking at, but if you’re buying in West Palm Beach, Fort Lauderdale, or Miami, about 85% of homebuyers paid under the original listing price. However, if you’re buying a home in Newark, New Jersey, San Francisco, or San Jose, only 39% received a discount from the original list price. It was also noted that those markets had a low amount of new construction. There could be more to come if the supply increases, and prices ease somewhat as it would likely bring more buyers back into the market. Depending on where you’re looking at buying, perhaps 2027 will be a great time to buy home.   Financial Planning: How Would an S&P 500 Portfolio Work in Retirement? Many investors nearing retirement feel comfortable staying fully invested in the S&P 500 because recent performance has been strong, but that confidence is often based on a short window of returns rather than the long reality of retirement. Retirement can last 20 to 30 years, and during that time markets will go through multiple corrections and bear markets. Once withdrawals begin, even modest withdrawal rates can amplify losses and deplete a portfolio. The late 1990s provide a clear example when the S&P 500 produced annual returns in the 20% to 30% range for several years in a row and many investors came to believe strong gains were easy and would continue… then 2000 came. Someone withdrawing an inflation-adjusted 4% from an S&P 500 portfolio in 2000 saw the account fall to roughly half its value within just three years, meaning a retiree at 62 with $1 million was left with barley $500k by 65. For those who stayed invested, after the Great Recession 9 years into retirement around age 71, the portfolio had lost close to 2/3rds of its original value.  At that point, the withdrawal rate needed to continue income was now 14%, up from the original 4%. Today the S&P 500 sits near all-time highs and trades at historically elevated forward earnings multiples, mirroring the late 90’s. While the index has delivered roughly 10% annual returns over the long term, those averages hide the danger of sequence of returns risk, where starting withdrawals before or during a downturn can permanently impair a portfolio and leave too little capital to fully recover even when markets eventually rebound.   Companies Discussed: Lennar Corporation (LEN), Sysco Corporation (SYY), Microsoft Corporation (MSFT) & Visa Inc. (V)

Another history lesson shows why we don’t overpay for hot stocks We know it's exciting to be in the next hot thing on Wall Street, but that was the same way people felt just a few years ago with hot software companies like Salesforce, Adobe and ServiceNow. Looking back, many of these once hot companies now have seen very disappointing five-year returns. As an example, Salesforce is only up around one percent over the last five years, and Adobe has actually fallen around 35% during that timeframe. The reason we won’t overpay for earnings on high flying companies is because many things can change like we have seen in the software industry. Software companies were supposed to benefit from AI, but now Anthropic's Claude code, which is an AI tool, says it can shrink the time it takes to build complex software. Also, new competition can come from startup companies that can slowly take away market share of the older companies a little bit at a time. Unfortunately, some of the software companies began to borrow substantial amounts of money and now have a highly leverage balance sheet, which could cause some problems in the future. In just the last 24 months, 13 software companies have defaulted on loans. I don’t think many of these big software companies will go out of business anytime soon, but I don’t believe their stock will run up to levels seen in the past anytime soon.

Gold has done well, but silver has surged! Should you buy it now?

Silver is now up over 250% in the last year alone as it has become immensely popular with retail investors. Many investors are excited to point out that silver has a strong use case as an industrial metal. It’s a key component in electronics, including circuit boards, switches, and solar panels thanks to the fact that it’s an excellent conductor of electricity. Thanks to increasing demand for areas such electric vehicles and growing electricity needs, largely due to the AI push, industrial use cases now account for around 60% of demand. This compares to under 50% just a decade ago. I was also surprised to learn that silver may be subject to supply shortages as about ¾ of new silver is created as a byproduct of mining other metals like copper, zinc, and lead. This has led to silver demand outstripping supply every year since 2018. While all this sounds positive, generally markets have a way of reconfiguring the supply and demand equation. I believe this could lead to companies that have silver as an input cost will instead look for alternative sources as the price has become prohibitive after the recent surge. This would then hurt demand for silver. On the supply side since the economics of finding silver is strong at this time, you could see more mining for silver and the other metals, which would then increase the supply of silver. Declining demand and increasing supply would be problematic for the price of silver. Another way to look at the value of silver is the silver-to-gold ratio which tells you how many ounces of silver you need to buy one ounce of gold. The 50-year average is around 65, but today that ratio has fallen below 50. That is the lowest ratio in over a decade. Ultimately, your guess is as good as mine for where the top is for silver, but long term I don’t believe we will see strong results from this level. Don’t forget this is a volatile asset with other historical instances of massive rallies that were followed by large declines. We have talked about the Hunt Brothers’ attempt to corner the market in the 80s, but more recently there was a bubble that occurred in 2011. The price peaked at around $49 in April of that year but quickly tumbled about 25% in just a week and ultimately ended the year at $27 for a total decline of nearly 45% from the high.  

Financial Planning: Best Accounts for Kids and Grandkids

When saving for kids and grandkids, the “best” account depends on the tradeoff between tax benefits, flexibility, and control. 529 plans offer tax-free growth and withdrawals for qualified education expenses, but non-qualified withdrawals trigger federal and state taxes and penalties on earnings. Up to $35,000 can be rolled into a Roth IRA over time without federal taxes or penalties, though some states, including California, still impose taxes and penalties. Roth IRAs provide tax-free growth and tax- and penalty-free access to contributions at any age, but contributions require earned income, which many children do not have. Trump accounts function similarly to a retirement account. Funds generally cannot be accessed before age 18, and early withdrawal penalties apply until age 59½. Growth is tax-deferred, but earnings are taxed at ordinary income rates upon withdrawal, similar to a traditional IRA funded with after-tax contributions. Unlike other retirement accounts, contributions can be made before age 18 even without earned income, and funds may later be converted to a Roth IRA, though taxes would apply to earnings at conversion. Custodial accounts (UTMA/UGMA) do not offer tax-deferred growth but benefit from the kiddie tax rules. In most cases, the first $2,700 of long-term capital gains and qualified dividends are taxed at 0%, allowing smaller accounts to grow largely tax-free. However, assets must be turned over to the child at adulthood with no restrictions on use. Finally, taxable accounts in a parent’s or grandparent’s name offer maximum flexibility and control over timing and purpose of gifts, but investment earnings are taxable to the adult each year, though usually at the lower capital gain and dividend rates. Because of the control and simplicity, we often recommend taxable accounts as a core strategy, supplemented by other account types when specific needs justify them.

Companies Discussed: McCormick & Company, Incorporated (MKC), Zoom Communications, Inc. (ZM), Booz Allen Hamilton Holding Corporation (BAH) & Pinterest, Inc. (PINS)

Is using part of your 401(k) for a down payment on your home a good idea? The President is trying very hard to stimulate the housing market and allow younger people to buy their first home. One idea that has been tossed around is allowing people to use their 401(k) for a down payment. People can currently borrow from their 401(k) and I often hear uninformed people say it’s a great thing because you get to pay yourself the interest. Briefly, it is not a great idea because those "interest" payments don't account for the negative impact of the opportunity for what those funds could have grown at. You also don't get a tax deduction when paying the loan, and then you pay taxes on distributions at a later date, so it also has a negative tax impact. Outside of 401k loans, how’s the administration looking to help first time homebuyers? Kevin Hassett, who is director of the National Economic Council, threw out one possibility that a homeowner could put 10% of the equity of their home into a 401(k). That may make your 401(k) balance look artificially high because as the home grows in value so does that 10%. The problem I see is when it comes to retiring that 10% cannot provide retirement income. I still believe the best way to fix the affordability problem is to increase the supply of homes to match the demand, which would reduce prices.

AI will create jobs that have not even been imagined yet There are jobs that are starting to be seen and developed as AI becomes more involved in business. One example is someone has to make sure that the systems are kept up-to-date and function properly. There’s also going to be people that have to understand the technology thoroughly and then translate the output, so managers, judges, regulators, or anyone else that is using it understands the answer. Experts will have to understand such things as self-driving vehicles and how the technology works. Say there is a car accident with two self-driving cars, who determines who’s at fault? There will need to be experts that understand the self-driving technology and then try to explain the situation. The AI system will have to be checked from time to time to verify that the AI system did not produce results that were unfairly skewed in one direction or the other. Once that is discovered, another expert would have to know how to fix and eliminate those problems using new data that helps eliminate the bias. Training is another area of opportunity. As people’s jobs change, they will need training in the new technology. The expert trainer would also use the technology to figure out what teaching style works best for the individual. Yes, the future is always scary because of the unknown, but innovation continues onward creating new opportunities and problems that need to be solved.

Financial Planning: Start Social Security Early to Invest?

When evaluating when to start Social Security, there are generally two schools of thought. Either collect early at age 62 to invest the funds or wait until age 70 for a larger monthly benefit. Proponents of waiting argue that the age-70 benefit is roughly 77% higher than collecting at 62 and that deferring protects against longevity risk. Regular people and some financial advisors alike believe this is the superior strategy. A recent article in the Wall Street Journal takes this stance, stating that many retirees will live until age 85, so collecting at 70 increases guaranteed income and reduces market risk. However, the article illustrates its conclusion using an inflation-adjusted return assumption of –3% on invested funds. While technically possible, such an outcome is extremely unlikely over a 23-year period (ages 62 to 85), especially because the analysis applies returns to monthly payments over time rather than a lump sum, meaning the cash flows would benefit from dollar-cost averaging rather than suffer from sequence-of-returns risk. In reality, retirees who collect at 62 rarely invest the benefits directly; instead, they reduce withdrawals from an existing portfolio, preserving capital that can compound and generate additional income to offset the lower Social Security benefit. When the math is examined with multiple expected returns, a retiree is better off collecting at 62 if they live to age 78 assuming a 0% return, age 84 with a 5% return, age 94 with an 8% return, and any lifespan with a 10% return. Ultimately, the decision is less about maximizing guaranteed income and more about understanding expected returns, cash-flow dynamics, and the opportunity cost of delaying benefits.

Companies Discussed: Expand Energy Corporation (EXE), Citigroup Inc. (C), The Kraft Heinz Company (KHC) & GameStop Corp. (GME)

The tariffs seem to be working with the October trade deficit at the lowest level since 2009 The October trade deficit was only $29.4 billion, which is far better than the expected deficit of $58.4 billion. Not only was it almost half the expected amount; but it was also the lowest deficit going back 16 years to 2009. The low trade deficit was due to imports falling to $331.4 billion, but exports also increased to $302 billion. Exports benefited from the high price of gold, silver and other metals as that increased exports by $10 billion during October. The big benefit on the reduction of imports came from pharmaceuticals dropping sharply probably because in late September the administration threatened 100% tariffs on overseas pharmaceuticals. The drug makers were apparently scrambling on what to do and trying to minimize the impact going forward. The Supreme Court will not make the decision on whether the tariffs are legal or not just because they are working; they will determine if the use of the International Emergency Economic Powers act to impose tariffs is legal or not. My hope is that they do agree with it, and if not, hopefully the administration can come up with some other way of keeping the tariffs in tack as they seem to be working very well.

Is the 10% credit card interest cap a good idea? At first glance, the average person is going to say yes that is great because current credit card rates around 23 to 24% are ridiculous. However, when you dig deeper into credit cards and how they work, people have to realize the risks for defaults and late payments are rather high. Banks that issue credit cards are in business to make a profit for their shareholders and if there’s no profit to be earned, then there’s no point in a business offering that service. The current default rate on credit cards is about 3%, which means banks have to write off the entire balance of whatever that person owed. The higher default rates are seen in ZIP Codes with lower incomes and also for younger borrows who got in over their head. If the 10% cap on credit cards does go through, it will hurt people with lower incomes and those that have lower credit scores because banks would no longer be able to be profitable on those accounts, and they would stop offering credit to them. It would also affect many across-the-board as you could see a reduction if not elimination of points and cash rewards on credit cards, which would be disappointing for many. In my opinion, it is better to have the higher interest rate on credit cards like we have today, as it broadens the pool of people that can access this tool. Unfortunately, people need to use some self-discipline to not get in over their head and make sure they can pay their payments and hopefully not carry a balance on the card. If they can do that, they pay no interest and also can benefit from cash-back and other reward programs.

Financial Planning: Who Benefits from the New Auto Loan Interest Deduction?

The new auto loan interest deduction created by the July 2025 “One Big Beautiful Bill” allows taxpayers to deduct up to $10,000 per year of interest paid on a qualified auto loan during tax years 2025 through 2028.  This is an above-the-line deduction, meaning it is available even if the standard deduction is taken. To qualify, the loan must be an auto loan for a new vehicle that had final assembly in the United States purchased in 2025 through 2028. Leases, personal loans, and cars purchased before 2025 do not qualify. The deduction is subject to income phase-outs, beginning at $100,000 for single filers and $200,000 for married couples, and fully phasing out at $150,000 for single filers and $250,000 for married couples.  Most states, including California, do not conform to this federal deduction, meaning it won’t reduce state income tax. However California lawmakers have proposed a separate state deduction (AB 490), but it has not become law.  For people who receive the deduction, the actual tax savings will likely range from a hundred to a thousand dollars because most auto loans don’t have anywhere near $10,000 of annual interest and only taxpayers in the 10%, 12%, and 22% bracket will qualify.

Companies Discussed: Constellation Brands, Inc. (STZ), Walmart Inc. (WMT), Expedia Group, Inc. (EXPE) & The Boeing Company (BA)

It’s a new year, is it time to hire or change to a new investment advisor?

With the new year, investors should take a look to see how their investments have done and how their investment advisor has been working with them. The beginning of the year is a fresh start, so it’s time to see what your percentage return was on your portfolio in 2025 and evaluate if your advisor kept you updated and gave you the customer service you need like returning your phone calls in a reasonable timeframe. You don’t want to jump from the pan into the fire, so when you’re looking for a new investment advisor, be sure that the company and the advisor are full fiduciaries, which means they must do what is best for you, not what is best for themselves. Ask yourself the question, is the advisor trying to sell me products that he or she makes a big commission off of? That could be a red flag that they don’t have your best interest in mind. It's also important to understand the investment strategy the firm and the advisor use. Do they use mutual funds or build your own portfolio with individual equities and investments that are liquid and don’t tie your money up for years to come in case the investment underperforms. I always believe it is worth asking the advisor how they manage their own personal portfolio. If it’s good enough for them, why is it not good enough for you? I know some advisors will say they have different objectives, but I think everyone has the same objective of making a reasonable return on their investments. And lastly, don’t be afraid to ask how they get paid when managing your investments. It may seem like an uncomfortable question, but if it’s an excessive amount, that can be a red flag. If the advisor is trying to dodge the question, that means to me, they’re trying to hide something from you at the very beginning, and you should runaway immediately. Take your time to find the right advisor, if you feel pressure from constant phone calls and high sales tactics, you probably want to look for someone else to work with on your investments.

The labor market ends the year on a soft note

This jobs report was special considering it was the first on time report in 3 months, but I'd say the data was lackluster. Nonfarm payrolls in December increased by 50,000, which was short of the estimate of 76,000. The two prior months also saw downward revisions that totaled 76,000. For the full year, payroll employment grew by 584,000, which equates to a monthly average of about 49,000 new jobs per month. This was less than 2024's gain of 2 million jobs or about 168,000 per month and actually registers as the worst payroll growth outside of a recession since 2003. While this all might sound troubling, it is important to remember that changes to government jobs had a large impact on the data. Since reaching a peak in January, government employment fell by 277,000 jobs. This obviously created a huge headwind for headline payroll growth. With that said, the labor market was still in a slower growth environment, and I continue to believe that will be the case as we move forward considering the unemployment rate still remains healthy at 4.4%. It's also important to remember that of those counted as unemployed, about 26% or 1.9 million people are considered long-term unemployed as they have been jobless for 27 weeks or more. I always do wonder how actively these people are looking for jobs. In terms of areas of strength in the report, both healthcare and foodservices and drinking places remained healthy. Health care employment was up 21,000 in the month and for the full year averaged monthly gains of 34,000. This was down from 2024's monthly average of 56,000, but still strong. Foodservices and drinking places saw employment grow by 27,000 jobs in the month and for the full year averaged monthly gains of 12,000 jobs, which was similar to 2024's average of 11,000 jobs added per month. Retail trade was the real headwind for the month as employment declined by 25,000 jobs. This could be due to seasonal changes, but it was interesting to see retail trade employment showed little net change in both 2024 and 2025. The other major industries in the report showed little to no changes in the month. Overall, I believe this continues to show that we remain in a slow hire/low fire labor environment and I don't see much evidence that will change this year. 

Financial Planning: Mortgage-Backed Security Purchase Lowers Mortgage Rates

The U.S. government’s announcement of a $200 billion purchase of mortgage-backed securities (MBS) through Fannie Mae and Freddie Mac is already pushing 30-year mortgage rates below 6%, creating an opportunity for homeowners and prospective buyers. During the COVID-19 pandemic, the Federal Reserve lowered interest rates and also purchased MBS, which helped push mortgage rates down.  Mortgage rates are not directly tied to the Federal Reserve interest rates, but the purchase of mortgage-backed securities is something that would directly lower mortgage rates. This is because investors purchase mortgages after origination for the interest income paid by homeowners, so Fannie Mae and Freddie Mac buying these securities increases demand which lowers the interest rates borrowers get on mortgages. For those with higher mortgage rates, this could be an opportunity to cut that down.  I don’t think we are yet at a point where it makes sense to buy down the rates further, but there is no limit to the number of refinances someone can do.   It may be best to refinance now and then again in another year or so.

Companies Discussed: Tyson Foods, Inc. (TSN), Lockheed Martin Corporation (LMT), Generac Holdings Inc. (GNRC) & Seagate Technology Holdings plc (STX)

Finally some data on the labor market!

With the government shutdown, a lot of the data for the labor market was delayed. We finally got employment figures for October and November, and they were interesting to say the least! To start, the October numbers looked horrific considering payrolls declined by 105,000 in the month. While this sounds troubling, it's important to remember all of those government workers on severance were still counted as employed until the severance ended. This led to a decline in government payrolls of 162,000 in the month of October. Losses in government payrolls continued in November, but at a much slower rate as they tallied 6,000 in the month. Since reaching a peak in January, government employment has seen a decline of 271,000 jobs. Looking at November, payrolls increased by 64,000, but healthcare continued to carry most of the weight as the sector accounted for more than 70% of the total net increase and added 46,000 jobs. Construction was also strong in the month as the sector added 28,000 jobs, but many other areas saw little change and transportation and warehousing was weak as payrolls declined by 18,000. Another concern in the report was the unemployment rate ticked up to 4.6%, which was above the 4.4% level in September and marked the highest reading since September 2021. Overall, when I look at the labor market it is definitely slowing, but I wouldn't say I'm overly concerned at this point in time. While it is concerning to see declines in the payroll level in three of the last six months, for the most part the private market has done a good job picking up the large declines in the government sector, which I view as healthy. I don't want to say our labor market is booming at this point in time, but I would still classify as relatively healthy. 

Inflation report shows great progress, can it be trusted?

Headline November CPI came in at 2.7% compared to last November, which was well below the estimate of 3.1% and core CPI, which excludes food and energy, showed an increase of just 2.6%. This was the lowest reading for core CPI since March 2021 when the increase was just 1.6% and it also came in well below the estimate of 3.0%. Some areas in the report remained challenging particularly in food, where we saw uncooked beef roast climb 21.2% and coffee increase by 18.8%. Beef prices have struggled as cattle supply touched its lowest point in 2025 since the early 1950s and coffee prices have been hit by extreme weather in major coffee-producing countries as well as the tariffs levied on Brazil. Shelter inflation was positive in the report as the annual increase was just 3% and it's believed there is more relief coming for the largest weight in the CPI, which generally occupies around 1/3 of the headline number. If the inflation for shelter slows further, it would be very beneficial for the inflation rate as we progress through 2026. The big problem with this report is there are questions about how accurate the data is. Due to the shutdown, there was no data collected for the month of October, and the BLS was only able to collect data for about half the month of November as the shutdown did not end until November 12th. For the time being we are pleased with the results from this CPI report, but I do believe there will now be even more emphasis on the December CPI as that will be the first full month of data following the record-breaking government shutdown. 

Want to become a millionaire? Invest in your 401(k)! There are more and more people with $1 million or more in a 401(k) as companies like Fidelity and Vanguard are seeing record numbers of people with accounts of more than $1 million. Fidelity said they hit the highest level ever when it comes to 401k millionaires with about 3.2% of their 401k’s or 654,000 accounts now over $1 million. Vanguard also had similar numbers for 401k millionaires. Becoming a 401k millionaire is not a get rich quick scheme, but it's a proven way to build your wealth long-term with proper investment choices. It is estimated that roughly 86% of those with $1 million plus in their 401k are 50 or older. It is also estimated that around 1000 people per day become 401k millionaires in the US. The key to becoming a 401K millionaire is to invest wisely, which means not too aggressive, but also not too conservative. Also, when a portfolio drops, you cannot sell everything and wait for the market to get better, you or an investment professional must verify that you have good quality investments in your portfolio that can handle the financial storms and also it's important to continue adding to your portfolio during these difficult times. It is important not to pull money out from your 401(k) for any reason at all, no matter how bad you think the situation is, it will improve. It is much better to deal with problems when you’re young rather than when you're in your 60s because you did not let your 401(k) grow to over a million dollars.

Financial Planning: Taking Advantage of Itemized Deductions Before December 31st

With the repeal of the $10,000 SALT deduction limit, many taxpayers may once again benefit from itemizing deductions rather than taking the standard deduction, and there are practical steps that can be taken before year-end to further enhance that benefit. The SALT deduction includes both state income taxes and property taxes, and because individuals are cash-basis taxpayers, deductions are generally taken when expenses are paid rather than when they are due, meaning that paying certain obligations before December 31st can shift future deductions into the current tax year. In California and many other states, property taxes are paid in two installments, with the first due in December and the second due in April.  If the April installment is paid by December 31st, it may be deductible in the current year instead of the following one. Similarly, the final state estimated tax payment is typically due on January 15th, but making that payment in December allows the deduction to be taken in the current year. Another significant itemized deduction is mortgage interest, and while mortgage payments are usually due on the first of the month, making the January 1st payment in December can allow the interest from that payment to be deducted in 2025 rather than 2026. In addition, charitable deduction rules are scheduled to change in 2026 and will be subject to an adjusted gross income (AGI) limitation, which means taxpayers who are charitably inclined may benefit from accelerating planned donations into the current year while the rules are more favorable. Taken together, these strategies tend to be most effective when income is higher in the current year, as accelerating deductions while in higher tax brackets results in greater overall tax savings.

Companies Discussed: Oxford Industries, Inc. (OXM), Exxon Mobil Corporation (XOM), Vail Resorts, Inc. (MTN) & Costco Wholesale Corporation (COST)

Just when Apple corrected their major problems, it looks like there’s a management drain Apple did a great job handling the proposed tariffs on its products, which would have devastated the company. Also, in court they managed to keep the $20 billion a year they receive from Google. But now, they seem to be fighting a management exit by some of their top executives. Over the last couple of weeks, it was announced that both their General Council and Head of Policy will be retiring next year. Another major concern was also announced in that timeframe that their Head of Artificial Intelligence and Strategy is also going to retire. Making matters worse, their Chief Operating Officer said he’ll be retiring in July of next year. Don’t worry about CEO Tim Cook being age 65, he said he is not considering retirement, and people at the company said he is not slowing down at all. It was also recently announced that Meta has taken from Apple a top designer named Alan Dye. Also Jony Ive, who is a Steve Jobs protégé and helped build the iPhone along with the Apple Watch, is heading over to OpenAI to help Sam Altman. It’s not just the top people leaving though as apparently dozens of Apple engineers along with designers who are knowledgeable in audio, watch design, robotics, and much more are also finding a new home at OpenAI. Running a major technology company like Apple and striving for new innovation makes it difficult when a company is losing top management and star engineers and designers. I don’t think this will cause a major drop in the stock short term, but it could be difficult longer term for the company when it comes to innovation and new products, which could concern investors in the years to come!

It’s time to put some commercial property into your portfolio You may be questioning why would I put real estate like commercial property in my portfolio that over the last five years or so has had a return of maybe 7% versus stocks that have done much better? The simple answer is the basic investing principle of buying low and selling high. Looking forward, I believe commercial real estate over the next five years should get better returns than artificial intelligence considering the fact that it is very pricey. Data from MSCI revealed that year to date large investors have purchased $4.6 billion more US commercial property than they sold. That is the first time that has happened in three years, and deal activity is still low compared to history. US commercial real estate values are off from the peak in 2022 and are now down on average around 17%. Looking just at commercial offices, there is a better discount considering there are down around 36% from their peak. History shows this could be a very good opportunity. There’s only been two times over the last roughly 50 years or so when commercial property prices were down more than 10%. You have to go back to the early 1990s, which was about 35 years ago, and who could forget the 2008 great recession. How should you invest in office buildings and commercial property? The best and the easiest way is to use public real estate investment trusts, which are known as REITs. Please do not let your broker sell you private real estate of any sort so they can get paid a big commission. REITs that trade on the market are commission free and completely liquid unlike private real estate deals. With public REITs you can many times receive good investment yields between 4% and 6%. However, make sure to understand the fundamentals to insurethat dividend yield is safe. A history lesson shows that commercial property under performed from 1997 to 2000 when the tech boom was happening, but when the tech boom ended and went bust, commercial real estate did very well. Could the same thing happen now as there are signs that the AI rally could end? If you do invest in a good quality public real estate investment trust, you should have at least a 4 to 5 year time horizon to hold that investment.

Financial Planning: The Benefits of Capital Gain Harvesting

While many investors focus on tax-loss harvesting, harvesting capital gains can be just as valuable especially when you fall into the 0% long-term capital gains bracket. For example, in 2025 a married couple filing jointly can have taxable income up to $96,700 and still pay 0% on long-term gains. Because the standard deduction ranges from $31,500 to $46,700, and itemized deductions can be even larger, a household’s total gross income can potentially exceed $150,000 while still remaining in the 0% capital gains bracket. If an investor wants to keep the same investment, they can immediately repurchase it, since wash-sale rules do not apply to gains. However, even though the gain itself is taxed at 0%, the added income may increase the taxation of Social Security benefits, pulling more of those benefits into taxable income. For those who don’t face that issue, gain harvesting resets their cost basis and reduces the taxes they will owe later if they sell in a higher-income year when their capital gains rate jumps to 15% or even 20%. This strategy can also make sense for those currently in the 15% capital gains bracket who expect to be pushed into the 20% bracket later. Overall, capital-gain harvesting can be a powerful tool in years of temporarily low income.

Companies Discussed: The Brink's Company (BCO), PVH Corp. (PVH), Pure Storage, Inc. (PSTG) & The Kroger Co. (KR)  

Bitcoin holder Strategy should be getting nervous about the price of Bitcoin The public company Strategy, which used to be known as MicroStrategy and trades under the symbol MSTR, should be getting nervous about its 650,000 Bitcoins that are worth around $56 billion depending on the day. The problem is the company has about $8 billion of convertible bonds outstanding that require interest payments and about $7.6 billion of perpetual preferred stock that also pays dividends. The cost to pay the interest and these dividends is about $780 million annually and since all the company’s assets are essentially in Bitcoin, they don’t receive any interest or profits from that asset. The CEO, Michael Slayer, is saying if they must, they will sell Bitcoin to raise the cash to pay the dividends and interest payments. The convertible bonds could also be problematic down the road as they are due in about 4.4 years on average and come with a combined interest rate of 0.421%. The stock itself has been pulverized, and its market cap has been as low as $49 billion from a high of $128 billion in July. MSCI has proposed cutting digital asset treasury companies from its indexes if crypto tokens make up a major part of the assets. This decision will come in a little over a month on January 15th and if this happens, Strategy could see $2.8 billion in passive outflows. JPMorgan estimates that about $9 billion of the company's market cap is tied to passive and index ETFs and mutual funds. This could put more pressure on the stock if more indexes also decide to remove these treasury companies. You won’t believe how the company makes their profit and loss statement. When the price of Bitcoin rises, the company books a paper profit even if it did not sell any Bitcoin. Obviously, if Bitcoin goes down in value, they must book the losses as well. One must love the estimates for the earnings of Strategy for 2025.  Strategy is expected to report a loss of $5.5 billion or a profit of $6.3 billion or something in between. That is some great guidance! I don’t know where Bitcoin is going today, tomorrow or anytime in the future, but I would be sweating bullets if I held Bitcoin or Strategy in my clients’ portfolios or my portfolio!

Holiday shopping hits record levels!

We continue to see conflicting data when it comes to the health of the consumer. They continue to say they don't feel good, but the hard data and the actual numbers remain quite strong. In a positive note from the National Retail Federation (NRF), an estimated 202.9 million consumers shopped during the five-day stretch from Thanksgiving Day through Cyber Monday. That is the largest turnout since data for the five-day period started being collected in 2017, and it easily tops last year's level of 197 million shoppers. Expectations for the period were also quite low considering the estimate was for just 186.9 million shoppers. While online shoppers increased 9% year over year to 134.9 million people, in-store shoppers still saw a nice increase of 3% to 129.5 million people. Adobe also provided sales data for the five-day period that indicated consumers spent $44.2 billion online, which was a 7.7% year-over-year jump. Black Friday in particular saw strong online sales as they totaled $11.8 billion and grew by 9.1% year over year. A big question here is if the shopping was done to capitalize on deals in an attempt to save money. That could be an indicator of a weaker economy, but I don't believe that's the full story as shoppers told NRF at the end of Cyber Monday that they had about 53% of their holiday shopping remaining, which was similar to a year ago. For the full holiday season, the NRF expects record sales of between $1.1 trillion and $1.2 trillion from Nov. 1 through Dec. 31. This would be the first time sales would top $1 trillion, and it would represent a 3.7% to 4.2% increase from the year-ago holiday period. 

Financial Planning: When Tax-Loss Harvesting Makes Sense and When It Doesn’t

Tax-loss harvesting is often promoted as a smart tax-saving strategy, but investors should understand its pitfalls before hitting the sell button. Selling a position at a loss may reduce taxes today, but it could also mean missing a rebound in that investment potentially costing more in lost gains than the tax benefit received. For example, if an investor buys a stock for $50,000 and harvests a $5,000 loss when the investment drops to $45,000, and they are in a 24.3% combined tax bracket (15% federal + 9.3% state), the tax savings is just over $1,200. That means the investment only needs to rise 2.7% to wipe out the benefit of harvesting, something that could easily occur during the required 30-day wash-sale waiting period. Even if the position doesn’t rebound, repurchasing after 31 days locks in a lower cost basis, potentially increasing future taxable gains possibly in a higher tax bracket. Many investors, especially retirees with lower taxable income, are already in the 0% long-term capital gains bracket, meaning losses may not even be needed; a married couple in retirement could have income near $150,000 and still realize long-term gains tax-free. Tax-loss harvesting can still be valuable when losses are large in percentage terms, when it helps avoid a higher tax bracket or IRMAA surcharges, when offsetting short-term gains (which long-term losses can do), or when exiting a position you don’t plan to repurchase.

Companies Discussed: Weyerhaeuser Company (WY), Netflix, Inc. (NFLX), Energizer Holdings, Inc. (ENR) & Valvoline Inc. (VVV)

The affordability index for people buying a home is the worst in 50 years People may be excited about buying a home because mortgage rates are around the lowest they’ve been in over a year, but the affordability of a home is still far out of reach for many. The reason for this, and we have talked about this for the last few years, is that the increase in the price of homes has far outpaced the increase in people’s income. The 50-year average for a price-to-income ratio is around four times, and it reached a low in 1999 of around 3.6 times. But with the rapid increase of homes over the last few years, the price to income ratio has climbed to slightly over five times. Also not helping are the increases in home insurance costs and property taxes. Back in the summer of 2019, when looking at households earning $75,000, nearly 50% of those people could afford to buy a home. Today, when looking at those same households earning $75,000, only 21% would be able to afford a home. Back in 2012, the home affordability index was over 200, but it has now been cut in half to just about 100 with no signs of improving any time soon. I believe it will probably take 3 to 5 years to correct itself. If you look back in history, the affordability index does not change overnight. What will happen is probably incomes will increase slightly over the next 3 to 5 years and maybe the price of homes will either stay the same or decline slightly, which would increase the affordability index. What this means for people buying a home today is you should not have any aspirations of a rapid increase in the value of your home. What caused the problem was during the pandemic mortgage rates dropped to lows not seen in 50 years and that pushed up demand and the prices for homes climbed at a rapid rate. I believe this scenario is extremely unlikely to play out again!

The brokerage firm Robinhood looks more like a gambling platform than a brokerage firm Robinhood initially went public at $38 a share in 2023 and the stock then fell to under $10 a share. It has recovered nicely since then as it’s now trading around $110 a share. What has caused this shift and the huge increase in the stock price? One big reason is that the company has really allowed major speculation for their investors. Starting off with crypto, they have allowed people to buy coins like BONK, Dogwifhat and Pudgy Penguins. Just when you think there’s no way they could come up with anything more speculative, surprise; they have come up with an investment known as prediction markets and event trading. Somehow the regulators have let this slide or maybe since government agencies don’t move that quickly, it just has not been addressed yet. It appears for investors on their app that you can predict what the outcome will be of a football game, politics, contracts over economics, even if aliens will exist on earth this year. Chief Brokerage Officer, Steve Quirk, says this is the fastest growing business we have ever had. Robinhood stock trades over 50 times projected earnings and is looking for about $4.5 billion in revenue, which is an increase of 53% over last year. The growth appears to be there for the company, but there is so much speculation and insane crazy things there is no doubt in my mind that in the future many people will lose more money than they ever thought was possible by speculating on crazy things rather than investing into good quality businesses. A fallout in those risky "investments" could hurt Robinhood's reputation, which I believe would be bad for long term growth. 

Financial Planning: The Real Cost of Employer Coverage vs. Medicare

When reaching age 65, sometimes there is the option to join Medicare or stay with an employer health insurance plan.  This is most common when a spouse retires after age 65 and they have the ability to join their spouse’s work plan. When comparing the cost of coverage, there is a key difference in how each affects your tax bill. Premiums paid through payroll for employer-sponsored health insurance are pre-tax, meaning you avoid federal, state, and payroll taxes such as the 6.2% Social Security, 1.45% Medicare, and 1.2% CA SDI tax in California.  This is different from a 401(k) for example where contributions are only pre-tax from federal and state taxes. For someone in the 22% tax bracket, a $500 premium would be around $300 after the tax savings. Medicare premiums on the other hand are paid with after-tax dollars and are only tax-deductible for people who itemize and have total medical expenses exceeding 7.5% of AGI, which means very few retirees actually receive any tax benefit. Additionally, Medicare Part B and D premiums may be elevated due to higher levels of income because of IRMAA. Employer health insurance can vary in coverage and cost so at times Medicare may be a more comprehensive and cost-effective option, but it is necessary to compare the after-tax costs to be sure.

Companies Discussed: Cisco Systems, Inc. (CSCO), The Walt Disney Company (DIS), Spectrum Brands Holdings, Inc. (SPB), Maplebear Inc. (CART)

A 50-year mortgage is being discussed as a way to reduce monthly payments and help with affordability, offering borrowers slightly lower costs that could help them qualify for homes otherwise out of reach. Critics argue that these loans would saddle buyers with far more interest paid to banks and that many borrowers would never pay off such a long mortgage, but those arguments often miss the bigger picture. Paying a low rate of interest to a bank is not inherently bad if it allows someone to invest money elsewhere at higher returns, just as today’s homeowners with 30-year mortgages at 2% benefit greatly from not paying them off early. Also, most mortgages today are never fully paid off anyway because homes are sold, or loans are refinanced long before they reach maturity. A 50-year loan would be no different, especially since borrowers could always pay more than the minimum if they wanted to accelerate payoff. In practice, savvy investors would likely use the freed-up cash flow from 50-year mortgages to invest in higher-return opportunities, but most borrowers probably wouldn’t resulting in slower wealth accumulation for the masses without addressing the root cause of housing affordability. If used correctly, this loan could be a useful tool, but I fear the overall impact could be damaging.     Companies Discussed:  Axon Enterprise (AXON), Zoetis Inc. (ZTS), Elf Beauty Inc. (ELF),Sweetgreen Inc. (SG)

In 2026 you could be buying stocks on the Texas Stock Exchange Businesses and CEOs are getting tired of the high taxes in New York City and the regulations that are costing them billions of dollars. Texas, which is known as a pro business state will be opening in Dallas the Texas Stock Exchange (TXSE). This has already been approved by the Security Exchange Commission (SEC). It is expected to see operations open for trading in the first quarter of 2026. The Texas stock exchange has the backing of JPMorgan Chase, who just invested $90 million into the new exchange. Large companies like BlackRock and Charles Schwab are also on board. It is backed by many businesspeople including billionaire Kelcy Warren, cofounder of Energy Transfer Partners, and billionaire Paul Foster, who founded the investment firm Franklin Mountain Investments. This could be a heavy blow to New York and New York City, who have been unfriendly to business because they felt like they have the only place in the country to trade. Now that New York City has elected Zohran Mamdani for mayor, it will be interesting to see how businesses respond since he says he will go after business and the wealthy to pay more taxes. The state of Texas has no income tax, but if you live in New York City you could pay a state tax of 10.9% plus a city tax of 3.9% and it doesn’t take long to get to those levels based on your income.

Public companies that bought Bitcoin are getting worried The craziness of public companies riding the Bitcoin wave as it increased in value caused many of their stocks to jump even more than the increase in Bitcoin or other cryptocurrencies. But now that Bitcoin has pulled back from its all-time high slightly over $126,000 and has dropped about 20%, those public companies that bought Bitcoin are seeing their stocks drop far greater than the decline in Bitcoin. Roughly 25% of the public companies that bought Bitcoin as a treasury strategy now have a market cap valuation below the total value of their Bitcoin value. What companies were doing was they would invest in Bitcoin then sell their shares at a premium as their stock increased in value and then used those proceeds to turn around and buy more Bitcoin. Now that Bitcoin has declined, there’s no reason for crypto buyers or traders to buy those stocks and instead it looks like they have been selling them. As an example, CleanCore Solutions is now down over 80% since investing in Dogecoin and even a larger player like Japan’s Metaplanet, which is a top five publicly listed Bitcoin holder, has seen its stock decline around 60% over the last 3 months. If Bitcoin were to continue its decline, the company could be forced to sell assets, which could cause Bitcoin to fall even further. So far, this has not affected the company who started this craziness of buying Bitcoin in their treasury. I'm referring to MicroStrategy, which has changed its name just to Strategy and still trades under the symbol MSTR. Really all this company does is buy Bitcoin. Strategy owns roughly 640,000 Bitcoin and at today’s price it is worth roughly $70 billion. It is estimated that Strategy's average purchase price for Bitcoin is $74,000, so they seem to be safe for a while. However, stock investors in Strategy are probably crying the blues since in July the stock was around $450 and as of today it trades around $240, close to a 50% decline. As we have said for years, no one really knows what direction Bitcoin is going, it could be up or it could be down. But one thing is for certain, if those companies that bought Bitcoin and pushed the price higher, now need to sell it that will probably cause Bitcoin to fall further.

Financial Planning: The Conflict of Interest around Universal Life Insurance

Universal life insurance is often presented as a hybrid policy that combines features of term life and whole life, marketed for its perceived benefits of tax-deferred cash value growth and the potential for tax-free income through policy loans in addition to a permanent death benefit. However, realizing these benefits typically requires significant overfunding, meaning the policyholder must pay premiums well above the minimum needed to keep the policy in force. Universal life offers flexible premiums, but there are ongoing fees and costs of insurance, which increase with age, required to maintain coverage. Only premiums paid beyond those costs build cash value that can be invested. The problem is that agent commissions are usually based on the “target premium”—the minimum amount needed to keep the policy active, not the funding level required for it to perform as illustrated. This creates a conflict of interest, where many agents are incentivized to sell the policy but not to ensure it’s structured or funded properly. As a result, many universal life policies become underfunded, fail to accumulate meaningful cash value, and ultimately function as expensive term insurance. While some advisors structure these policies correctly, they are the exception rather than the rule. Because the life insurance industry is easy to enter and highly lucrative, it attracts many underqualified or self-interested salespeople. For most people, term life insurance combined with disciplined investing remains a more transparent and cost-effective approach that will outperform even the most efficiently structured life insurance, especially since the need for a death benefit typically declines by retirement. It’s important to regularly review existing life insurance policies to ensure they’re performing as intended and not quietly eroding in value over time.

Companies Discussed: Alexandria Real Estate Equities, Inc. (ARE), Kimberly-Clark Corporation (KMB), Chipotle Mexican Grill, Inc. (CMG) & Newell Brands Inc. (NWL)

Can Travis Kelce turn around Six Flags? If you’re not sure who Travis Kelce is, he is a tight end for the Kansas City Chiefs and engaged to the well-known singer Taylor Swift. Six Flags, which is a public company that trades under the symbol FUN, has received an investment of $200 million from the activist investment company JANA Partners. It was not disclosed how much investment Travis has of the $200 million, but he does like to invest in companies both public and private. He has investments in over 30 companies that include manufacturing, distribution, consumer goods, entertainment, and a beer company. He is pretty excited about his investment because as a kid he used to love the roller coasters, Dippin' Dots and him and his brother have great memories at Six Flags. He has suggested that they do a roller coaster with a 300 foot drop where riders feet dangle from beneath. Investing in Six Flags seems to be an uphill battle. Year to date the stock is down roughly 45%, the company is losing money and has a market capitalization of $2.6 billion. Travis does have a long-term perspective on all his investments likes we do. He is OK investing in a company losing money in hopes it could be turned around. Our philosophy at our firm is we will not invest in companies that do not have earnings. One benefit he does have is obviously his name and I’m sure if him and his fiancé, Taylor Swift, would start showing up at Six Flags, you can bet that they will be all over the news giving the company some nice free advertising.

Markets actually declined after the Fed rate cut 

On Wednesday, the Fed announced they would lower their benchmark overnight borrowing rate by 0.25% to a range of 3.75%-4%. This marked the second consecutive cut of 0.25% and there is still one meeting left this year where we could see another rate cut. The keyword here is could and the lack of conviction around another cut is likely what spooked the market. Powell said a December rate cut isn’t a “foregone conclusion” and while recently appointed Fed Governor Stephen Miran again dissented in favor of a 0.5% cut, there was also a hawkish dissent with Kansas City Fed President Jeffrey Schmid voting for no decrease. Schmid's vote and Powell's language was likely what sent the market lower after the announcement as many essentially had the December rate cut factored in as a sure thing. Powell also added that there is “a growing chorus” among the 19 Fed officials to “at least wait a cycle” before cutting again. This resulted in traders lowering the odds for a December cut to 67% from 90% the day prior. Given the lack of data and an economy that still appears to be in an alright position, I do believe the Fed needs to be careful cutting too quickly especially since they are taking another accommodative stance with the announcement that they would be ending the reduction of its asset purchases – a process known as quantitative tightening – on Dec 1. This in theory will stimulate the Treasury and mortgage-backed securities markets, which should help with longer dated debt instruments, as the Fed was allowing these assets to just roll off the balance sheet and now will need to step in and buy new debt to replace the securities as they mature. While QT shaved off around $2.3 trillion from the Fed's balance sheet, Covid led to a major expansion from just over $4 trillion to close to $9 trillion. The question is with the rapid expansion just a few years ago, was enough removed from the balance sheet to put it at a more normalized level. Like with the Fed cuts, I do believe if monetary policy eases too much, we risk a return of inflation and a further increase in many speculative assets that could cause problems down the road.

Financial Planning: When does a Solar System Make Sense?

Buying a solar system generally makes the most sense if you use a lot of electricity and plan to stay in your home long term. Installing by the end of 2025 allows you to capture the 30% federal tax credit, which significantly shortens the payback period. If the system is financed with a mortgage or home equity line of credit (HELOC), the interest may be tax-deductible, allowing for little or no upfront cash outlay and after-tax loan payments that can be lower than the monthly electricity savings. Owned solar panels usually increase home value, though not always enough to fully offset the system’s cost, which is why longer-term ownership is important to recoup the investment. In California, including a battery is almost always recommended so you can store power generated during the day for use at night, reducing the need to buy expensive electricity from the grid. Leasing can be attractive for shorter-term homeowners if lease payments are well below current utility costs, but leases generally don’t increase home value and don’t qualify for tax credits. The main advantage is immediate monthly savings without an upfront investment, though leased panels can complicate a future home sale. In some cases, it may be best not to install solar at all—for example, if you don’t plan to stay in the home long term, or if your electricity usage and potential savings are too low to justify the hassle and possible roof wear from installation.

Companies Discussed: The Coca-Cola Company (KO), Capital One Financial Corporation (COF), QUALCOMM Incorporated (QCOM), Knight-Swift Transportation Holdings Inc. (KNX)

The September Consumer Price Index, also known as CPI, showed inflation climbed 3% year over year for both the headline and core numbers. Core CPI, which excludes food and energy, came in better than both the estimate and the previous month's reading; both stood at 3.1%. It was a surprise to get this data with the government shutdown, but since it is used as a benchmark for cost-of living adjustments in benefit checks by the Social Security Administration it was a rare economic point in an otherwise quiet period. Energy, which provided such a benefit to the headline number for many months, has started to reverse course as it climbed 2.8% compared to last year. Gasoline was a small benefit as it was down 0.5%, but energy services climbed 6.4% thanks to an increase of 5.1% for electricity and an increase of 11.7% for utility gas service. What I would look to as tariff impacted areas, has still remained quite muted considering apparel prices fell 0.1%, new vehicles were up just 0.8%, and food prices had maybe thehardest hit with an increase of 3.1%. Much of this came from food away from home, which was up 3.7%. Food at home saw a more muted increase of 2.7%. Shelter inflation remained above the headline and core numbers at 3.6%, but it is much less problematic than it was in prior periods. Another positive was owner's equivalent rent climbed 0.1% compared to the prior month, which was the smallest month over month increase since January 2021. Overall, this report likely produced enough evidence for the Fed to cut rates at this month's meeting as odds stood above 95% after the inflation annoucement. The likelihood for a December cut also initially climbed to 98.5% following the report. 

The bank earnings from last week had some surprising undertones.

Overall, the third-quarter report from the big banks showed things are pretty much going along OK. But then a couple of the big banks brought up the issue of private credit and some bankruptcies that led to write-downs. Jamie Dimon, the CEO of JPMorgan Chase, pointed out that even though he said he probably should not say it that "if you see one cockroach, there are probably more." Some smaller financial institutions like Zions Bancorp and Alliance Bancorp took a $50 million charge and $100 million charge respectively due to potentially fraudulent loans. The issue here is commercial banks have been making loans to nonfinancial depository institutions or NFDIs and I point out that this type of funding is not very transparent for investors to see what is going on behind the scenes. I was surprised to learn that these NFDIs now account for roughly 1/3 of commercial and industrial loans originated by large banks. One may think if you’re invested in AI companies, you’re safe but research has shown that even your deep pocket players of AI are funding investments with these private loans. As time passes, the more I read, the more I become concerned about what we don’t know about leverage in this economy.

Risky investing behavior continues to amaze me!

Many people will point out that we have missed the boat on crypto, but I continue to worry about the space long term as there is no true way to value what these cryptocurrencies are worth. While this is a major concern for our firm, I would say leverage in the space is another major risk. A big problem is the rules and regulations and ultimately the transparency in the space is not as clear as when you invest in public equities. I was blown away reading an article on CNBC by how crazy the leverage can be, and I bet most investors have no clue about it. While there are ways to leverage crypto in the US, the offshore market is where things get wild! Offshore, decentralized exchanges Hyperliquid offer maximum leverage of 40-times for bitcoin and 25-times for ether and Binance Labs-linked Aster offers as much as 100x leverage, depending on the token. Leverage is so dangerous because if a decline comes and investors need to unwind a position it can create a cascade of selling that leads to massive losses. It is not just the crypto market where people are gambling though. We saw a return to meme craziness with Beyond Meat producing massive gains of 128% Monday and 146% Tuesday. On Wednesday, the stock at one point produced another triple-digit intraday gain, but it ended up closing down 1% on the day. I also saw a nuclear power development company by the name of Oklo have a sizeable pullback after the Financial Times noted the 500% advance in 2025 and $20 billion market value has come despite “no revenues, no license to operate reactors and no binding contracts to supply power.”  These are examples of pure gambling and examples like these typically come during frothy times before reality hits and big pullback comes. 

Financial Planning: The real cost of financial mistakes

When it comes to financial wellbeing, avoiding mistakes can be even more powerful than chasing great decisions. Too often, people lose ground not from lack of opportunity, but from unforced errors. Drawing retirement income without tax strategy can quietly cost thousands in extra taxes or Medicare premiums. Holding too much cash or being overly aggressive both expose you to risk, one to inflation, the other to unrecoverable losses. Maintaining investing discipline sounds simple but emotional reactions like selling when markets fall or chasing what’s hot can destroy more wealth than poor returns ever could. Many homeowners also miss out by not structuring their mortgage correctly resulting in more short-term fees, long-term interest, and missed investment returns. The key isn’t perfection; it’s recognizing that protecting yourself from big mistakes is often the best investment you can make.  When making a financial decision, do your best to get your information and advice from accurate and unbiased sources so you can fully understand the impact of the decision.

Companies Discussed: The Progressive Corporation (PGR), Bank of America Corporation (BAC), ManpowerGroup, Inc. (MAN) & Snap-on Incorporated (SNA)

Great news, more working-class Americans than ever before are in the stock market. That does sound like good news, but then when you dig a little deeper, it is rather scary! 54% of Americans with incomes between $30,000 and $80,000 have taxable investment accounts. There are several reasons for this like no more commissions for trading stocks, the excitement of investing on certain social media sites, and it’s so easy to trade stocks now as anyone who has a cell phone can pretty much trade stocks instantaneously. I remember an old saying from years ago that when your barber starts talking to you about stock tips that is the peak of the market. This seems to be where we're at today and unfortunately, these investors have only been investing for probably the last five years and have not experienced any long, lasting declines or turmoil in the markets. Many of these investors are simply trading stocks and don’t understand the fundamentals of investing for the long-term. Some of them have experienced very good returns, not because of any specialized knowledge but because of the luck of picking some highflyers that have done well for them in the short term. In many cases, they do not believe it’s luck and they feel they now know what they’re doing. These investors probably have no idea what the earnings or debt is for the stocks they are trading. They just see that they continue to make money as they buy and sell. It is a shame because many of them are young investors from 25 to 45 years old and a big mistake could cost them years of compounding. Over my 40+ years of working in the investment industry I’ve heard the same story many times, and it never turns out well. When you try to help them understand how things really work in the investment world, they justify what they’re doing with such statements as “this time it is different”. I wish these young investors would understand that investing in stocks and earning a 10% annual return per year is very good. I’m sure many who read this or hear the words I speak think I have no clue what they’re doing, and they have a specialized technique that can’t fail. When the day comes,  which it will, these investors will be left with a small amount of capital and not much time left to invest because they are now older and closer to retirement. Only then will they realize that their risky trading strategy proved to be nothing more than gambling!

Lower end consumers are having a hard time making their car payments With the rising cost of cars and higher interest rates, lower end consumers are falling behind on their car payments, and the numbers are starting to get a little scary. 14% of new cars that were sold to people had a credit score under 650, this is the highest percent going back to 2016. People seem to be getting in over their head as subprime loans that are 60 days or more overdue are at a record 6% this year. The number of repossessed vehicles is also climbing to a record not seen in 16 years to an estimated 17.3 million repossessed vehicles. Some consumers overbought a car probably due to a good salesperson and that new car smell that sometimes is hard to resist. Some consumers are starting to regret their new car purchase considering the average car payment is around $750 and 20% of loans and new leases are over $1000 a month. We will continue to watch this indicator along with others to verify that we are only seeing a slowdown of growth in the economy, rather than a declining economy. It's important to remember to be careful where you invest. It appears that some of these subprime loans for cars ended up in private loan deals that were sold as low risk because of no market fluctuation. The problem here is we are starting to see write-downs from publicly traded banks for bad loans and with private credit you might not know there is a problem until it's too late since they don't have to disclose the same info as these publicly traded companies. 

Financial Planning: Upgrade Your Emergency Fund to an Emergency Plan

When paychecks stop, as many federal employees are currently experiencing, having an emergency plan with multiple layers of liquidity is essential. The first line of defense is your credit card. When used strategically, it can buy you up to two months of interest-free spending since no interest accrues until after the statement due date. However, you don’t want to carry a balance beyond that point. Next comes cash reserves, ideally kept in a high-yield Treasury bill money market fund, where your money earns competitive interest while avoiding state tax. Beyond cash, having credit lines such as a HELOC provides deeper, low-cost access to capital without forcing you to liquidate investments. These can take a couple of months to establish, and since they generally don’t have origination fees, it’s best to set them up before you need them. After that, investment accounts can serve as a secondary safety net. Taxable accounts may generate capital gains, but withdrawals are unrestricted. Roth IRA contributions can be withdrawn tax- and penalty-free at any age, and HSA accounts can issue reimbursements for qualified medical expenses incurred in prior years. In a true last-resort scenario, you can even access retirement funds through a 60-day rollover, temporarily using the cash before redepositing it. By layering these tools, from credit to cash to credit lines to investments, you build a structured, flexible liquidity plan that can withstand extended income disruptions and operate far more efficiently than simply keeping 12 months of expenses in a savings account. Companies Discussed: Ferrari (RACE), Papa John's International, Inc. (PZZA) Salesforce, Inc. (CRM) & Eli Lilly and Company (LLY)

How will the US government shutdown affect you and the economy? Over the last 50 years, the government has shutdown 21 times with the longest being December 2018 when it lasted 34 days. The shutdown will affect mostly those consumers who are traveling with experts from the travel industry saying it will lose about one billion dollars a week. Think about all the national parks that will be closed and the frustrations at the airports will probably curtail travelers' enthusiasm for traveling. Even with all the negative headlines, stocks tend to do well during a government shutdown with the average three month return after the shutdown at 9.5% and one year later at 22.4%. I would not encourage people to think they will get a 22% return this time around because of the valuation on the stock market these days. Unfortunately, bonds don’t do as well with the three-month return being a -37% and a one-year return on bonds being a -10.7%. What this means is during a government shutdown generally long-term interest rates increase as bonds fall, and this would be detrimental to the housing market as we would then see mortgage rates increase if history repeats itself. On the shorter end of the yield curve, the Federal Reserve who sets short term interest rates will be handicapped because they will not be getting economic information such as the labor report and other government data to make their decision for interest rates cuts. It is possible if the shutdown is still ongoing at the end of October, the Federal Reserve may not cut interest rates because of the lack of data. The million-dollar question of how long it will last is a difficult one to answer as no one knows for sure but it appears since both sides are so far apart, they will not come to the negotiating table and until some negativity starts showing up in the economy there is not much pressure on the politicians. That means this shutdown could be one for the record books and could perhaps last a month or two!

Public debt looks strong, but private debt not so much Public debt, which are bonds that trade on the public market, is looking rather strong based on the small yield margin between investment grade and speculative grade securities compared with the risk-free government debt. In September, $207 billion of corporate bonds were issued and that’s the fifth highest monthly amount on record. Year to date returns for those holding public corporate bonds stands between 7 to 8%. Private debt on the other hand is starting to have issues as companies such as Tricolor Holdings, which is a lender to individuals with low credit ratings, filed for chapter 7 bankruptcy in September. The debt holders may get something, but when a company files chapter 7 bankruptcy, the government receives their money first along with the attorneys and then what is left over if any, goes to the debt holders then equity holders. Also, last month an auto parts company called First Brands filed for chapter 11 bankruptcy, they had $6 billion of leveraged loans outstanding. This could be the beginning of an avalanche of defaults in private credit as I believe if the economy continues to slow down, these products will have some major problems. Hopefully you weren't sold anything that deals with private debt, equity or real estate by your broker.

Financial Planning: Updated Tax Brackets for 2026

For 2025, married couples filing jointly will see their standard deduction rise from $31,500 to $32,200 with an additional $1,650 per spouse for those age 65 or older and a new $6,000 deduction per spouse for households with adjusted gross income (AGI) under $150,000, bringing the total possible standard deduction to $47,500. The 12% federal tax bracket will now apply to taxable income up to $100,800 (up from $96,950), and the 0% capital gains and qualified dividend threshold will increase to $98,900 (from $96,700). When calculating tax liability, AGI minus the standard deduction equals taxable income.  For retirees, this means the $150,000 AGI level is an especially important threshold to stay under. It unlocks the extra $6,000 standard deduction, keeps all ordinary income in the 10% and 12% brackets, and ensures that capital gains and dividend income remain tax-free. These inflation adjustments give married couples, especially retirees and middle-income earners, more room to keep their income in lower tax brackets and reduce their overall taxable income going into 2026.

Companies Discussed: Verizon Communications Inc. (VZ), Cal-Maine Foods, Inc. (CALM), International Paper Company (IP) & Advanced Micro Devices, Inc. (AMD)

Will the revenue from AI cover all the debt and expenses it created? AI is definitely part of the future, but has overbuilding surpassed the revenue that it can create? When one steps back and looks at the numbers they are staggering. Over the past three years, major tech firms have committed more funds towards AI data centers than it cost to build the U.S. interstate highway system that took 40 years to build. These numbers are even adjusted for inflation. In the next five years, the AI infrastructure spending will require $2 trillion in annual AI revenue. If you think that’s a lot of revenue you are correct. In 2024 the combined revenue of Amazon, Apple, Alphabet, Microsoft, Meta and Nvidia did not hit $2 trillion. It is also five times the amount of money spent globally on subscription software. Consumers have enjoyed the free use of AI, but it appears for businesses paying more than thirty dollars a month per user is the breaking point. AI executives claim the technology could add 10% to the global GDP in the years to come. With that thought they are saying the benefit comes when it can replace a large number of jobs and that the savings would be enough to pay back what they invested. My question is, if you’re replacing all these jobs, consumers will have less money to spend and probably won’t need or care about AI. There are many history lessons about bubbles that did not pay off because of the over excitement on inventions with such things as canals, electricity and railroads just to name a few. People may remember the excitement over the Internet and the building of tens of millions of miles of fiber optic cables in the ground. The amount spent was the equivalent to about one percent of the US GDP over a half a decade. The justification from the “experts” was that the Internet use was doubling every hundred days. The reality was only about 1/4 of the expectation came to fruition with traffic doubling every year. Most of the fiber cables were useless until about 10 years later thanks to video streaming. A report out of MIT said they found 95% of organizations surveyed are receiving no return on their AI product investments. In another study from the University of Chicago showed that AI chatbots had no significant impact on workers earnings, recorded hours or wages. I still believe AI will be here to stay, but the question is have the expectations gone too far? I think they have! 

Finally, some scrutiny on private investments from the SEC! The SEC has an investment advisory committee that was formed back 15 years ago that provides guidance to the regulator. Recently, the committee approved a set of recommendations on how to deal with the private market and protect the less sophisticated investors. The recommendations cover the key problems with private investments for investors, which include how they come up with valuations, how complex they are and that they are not a liquid investment. I thought it was also a wise move that they recommended the SEC demand better disclosures and also who can and cannot invest in private markets. I was very happy to see that they’re not just putting across the board if you have a net worth of X amount you can invest in private investments. The recommendation was based on the investor's level of investment sophistication. I’m hoping the SEC comes up with these rules quickly before more people find themselves in a private investment that they cannot get out of and perhaps lose all their money. Today would not be soon enough to pass this legislation. My recommendation is if you’re not in any type of private investments, don’t go into them! No matter how good your broker makes it sound, remember he or she is likely getting a big fat commission to put your money into these high-risk investments.

Financial Planning: Keeping more of your Home Sale Proceeds

Selling your primary residence can result in a substantial profit, but the IRS provides a valuable tax break to help offset that gain. Individuals can exclude up to $250,000 of capital gains ($500,000 for married couples filing jointly) if they’ve owned and lived in the home for at least two of the past five years. Be careful not to confuse this with selling an investment property, which does not qualify for the primary residence exclusion. Instead, gains from investment property sales may be deferred using a 1031 exchange, where the seller reinvests the proceeds into another investment property. By contrast, with a primary residence sale, you can use the proceeds however you like, and the gain is excluded up to the allowable limit without any reinvestment requirement. Importantly, even if your income exceeds the thresholds for the 3.8% Net Investment Income Tax (NIIT) ,$200,000 for single filers or $250,000 for joint filers, the portion of the gain excluded under this rule is not subject to NIIT. Only any gain above the $250,000/$500,000 exclusion could be subject to the tax. Most states, including California, conform to the federal exclusion, meaning they also will not tax gains up to the $250,000/$500,000 limit. For those expecting taxable gain, timing the sale in a year with lower income can help reduce the capital gains tax rate, since some or all of the gain may fall into the 0% or 15% capital gains brackets. It’s also wise to keep records of capital improvements such as remodels, additions, or system upgrades since these increase your cost basis and reduce the taxable portion of any gain. With proper planning, documentation, and a clear understanding of these rules, many homeowners can sell their primary residence while minimizing or even avoiding capital gains tax.

Companies Discussed: AutoZone, Inc. (AZO), Tilray Brands, Inc. (TLRY), Starbucks Corporation (SBUX) & Wynn Resorts, Limited (WYNN)

A psychologist by the name of Gerald Wilde came up with the term homeostatic years ago and I believe this is totally relevant in today's market. It essentially means that when the environment comes to feel safer, people’s behavior becomes riskier. A great example he used was that people will probably drive faster in a big SUV than in a little tin can of a car. Relating it to today's market, investors seem to feel safer because of the long bull market. As the market continues to rise in the longer term, investors' appetite for risk increases. They do not realize that their behavior is risky because they have a false sense that the market will not drop. While the risk of their investments is high, because of the confirmation day after day of the market going up, they don’t feel that they are taking any risk. From my perspective, the risk just seems like it continues to climb as people chase quick returns. AS an example, out of 672 launches of new exchange-traded funds so far this year, according to FactSet, 28% are tied to a single stock and 25% are leveraged and at least three seek to double the daily gains or losses of cryptocurrencies! You may not want to believe it, but there is a lot of risk in markets today and this could all end very poorly for those gambling in the market. Ultimately, there are two different types of investors, one is the long-term investor who is investing to build long-term wealth, while the other investor is in it for entertainment and they enjoy the roller coaster ride with the thrill of gains and the pain of the losses. This is a lot like the addiction that gamblers get. The difference is that long-term investors have odds of nearly 100% when it comes to making money over the long-term. Unfortunately, for those who do a lot of trading and take the higher risk road, well the odds of making money over the long term is closer to zero. If you check the prices of your stocks, I would say much more than a few times a year, you’re probably in it for the entertainment and will probably make poor emotional decisions when difficult times come, and they will!

IPOs look hot, don’t touch them, you’ll get burned! So far in 2025 there have been over 150 IPOs which if you’re not familiar with the term, it stands for initial public offering. These IPOs have raised about $29 billion so far this year and it is a nice increase in the total number of IPOs when compared to recent years. At this time last year, just 99 IPOs had occurred and in 2023 it was even worse at 76. The exciting news reads “first day gains are averaging 26%, which is the best since 2020”, but it’s important to understand that those eye popping first day gains are not based off the first public trade but rather are gains on shares that were issued prior to heading to the market. Unfortunately, you as an investor have little to no chance of getting those shares as you generally see these go to your institutional investors and high net worth clients of Fidelity, Charles Schwab and other big firms. So, if you can’t get the shares before they begin trading is it worth riding the bandwagon? I’m going to explain why the answer is a solid no. First off look at an ETF called Renaissance IPO (IPO). Back in 2021 it hit a high around $75 a share and by 2023 it fell to about $25 a share. With the recent frenzy in IPOs, it has climbed back above 50, but that is still a disappointing return to say the least. Also, this means any investors who bought it in 2021 through 2022 are still underwater. There is generally a ton of volatility around these trades considering when companies do an initial public offering, they’re only releasing 15 to 20% of their equity many times and they often come with an initial lockup period of around 180 days, which really reduces the number of shares that are trading. Also, make no mistake that the investment bank that is issuing those shares has an obligation to try to get the opening price as high as possible to get full value for their clients. If it’s an oversubscribed IPO, the demand will be higher than the supply, and the price will rise. Unfortunately, that means the company left money on the table that they could’ve put in their pockets rather than letting investors benefit from those gains. I believe investing in IPOs is a high-risk game, not to be played with by the average investor. A good example is Newsmax, which was a hot IPO with an issuing price of $10 a share that very quickly went to $265, as of today it is trading around $13 a share. A lot of people have lost their shirts, and I doubt they will get them back. To me the safer play to benefit from the increased number of IPOs is the banks handling this process considering they should be seeing a nice increase in profits. This would include your large players like JPMorgan Chase and Goldman Sachs. As of now there are other highly anticipated IPOs that could occur over the next year with names like robo-advisor Wealthfront, crypto firm Grayscale Investments, financial-technology firm Stripe, and sports apparel and betting company Fanatics all potentially hitting the public market. 

What's going on with the real estate market?

This week we got both existing and new home sales for the month of August and there was a stark difference in the reports. The headline number for new home sales showed an increase of 15.4% compared to last year, while existing home sales were up just 1.8% over that timeframe. The first important consideration here is new home sales can be extremely volatile on a month-to-month basis, and they make up a smaller portion of overall sales. Pre-pandemic, new home sales were normally around 10% of total sales, but with the limited listings in recent years they have been closer to 30% of all sales. One other reason for the large difference is how the reports are calculated. New home sales look at people that were out shopping and signing deals in August, while existing home sales look at closings in the month, which means these were deals that were signed in June or July. Interest rates may have played a factor here as rates for the 30-year fixed mortgage were around 6.7-6.8% in June and July vs around 6.5-6.6% in August. This also doesn't include the fact that many homebuilders offer lower rates to entice buyers. The supply of new homes also looks much better for buyers considering there was a 7.4-month supply in August and that was down from a nine-month supply in July. This compares to a 4.6-month supply for existing homes in the month of August. Homebuilders have a much larger need to move homes quickly as many of them don't want them sitting on their balance sheet as that can create risks. This compares to the average home seller that may not have a need to sell their home and when looking at the crazy market from just a couple years ago, I believe many of them have unrealistic expectations for how much their homes are worth and how fast the property will sell. Homes are staying on the market longer at around 31 days on average, which compares to 26 days last year. These factors have led sellers to either pull their listing or even delay listing in the first place. One similarity between the two reports was the annual price appreciation with the median price on existing home sales climbing 2% to $422,600 and the price on new home sales climbing 1.9% to $413,500. These high prices and higher mortgage rates have continued to impact the first-time buyer as their share in the existing home sale market was near historical lows at 28%. With everything considered here I still believe the housing market will remain on a slow upward trajectory with limited supply continuing to battle against affordability concerns.

Financial Planning: Insurance Vs Investments

When building a financial plan, it’s important to recognize that investments and insurance serve very different purposes. Insurance is designed to protect against loss. Life insurance provides for your family if you pass away, health insurance shields you from crushing medical bills, and auto insurance protects you financially from accidents or damage. You pay a known cost, the premium, to avoid a potentially devastating unknown cost, which makes insurance a valuable safety net. Investments, on the other hand, are meant to grow wealth and produce income. Stocks, bonds, and real estate help your money work for you overtime. While they can experience short-term volatility and uncertainty, most high-quality investments are built on solid foundations and have historically rewarded patience; those who can tolerate the ups and downs are almost guaranteed to come out ahead in the long run. The confusion comes when insurance products, like permanent life policies or annuities, are marketed as investments. While they may promise guarantees or cash value, they usually come with high fees, low returns, limited flexibility, and lots of fine print, making them poor substitutes for true investments. That doesn’t mean insurance is bad, it simply means it works best when used for protection, not growth. The healthiest financial plans keep the roles clear: use insurance to protect and use investments to build wealth. Mixing the two often results in an expensive compromise that doesn’t perform well on either front.

Companies Discussed: Compass, Inc. (COMP), PACCAR Inc. (PCAR) & Amazon, Inc. (AMZN)

Although the labor market has been softening and consumers say they are worried about inflation, people are still spending money. August retail sales were up 5% compared to last year and if the annual decline of 0.7% in gasoline stations was excluded, sales would have increased 5.5% compared to last August. Strength was broad based in the report and outside of gasoline stations the only other major categories that saw declines were department stores where sales were down 1% and building material & garden equipment & supplies dealers, which fell 2.3%. Non-store retailers continued to be a dominant category as sales climbed 10.1% and food services and drinking places still saw impressive growth of 6.5%. It's because of reports like this that I worry the Fed may make a mistake if they cut rates too quickly. If they overstep, they run the risk of overheating the economy and putting added pressure on inflation. 

Are quarterly reports necessary for public companies?

President Trump floated the idea of switching company reports from quarterly to semiannual. It appears Trump believes this will help companies focus more on the long-term business performance rather than fixating on short-term quarterly numbers. There's also hope this will save time and money for public corporations. The SEC acknowledged they are actively looking into the plan as a spokesperson for the agency stated, "At President Trump’s request, Chairman [Paul] Atkins and the SEC is prioritizing this proposal to further eliminate unnecessary regulatory burdens on companies." Being a long-term investor, I can see the benefits of changing this requirement as one quarter should not dictate your decision on whether you should buy, sell, or hold a business. Ultimately, a change like this wouldn't have a real impact on my investment philosophy and if this enabled companies to focus more on the long term and helps with costs, I would be in favor of giving companies the option to make this switch. In terms of the long-term focus, both Jamie Dimon and Warren Buffett have spoken out against not necessarily the quarterly reports, but the quarterly guidance. In a 2018 op-ed piece for the Wall Street Journal, the pair said, “In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.” As for the regulatory burden, I'm sure there is hope this would help entice companies to come public. There has been a huge shift in companies staying private longer and I do believe the compliance piece deters some from coming public. I'm sure there are other reasons for staying private, including control and other liquidity avenues that weren't as prominent years ago. Nonetheless, it is concerning that the number of publicly listed companies in the U.S. has fallen from more than 7,000 in 1996 to around 4,000 today. 

Is your financial advisor "quiet retiring"? You may not completely understand what “quiet retiring” means, but a few years ago, my son Chase and I were on the Dr. Phil Show because they were doing an episode on what they called “quit quitting”. Chase and I were on the pro side for business and working hard, while the other side essentially felt they should still get paid the same amount and not work hard. So, I have coined the phrase, “quiet retiring”. I have been seeing this happen in the financial service industry, especially considering the fact that the average US financial advisor is 56 years old. I have noticed more of them feel they deserve to play more golf or travel more than the average person since they seem to be in retirement mode. They are not telling their clients this and they have their admin staff handle most of the routine details so you, the client, really don’t know that they are not working that much behind the scenes. Hence the term "quiet retiring". Something you definitely should find out is how much your financial advisor is working? Especially if they're in their mid to late 50s because you may not have the person with the most experience watching your investments. This is very important when it comes to preparing for and weathering through difficult times. If your financial advisor is talking about retiring in the near future, be sure to understand fully what the succession plan is and who you will be dealing with. It has now been known in the industry for a few years that the average age of financial advisors is getting older and less younger advisors are coming into the industry. Be sure you understand who your financial advisor really is, who is watching your portfolio and is your investment advisor one of those that is quiet retiring?

Understand the risk of low rated bonds Some investors rightly so have started selling some stocks and they are not excited about buying more stocks at this time. As we’ve been saying for quite a while now, we think this is a wise move to sell some stocks that are overpriced, but unfortunately, it seems investors got used to the high returns and they have turned to low rated high-yield bonds. According to JPMorgan Chase, issuance of junk rated bonds and loans hit a monthly record of $240 billion in July. In 2025, $930 billion has been raised through junk bonds and loans. Add that to the over $1 trillion in junk bonds from 2024 and you can see that the risk for investors is starting to increase. Most investors will not buy these individual junk bonds, but they have been plowing money into the high yield mutual funds and exchange traded funds, also known as ETFs. If you dig a little bit deeper, you find some companies are raising money foolishly like a company called TransDigm Group. The company issued nearly a $5 billion high yield bond in August to pay a dividend to their shareholders. We like companies that pay dividends, but it should be from cash flow not from borrowing money that has to be paid back. Business development companies are also back in the news, and these businesses make private loans to small and midsize companies. Over the 12-month period ending in June, private loan activity increased by 33%. I have similar concerns with business development companies and private credit, which I believe will have a crash sometime in the future and cost investors more money than they anticipated. The current default rate on higher yield bonds is 4.7%, which is not bad, but it is not good either. If interest rates on the long end were to increase, which I think is a good possibility the need for debt increases. This could slow the economy and cause some of these smaller companies that have these high-yield loans to default and file bankruptcy, which means investors would lose money. It is nice to get a 10 to 20% return on your portfolio, but sometimes when things are expensive, you have to be conservative and while that may cost you some of the upside, the downside can be a lot nastier than you realize!

Financial Planning: Dealing with underwater cars

About a quarter of vehicles traded in today carry negative equity, with the average shortfall around $6,500. This happens because cars depreciate quickly, and the trade-in value offered by a dealership is the lowest number you’ll see—less than what you might get in a private sale, and well below the dealer’s eventual resale price.  Because of this depreciation, about 40% of financed vehicles on the road carry negative equity. While it’s possible to roll negative equity into a new auto loan, that often creates a deeper hole: you’re financing more than the car is worth, and the new vehicle immediately begins its own depreciation cycle. Lenders may approve the loan, but the higher loan-to-value ratio can lead to higher interest rates or tighter terms. GAP insurance can be used to cover the difference between a car’s actual value and what’s owed in the event of a total loss, but it doesn’t prevent the financial strain of trading in too early, and it comes with an extra cost. With so many vehicles underwater, the safer move for most people is to keep driving the current car until the balance catches up with its value rather than trading in and compounding the problem or bring more cash to the deal, so you don’t have to finance as much.

Companies Discussed: Zillow Group, Inc (Z), Workday, Inc. (WDAY), Lyft, Inc. (LYFT) & Synopsys, Inc. (SNPS)

I recently saw there was a bipartisan bill presented in the House that would ban lawmakers from trading individual stocks. I feel like we have been hearing about this for years, and according to NPR, “For more than a decade, a series of bills have been proposed to address such trades, but differences about the details and a lack of support from top congressional leaders stalled past reform efforts.” The question is, will this time be different? The bill made me curious though about how active congress was when it came to trading and let’s just say I couldn’t believe the numbers! In 2022 154 members of Congress made 14,752 trades, in 2023 118 members made 11,491 trades, in 2024 113 members made 9,261 trades, and through July of 2025 108 members made 7,810 trades. That is a crazy amount of activity and I’m not sure how they even have time for that. Their returns were also quite impressive with Democrats producing an average return of 31.1% in 2024 and Republicans producing an average return of 26.1%. For reference, the S&P 500 was up 23.3%. The numbers were quite staggering when you look at the individual performance of some of these politicians. In 2024, Rep. David Rouzer (R-NC) was up 149.0%, Rep. Debbie Wasserman Schultz (D-FL) was up 142.3%, Sen. Ron Wyden (D-OR) was up 123.8%, Rep. Roger Williams (R-TX) was up 111.2% and Rep. Nancy Pelosi (D-CA) rounded out the top ten with 70.9% return. These are hedge funds that are beating returns in several cases! Personally, I think it is ridiculous that politicians can trade individual stocks, and I hope there is finally action in Congress that ends it!

There are risks to Nvidia stock that you may not realize!

There is no denying what Nvidia has done has been extremely impressive, but one major problem with the company is the revenue is extremely concentrated. Their top customers made up 23% of total revenue in the recent quarter, which was up from 14% in the same quarter last year. Their second largest customer made up 16% of total revenue, which was up from 11% in the same quarter last year. Sales to four other customers contributed 14%, 11%,11%, and 10% of revenue respectively. This means that six customers accounted for 85% of Nvidia’s total sales. My concern is what if one of them drops out of the AI arms race or if a few of them pull back spending, that could really slow Nvidia’s business. I also believe that China is a risk to Nvidia. While sales have been hindered in the country due to political constraints, I believe many investors are looking to China as an area of potential growth for the company. All I can say to that, is do you really think the Chinese government wants Chinese companies using Nvidia chips? It was reported that Alibaba has recently developed an advanced chip, and I’d assume Huawei and other Chinese companies are racing to compete against Nvidia. While Nvidia stock essentially just keeps climbing, it’s important to realize there are several risks that could take the stock down! 

Understanding more about AI and why it's becoming more expensive We are no expert on artificial intelligence, but we have learned that while AI has gotten smarter it has also gotten more expensive. It is now broken down into a unit of AI which is known as a token and while the price of tokens continues to drop, the number of tokens needed to accomplish a task is increasing dramatically. There are two basic attributes to AI, one is called training, and the other is AI inference. The increase in cost is coming from the training side that has to use large models and demands even more costly processing. AI applications are using so-called reasoning and new forms of AI double check queries on their answers, which may include scanning the entire Web. Sometimes they write their own programs to calculate things all before releasing an answer that may only be a short sentence. Delivering meaningful and better responses takes a lot more tokens to complete that process. Looking at examples, basic chatbot Q&A requires 50 to 500 tokens. Short document summaries can be used anywhere from 200 tokens to 6000 tokens. Lawyers and paralegals who use legal document analysis require 5,000 to 250,000 tokens. If one is trying to do multi-step agent workflows, well now you’re looking at 100,000 to over 1 million tokens. Please understand when we talk tokens we’re not talking about anything that has to do with cryptocurrencies, and this is a different token pertaining to AI. Some big companies are spending $100 billion a year or more to create cutting-edge AI models and building out their infrastructure. However, for all that investment there needs to be a return on investment, and businesses and individuals will eventually have to pay more for artificial intelligence. The CFO of Open AI said last October that 75% of the company’s revenue comes from your average person paying $20 a month. Currently the cheapest AI models, which includes Open AI‘s new ChatGPT – 5 nano is costing around $.10 per million tokens but go to the top-of-the-line GPT -5 and that costs about $3.44 per million tokens. What they are trying to figure out is what the consumer will pay for AI.  There is also concern about how long the big giants can keep up this spending when they’re competing with their own

Financial Planning: 529 Withdrawal Pitfalls

A 529 plan is a tax-advantaged savings account designed to help families pay for education costs, with contributions growing tax-deferred and withdrawals tax-free when used for “qualified education expenses” such as college tuition, fees, books, and room and board. A qualified withdrawal avoids taxes and penalties, while a non-qualified withdrawal means the earnings portion (not contributions) is subject to federal and state income tax plus a 10% federal penalty. The IRS also allows up to $10,000 per year, or $20,000 in 2026, per student for K–12 tuition, and under the One Big Beautiful Bill signed on July 4, 2025, Congress expanded 529 qualified expenses to include not just K–12 tuition, but also fees, books, and required supplies for primary and secondary education. However, California does not conform to this expansion and continues to treat K–12 withdrawals of any kind as non-qualified, taxing the earnings and applying a 2.5% state penalty. This mismatch means California families using 529 funds for K–12 costs may face unexpected taxes and penalties despite the new federal flexibility.  Keep this in mind if you are considering funding a 529 plan.

Companies Discussed: Lululemon Athletica Inc. (LULU), Broadcom Inc. (AVGO), PepsiCo, Inc. (PEP) & DocuSign, Inc. (DOCU)

Another weak job report likely solidifies a Fed rate cut

August non-farm payrolls increased by just 22,000, which was well below the estimate of 75,000. This weak report also comes with another month of negative revisions as employment in June and July combined is 21,000 lower than previously reported. Healthcare and social assistance continued to lift the headline number as the sectors added 31k and 16k jobs respectively. Many other areas in the report actually saw declines with payrolls in construction falling 7,000, manufacturing declining 12,000, and professional and business services dropping 17,000. Government also saw a decline of 16,000 jobs and I worry this is a ticking time bomb since employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey and those that opted to take the government’s offer at the beginning of the year will start coming off severance pay as the deal lasted through September. The most recent data I saw was that 75,000 federal employees took the offer, but not all were accepted into the program. I guess we will see the actual data and its impact over the next couple of months. With the weakness, I was surprised to see leisure and hospitality produce a gain of 28,000 jobs in the month. While much of this sounds concerning, the unemployment rate held relatively steady at 4.3% and that doesn’t incorporate the fact that 1.9 million or 25.7% of all unemployed people were jobless for 27 weeks or more. My belief is that many of those that have been unemployed that long are skewing the data as I can’t imagine they have been looking for a job that hard. With the unemployment rate low and deportations potentially weighing on the supply of workers, I just don’t see how it would be possible to maintain strong job growth given the limited supply. Because of this I still don’t remain overly concerned by the weak showing. Even with my lack of concern, this will likely lead to a Fed rate cut this month with markets now essentially putting odds for a 25-basis point cut at 100% and even a 50-basis point cut is now on the table with markets putting those odds at 12% after the job print. That’s up from a zero percent chance on Thursday.

Should you panic over the job opening data?

The Job Openings and Labor Turnover Survey showed job openings fell to 7.18 million in the month of July. This was below the estimate of 7.4 million and also marked the lowest reading since September 2024. It was only the second time since the end of 2020 that job openings came in below 7.2 million. While this may sound troubling, I believe it just illustrates how crazy the labor market got after Covid. If we look at job openings before 2020, nearly 7.2 million openings would have been a great number. In 2016, job openings averaged 5.86 million; in 2017, job openings averaged 6.12 million; in 2018, job openings averaged 7.11 million; and in 2019, job openings averaged 7.15 million. So, while the headline may sound troubling, I still believe we could have job openings fall into the low 6 million range and it wouldn't be problematic, especially given the fact that unemployment remains extremely low. Even with that, I do believe the Fed will use this as further evidence of a softening labor market and that will give them the excuse to cut rates at the meeting this month. I'm still not convinced that is the right move, but we did hear from Fed Governor Christopher Waller, who is supposedly on the short list to replace Powell as Fed chair, that he believes there should be multiple cuts over the next few months, saying interest rates today are perhaps 1.0 to 1.5 percentage points above their “neutral” level. 

American luxury brands are destroying Europe’s luxury brands It appears that European luxury brands like Gucci, Hermes and LVMH have increased their prices beyond what the average consumer is willing to pay. Currently, American consumers are spending the lowest share of discretionary income on luxury goods since 2019. The European luxury brands seem to have their heads in the clouds thinking American consumers would pay any price for a luxury purse from Europe. I think they have now discovered that the American consumer has reached their limit.  Two luxury American brands have benefited from the ignorance of the European luxury brands. Both Ralph Lauren and Tapestry, which owns Coach and Kate Spade, have seen their sales increase. A chart of these luxury brands stocks shows European brands dropping while American brands have been increasing. One may be thinking now is the time to step in and buy Tapestry or Ralph Lauren, but with the recent stock increase they are no longer a great value as Ralph Lauren trades at over 20 times forward earnings and Tapestry is now over 19 times forward earnings. I would take a different side of the coin as I believe investors should understand that the European luxury brands will likely not just sit on their hands and do nothing and they will likely try and win back market share. With the increase in prices over the years I’m sure the profit margins are very fat, and they may have a good amount of space to do some heavy discounts to get their market share back. Both Tapestry and Ralph Lauren are dealing with the current tariff situation and that could hurt their profit margins going forward as well. On a side note, in years past we have warned people paying the high prices for European purses that they would not appreciate as much if at all. I have not researched it, but I feel pretty confident that if sales are down as much as they are, the resale on those expensive purses has probably dropped as well.

Financial Planning: Mortgage rates reach 2025 low

Mortgage rates have fallen to their lowest level of the year, reaching levels not seen since last October. Throughout 2025, 30-year mortgage rates have fluctuated between 6.5% and 7%, and as of Friday, September 5, they dipped as low as 6.29%. While this presents an opportunity for buyers and homeowners considering a refinance, caution is warranted. Rates are still likely to experience volatility even as the broader declining trend continues over the next several years. In 2024, mortgage rates actually rose at year-end despite the Federal Reserve implementing three rate cuts. In 2025, it is widely expected that the Fed will cut again in September, with additional cuts likely by year-end. This current window of lower rates may be worth taking advantage of, but paying upfront points may not be wise just yet, as there will likely be future opportunities to capture even lower rates.

Companies Discussed: The Kraft Heinz Company (KHC), Best Buy Co., Inc. (BBY), Snowflake Inc. (SNOW) & Alphabet Inc. (GOOGL)

I remember hearing about a company by the name of Yieldstreet a few years ago and how it was a new way for smaller investors to get access to private investments and diversify away from stocks. The company promoted their platform with the tagline, “Invest like the 1%.” Unfortunately, it is now coming out that several investors may have lost everything they invested in the platform. One gentleman shared with CNBC how he invested $400,000 in two real estate projects: A luxury apartment building in downtown Nashville overseen by former WeWork CEO Adam Neumann’s family office, and a three-building renovation in the Chelsea neighborhood of New York. Each project had targeted annual returns of around 20%. After three years, Yieldstreet declared the Nashville project a total loss, which wiped out $300k of his funds and the Chelsea deal needs to raise fresh capital or it will face a similar fate. Unfortunately, he is not alone and CNBC reviewed documents that show investors put more than $370 million into 30 real estate projects that have already recognized $78 million in defaults in the past year. Yieldstreet customers who spoke to CNBC say they anticipate deep or total losses on the remainder. Looking into this platform in more detail, it’s crazy what they were doing. Their portfolio doesn’t just consist of real estate as there is also private equity, private credit, art, crypto, and other less common investments. It appears Yieldstreet makes money by charging a management fee of around 2% on invested funds. The craziest part to me though was in several cases, Yieldstreet went to its userbase to raise rescue funds for troubled deals and told members the loans combined the protections of debt with the upside of equity. But in one case, a $3.1 million member loan to rescue a Nashville project was wiped out after just a few months! One of the big problems with these platforms is professional large investors are more disciplined when looking at investing in this space and the smaller players may be getting the bad deals that are passed over by the more established players. It’s unfortunate to see people lose money like this, but this is why I avoid the private investment space. There is just not enough clarity and in many cases these platforms seem to be in it for themselves rather than for their investors. I will continue to invest in good, quality equities as I worry, we will continue to hear stories like this from investors who put money into private investments thinking they were investing in a safer asset, just to find out years later there is nothing left.  

Will tariffs hurt this holiday season?

Here we are already at the end of August and before you know it, you’ll be thinking about putting out the Christmas lights and decorating your home. For the past few years, we have seen growth in holiday sales, but this year could be different as it appears from recent conference calls from CEOs at Walmart, Home Depot and Target that they are seeing the tariff increases starting to come through. During his recent conference call, the CEO of Walmart, Doug McMillon, said that the impact of tariffs has been gradually increasing to protect the consumer, but he also said that the company is seeing cost increases each week as it rebuilds inventories with new products post tariff. He also mentioned that they may not be able to protect the consumer from rising prices much longer. What is also bad about this is that retail sales may rise, but consumers will receive less product to put under the Christmas tree considering sales are not adjusted for inflation. This could be the delayed inflation that Jerome Powell and the Federal Reserve has been waiting for and unfortunately, it may show up when people begin shopping for Christmas gifts. Maybe there should not be an interest rate cut in September after all? 

Should you work in retirement?

When many people are in their working years, they can’t wait to retire so they can do what they want to do. For some people that retirement works out well, but science has shown that there’s health benefits to working in retirement along with financial benefits. The health benefits would include more physical activity as you’re not laying around the house or sitting in the rocking chair on the front porch. Instead, you’re moving around walking places and staying active. Working also helps you stay connected with other people, which has been proven to extend your life. The financial benefits from working in your later years would include taking out less from your retirement accounts to maintain a good lifestyle. Also, you can hold off on Social Security which means you’d get a larger Social Security check when you do decide to collect. The type of work you do depend on you and some people in retirement have started a second career that is a job that they always wanted to do. Some people just work part time to stay active and involved. If you’re in retirement, you can take a low stress job because you don’t really need all the income to cover your expenses as long as you have the financial accounts/investments to do so.

Financial Planning: The challenge of creating retirement income

For decades, American workers relied on pensions, but today retirement security largely depends on defined contribution plans like the 401(k), where the burden has shifted to the individual saver. The real challenge comes when it is time to turn a pile of assets into a reliable, inflation-adjusted income stream that can last 20–30 years. Some retirees look to CDs and Treasury bills, which are guaranteed and currently pay about 4% interest, but they offer no appreciation to offset inflation and yields will likely decline as short-term rates drop. Corporate bonds may provide a slightly higher return, but they come with interest rate, credit, duration, and reinvestment risks that often outweigh the modest extra yield. Others consider annuities, which can create a pension-like income stream, but these require handing over principal, and because they are designed by insurance companies, the terms typically favor the provider rather than the investor. High-dividend stocks can also be appealing, but they may be a trap, as struggling companies often have elevated yields due to falling stock prices, which can be compounded further if the dividend is cut. On the other end of the spectrum, broad market indexes like the S&P 500 and Nasdaq have been popular for growth, but their dividend yields remain low, around 1.2% and 0.8% respectively, forcing investors to sell shares for income, and poorly timed sales can shorten portfolio longevity. Even dividend aristocrats, known for steadily increasing payouts, currently only yield about 2% to 2.5% on average. There is no simple solution, but one truth stands out: accumulating assets is very different than generating income from them. Retirees need a clear income plan before leaving the workforce in order to maximize both security and enjoyment in retirement.

Companies Discussed: Cracker Barrel Old Country Store, Inc. (CBRL), Zoom Communications Inc. (ZM), Ralph Lauren Corporation (RL) & Viking Holdings LTD. (VIK)

Stay away from interval funds!

I have been seeing more of these interval funds when we take over accounts for new clients and let me tell you I am not a fan of them. They appear to be normal mutual funds, but when you go to sell them, you find out you can only sell once per quarter. The other problem is when you enter the sell, the next day you realize you still own shares in the fund. The reason for that is product’s unique structure typically allows investors to redeem just 5% of a fund’s assets! I’m sure most people have no idea when their advisor or themselves buy these funds that they will be locked in them for years to come. For example, I first saw these about 4 years ago with a new client and we still have not been able to fully exit the position. The reason withdrawals are limited is because the funds generally invest in illiquid assets, so managers want to make sure investors can’t exit in masse and force the manager to sell securities at fire sale prices. As many of you know, we are not fans of illiquid investments because if things go south, you have no way of exiting these positions in an efficient manner. The allure here for many is that retail investors with less investible assets generally don’t have the same access to as many private equity, venture capital, real estate, and private debt deals, so interval funds enabled those investors with minimums as low as $1,000 to gain exposure to the space. I would not recommend investments in any of those assets, but it just appears these are sold as a way for people to invest “like the wealthy”. A big problem here is the fees are just crazy! According to Morningstar, of the 307 interval fund share classes currently available, the median fund’s total expense ratio is 3.02%. A big reason for the high fees is they include the cost of leverage, which these funds use in many cases to amplify returns…. That doesn’t risky! Even if we exclude leverage costs though, the median expense ratio is still 2.18%. Brian Moriarty, a principal on Morningstar’s fixed-income strategies team had some interesting things to say after researching the space. He concluded before deducting any fees or incorporating any leverage, there was little difference between private-credit interval funds and public bank loan mutual funds and exchange-traded funds. However, after incorporating leverage, interval funds have beaten traditional loan and high-yield bond funds, as they’ve had about 1.3 times exposure on average to such debt in a rising market, but the problem is they will also have that exposure in a falling one. Needless to say, you will not fund us buying any of these funds in our portfolios at Wilsey Asset Management!

ESPN just launched a new streaming product and I’m more confused than ever!

I like streaming because it gives more flexibility in choosing what you want to watch, but gosh there are so many different apps and so many different bundles to choose from now. I believe it has just gotten more and more confusing and companies seem to keep increasing the prices for their services. Just this year Netflix increased their prices for various tiers, but the tier with ads went from $6.99 to $7.99, Peacock went from $7.99 to $10.99, and Apple just recently went from $9.99 to $12.99. Apple has been aggressive with pricing considering in 2022 you could get the service for just $4.99 and I personally believe it may be the worst value as I don’t think their content justifies that price point. In terms of new services, ESPN just launched it’s new service to allow consumers access to its programming without needing to get cable, but the price is quite high at $29.99 per month. Fox also just announced its new streaming service for $19.99 per month. You add these services to other like Disney+, Paramount+, HBO Max, and Hulu and the costs seem to just get quite ridiculous. For me I don’t use all the services so I save money on streaming vs traditional cable, but during football season they really get you. Since the league splits its games among so many providers you’re almost forced to have Fox, ESPN, Peacock, Paramount+, Amazon Prime, and now even Netflix carries some of the games. I’m not even going to throw in Sunday Ticket into that mix, which now costs almost $480 for returning users. It’s now gotten to the point where I wish these sports leagues would just go direct to consumer to keep things simple. What do you think, has the complexities in streaming gotten out of hand?

Financial Planning: Form SSA-44 to Reduce Medicare Premiums

When you retire, your income often drops significantly, but Medicare bases its Income-Related Monthly Adjustment Amount (IRMAA) on your tax return from two years prior when you may have been earning much more. This can result in unnecessarily high Medicare premiums at the start of retirement. For example, in 2025, a married couple with income above $212,000 begins to trigger IRMAA increasing premiums by $1,000 to over $6,000 per person per year depending on how high the income is.  If that couple retires and their income falls to less than $212,000, they would still be charged the higher IRMAA unless they file Form SSA-44 to report “Work Stoppage” as a life-changing event. By filing, Medicare will use their new, lower income to set premiums, potentially saving thousands of dollars per year. If you’re nearing retirement or have recently retired, beware of the Medicare costs and consider filing this form to avoid paying too much. 

Companies Discussed: Ventas, Inc. (VTR), KinderCare Learning Companies, Inc. (KLC), C3.ai, Inc. (AI) & Brinker International, Inc. (EAT)

I’m sure some will disagree with me based on the headlines arguing they were so happy that they had their 401(k) to tap for whatever their financial emergency was. In my opinion, people are thinking short term and not thinking about the long-term crisis when they retire in 20 or 30 years and then might be living at the poverty level because their 401(k) was not large enough to generate a decent income and social security was far less than they thought. I also want people to understand based on how fast medical technology is moving, in 20 to 30 years you may be spending more time in retirement than the 20 years or so that you were thinking. The numbers are frightening when I look at them and I have wished many times that the 401(k) would eliminate the ability to access funds before retirement like the old pension plans from companies. According to Vanguard, 2024 saw a record of 4.8% of workers that took a hardship distribution for a financial emergency. This was more than double the 2% level in 2019. Even more frightening was nearly 33% of people decided to take and cash in their 401(k) when they changed jobs in spite of the fact of paying taxes and penalties as opposed to rolling that retirement over to an IRA rollover or their new 401K plan. Congress in their infinite wisdom has made it easier to qualify for withdrawals from 401(k)’s for emergencies. I believe the Congress that set up the 401K in 1978 under The Revenue Act of 1978 did not envision the raiding of 401(k)’s for emergencies. I’m pretty confident in 1978 Congress felt this would be a great retirement plan for all Americans, not an emergency fund of to pay off debt. I highly recommend before people take any money out of the 401(k), they talk to a real financial professional to understand the taxes and penalties they are paying. It’s not just the taxes and penalties, and one should also figure out the future value of what that account could have grown to and how that withdrawal could devastate their retirement!

Inflation report shows some positives and some negatives

The July Consumer Price Index, also known as CPI, showed an annual increase of 2.7%, which was in line with June’s reading and below the expectation of 2.8%. The headline number was helped by energy, which showed an annual decline of 1.6%, largely thanks to a decline of 9.5% for gasoline. Energy services on the other hand were not as favorable considering an increase of 5.5% for electricity and 13.8% for utility (piped) gas service. I do wonder if the power demand for these large data centers is starting to put a strain on the grid and I worry this could become even more problematic. As for core CPI, which excludes food and energy, it was up 3.1% from a year ago and was slightly above the forecast of 3%. This was a slight increase from the 2.9% level in June and the highest annual increase since February. Surprisingly, shelter continues to be a large reason for the elevated inflation rate as it was still up 3.7% compared to last year. In terms of tariffs showing up in the report, it still appeared to be subdued. Furniture was up 7.6% compared to last year, but other areas that I would anticipate seeing pressure like apparel and new vehicles saw little change. New vehicle prices were up just 0.4% compared to last year and apparel prices were actually lower by 0.2%. I did see an economist point out the fact that core goods inflation on an annual basis registered the largest growth in over two years, but at 1.2% I wouldn’t say that is putting strain on the economy. These tariffs will likely put continued pressure on inflation, but if other areas like shelter continue to see less inflation that could counteract that pressure and keep overall inflation in a manageable situation. Based on the slowing labor market and these manageable levels of inflation I do believe the Fed should cut in September.

What does the national debt surpassing $37 trillion mean for you?

 On Tuesday, August 12th, the United States national debt passed $37 trillion for the first time ever. The debt is growing at about $6 billion per day, but that appears to be better than last year. In July 2024, the national debt passed $35 trillion and then in November 2024 it surpassed $36 trillion. Looking for some positives here, it did take nine months for the debt to grow another $1 trillion to the $37 trillion mark. At the end of the second quarter, debt to GDP stood at 119.4%, which is manageable but should not go much higher. Hopefully we can have a slowdown in debt expansion or maybe even a reversal and still have the GDP increase. The reason having a high national debt is a negative is it takes investment out of the private sector to fund our national debt, which can slow down the growth in our economy. A large national debt can also cause interest rates to increase as the need for more debt often means offering higher interest rates to attract buyers. It is also important to know that even when the Federal Reserve cuts interest rates, that generally has a larger impact on the short end of the curve, which includes instruments like treasury bills. Your long-term debt, such as 5–10-year notes are not controlled by what the Federal Reserve does and instead is based on supply and demand. It would not be a wise move for the government to only issue short-term debt for a lower rate because if rates were to increase in the future for whatever reason, that could cause our national debt to grow out of control and potentially cause a financial collapse. Also, keep in mind that generally mortgage rates align with the rates for longer term debt and now with some car loans being six or seven years, the interest rates for those loans will probably not drop because they are now longer-term loans not the old 3-to-4-year loans they used to be. We are not in trouble yet, but we are getting close to the edge and we need to grow the economy and still reduce the national debt so our country can continue to prosper and grow.

Financial Planning: Changes Coming to Charitable Giving

The One Big Beautiful Bill Act, signed on July 4, 2025, delivers some new changes coming to how charitable giving may be deducted. For the first time since the pandemic-era CARES Act, those who claim the standard deduction will be able to deduct cash donations up to $1,000 for single filers and $2,000 for joint filers.  This will act as an above-the-line deduction in addition to the standard deduction.  For itemizers, however, the law imposes a new 0.5% of AGI floor, meaning only contributions above that threshold will count toward deductions, potentially reducing benefits for those making smaller annual gifts. For example, a tax filer with an AGI of $200,000 receives no tax benefit on the first $1,000 (.5%) of donations. Also, itemizers are not able to take advantage of the $1,000 to $2,000 above-the-line charitable deduction that standard deduction filers can.  In addition, high earners who are in the 37% tax bracket will only receive a 35% deduction on charitable donations. All of these changes go into effect in 2026, so those claiming the standard deduction may want to wait until then while itemizers and high earners may want to make donations before the end of the year.

Companies Discussed: Intel Corporation (INTC), UnitedHealth Group Incorporated (UNH), Nexstar Media Group, Inc. (NXST) & Bloomin’ Brands, Inc. (BLMN)

With the market continuing to march higher and setting record high after record high, I do worry more and more that a crash could be coming. It doesn’t mean it will happen tomorrow, next week, or maybe even this year, but I do believe the risk to reward of investing in the S&P 500 at this point is not favorable when you take all the data into consideration. I have talked a lot about the fact that the top 10 companies now account for nearly 40% of the entire index and the forward P/E multiple of around 22x is well above the 30-year average of 17x, but there are also less discussed factors that are quite concerning. There is something called the Buffett Indicator that looks at the total US stock market value compared to US GDP. Buffet even made the claim at one point that this was “the best single measure of where valuations stand at any given moment." The problem here is that it now exceeds 200%, which is a historic high and well above even the tech boom when it peaked around 150%. Another concerning measure is the Shiller PE ratio, which looks at the average inflation-adjusted earnings from the previous 10 years in relation to the current price of the index. This is now at a multiple around 39x, which is well above the 30-year average of 28.3 and at a level that was only seen during the tech boom. While valuation isn’t always the best indicator for what will happen in the next year, it has proven to be a successful tool for long term investing. Unfortunately, valuations aren’t my only concern. Margin expansion is even more frightening as the reliance on debt can derail investors. Margin allows investors to buy stocks with debt, but the big problem is if there is a decline and a margin call comes the investor would either have to add more cash or make sells, which causes a further decline in the stock due to added selling pressure. Margin debt has now topped $1 trillion, which is a record, and it has grown very quickly considering there was an 18% increase in margin usage from April to June. This was one of the fastest two month increases on record and rivals the 24.6% increase in December 1999 and the 20.3% increase in May 2007. In case you forgot, both of the periods that followed did not end well for investors. Looking at margin as a share of GDP, it is now higher than during the dot-com bubble and near the all-time high that was reached in 2021. One other concern with the margin level is it does not include securities-based loans, which is another tool that leverages stock positions and if there is a decline could cause added selling pressure. Unfortunately, this data is not as easy to find since they are lumped in with consumer credit. The most recent estimate I could find was in Q1 2024, they totaled $138 billion and with the risk on mentality that has occurred, my assumption is the total would be even higher now. We have to remember that we now are essentially 18 years into a market that has always had a buy the dip mentality. Even pullbacks that occurred in 2020 and 2022 saw rebounds take place quite quickly. This has created a generation of investors that have not actually experienced a difficult market. I always encourage people to study the tech boom and bust as it was devastating for investors. The S&P 500 fell 49% in the fallout from the dotcom bubble and it took about 7 years to recover. Investors in the Nasdaq fared even worse as they saw a 79% drop and it took 15 years to get back to those record levels. Unfortunately, this isn’t the only historical period that saw difficult returns. If you look back to the start of 1964, the Dow was at 874 and by the end of 1981 it gained just one point to 875. This was an extremely difficult period that saw Vietnam War spending, stagflation, and oil shocks, but it again illustrates that difficult markets with little to no advancement can occur. So, with all of this, how are we investing at this time? We are maintaining our value approach, which generally holds up much better in difficult markets. For comparison, the Russell 1000 Value index was actually up 7% in 2000 while the Russell 1000 Growth index fell 22.4% that year. We are also maintaining our highest cash position around 25% since at least 2007.  I continue to believe there are opportunities for investors, it just requires discipline and patience. One other person remaining patient at this time is Warren Buffett. Berkshire now has near a record cash hoard of $344.1 billion and the conglomerate has been a net seller of stocks for the 11th quarter in a row. I’d rather follow people like Buffett at times like this over the Meme traders that have become popular once again.

Consumers are doing a better job managing their credit card debt 

Data released by Truist Bank analysts show that card holders of both higher and lower scores are doing a better job paying their bills on time. This is based on a drop in the rate of late payments from last quarter. Also improving is debt servicing payments as a percent of consumers disposable personal income. The first quarter shows debt-servicing payments were roughly 11% of disposable income, which is a strong ratio to see considering that level is below what was typical before the start of 2020 and it’s far below the 15%-plus levels that were seen leading up to the Great Recession in 2008. According to Fed data, card loan growth was only 3% year over a year, which could be due to lenders increasing their credit standards. Stricter standards also made it more difficult for subprime borrowers to obtain new credit cards considering the fact that as a share of new card accounts, this category accounted for just 16% of all new accounts. This was down roughly 7% from the last quarter in 2022 when it was 23%. Consumers may also be more aware of the high interest costs considering rates stood at 22% as of May. There has been a decrease in rates from the peak last year, but Fed data reveals before interest rates began rising in 2022 interest rates stood at 16% for card accounts. If the Fed were to drop rates a couple of times between now and the end of the year, we could see a small decline in the rate. With that said borrowing money on a credit card and accruing interest is a terrible idea as even a 16% rate would not be worth it! 

Real estate investors may be supporting the real estate market.

This may sound like a good thing, but this could be dangerous long-term since investors don’t live at the property. It would be far easier for them to default on the mortgage and let the house go into foreclosure or sell at a price well below market value just to get their investment back. So far in 2025 investors have accounted for roughly 30% of sales of both existing and newly built homes, which is the highest share on record. This is according to property analytics firm Cotality and they started tracking the sales 14 years ago. Most of these investors were small investors, who own fewer than 100 homes as they accounted for roughly 25% of all purchases. This compares to large investors which accounted for only 5% of purchases of new and existing homes. Within the small investor space, the stronger category is those with just 3-9 properties as this group has accounted for between 14 and 15% of all sales each month this year. The data also shows that the large investors like Invitation Homes and Progress Residential have become net sellers in the market and are selling more properties than they are buying. This is likely due to reduced rents from the high competition in the rental market and a softening of the overall real estate market in certain areas that has not provided the expected return that they wanted. I do worry that the small investor here has less access to good data and is less disciplined with their investment strategy. They are likely buying homes because real estate has been a good investment for the last several years, but if the market were to turn, they would be more likely to panic and sell and they may not have the means to continue holding the real estate. I do believe if interest rates remain, housing prices could remain stable or perhaps even drop a little bit. It’s important to remember long term mortgage rates generally stem from longer term debt instruments like a 10-year Treasury, rather than the short-term discount rate set by the Fed.

Financial Planning: When and How a Refinance is Helpful

After several years of elevated mortgage rates, steady declines have made more homeowners candidates for refinancing, but a smart decision requires looking beyond the headline interest rate. The first question is whether the refinance actually reduces the rate, and if so, what third-party closing costs and discount points are involved. Every mortgage carries these costs, and paying points may not make sense if rates are expected to fall further and another refinance could be on the horizon, especially since few 30-year mortgages last their full term before a sale or another refi. The structure of the new loan also matters: should costs be paid upfront or rolled into the loan balance, and how long will the loan likely be kept? The real goal is to borrow at the lowest overall cost over the life of the loan, factoring in both the rate and the cost to obtain it. A lower rate and payment may feel like a win, but without careful structuring, it may not be the most cost-effective move, something mortgage brokers often overlook when focusing solely on rate reduction. Here’s a real example from just last week. A homeowner with a $580,000 mortgage at 6.875% and a $3,900 monthly payment has the opportunity to refinance to 5.5%, lowering the payment to $3,500 with no additional cash due at closing, and saving roughly $80,000 in total interest over the life of the loan. At first glance, this looks like a no-brainer. However, this structure would only be ideal if the homeowner never had another chance to refinance, which is unlikely given their current rate of 6.875%. In this case, all costs were rolled into a new loan balance of $616,000—an increase of $36,000—explaining why no cash was required at closing. A better approach might be to refinance to a rate only slightly lower than 6.875%, still reducing both the monthly payment and lifetime interest, but without dramatically increasing the loan balance by rolling in discount point costs. Refinances can continue as long as rates are expected to decline, and the best time to pay points is in a “final” refinance when rates are no longer expected to drop so the benefit can be locked in for the long term.

Companies Discussed: Carrier Global Corporation (CARR), Polaris Inc. (PII) & Align Technology, Inc. (ALGN)

The July jobs report showed nonfarm payrolls grew by 73k, which missed the estimate of 100k. Unfortunately, the news got even worse as you dug into the report. The prior two months saw major negative revisions as June was revised from 147k to just 14k and May was revised from 125k to just 19k. This amounted to a total negative revision of 258k when looking at the two months combined. Another negative was job growth in the month of July was heavily reliant on health care & social assistance as the category added 73.3k jobs in the month. This means that this category essentially carried the report as the total jobs created in the month topped the full headline number. There were some other areas that saw growth with retail trade adding 15,700 jobs, leisure and hospitality adding 5k jobs, and construction adding 2k jobs. Unfortunately, there were more categories than normal that saw declines with information falling by 2k jobs, government was down 10k jobs, manufacturing declined by 11k jobs, and professional and business services declined by 14k jobs. While all this sounds negative, I still wouldn’t panic over this report. The main reason is the unemployment rate remains historically low at 4.2% and layoffs have not materially increased. I would even make the claim that the unemployment rate is healthier than it appears. Of those that are unemployed, the average weeks unemployed now totals 24.1 and those that have been unemployed for more than 27 weeks jumped to 1.82 million, which is about one-quarter of all the unemployed. If you have been out of work more than 27 weeks, how hard have you really been looking or are some of those really just retired now? It seems we are in an environment where companies are keeping their employees and limiting new hires. With more clarity on the trade deals and tariffs now, that could help stabilize the labor market, but my main concern is are there enough qualified candidates to truly fuel job growth? A large problem we have discussed in the past is an aging population that has seen assets climb tremendously, which has enabled many near retirement age the luxury to retire. While I don’t want to say this is a negative, the working age population or those between 25 & 54 remained near historical highs around 83%. One positive in the report I didn’t discuss yet was the fact that wage inflation came in above expectations at 3.9%, which is nice considering the decline in inflation we have seen this year. While again I may sound negative on this report, I want to be clear that there is no reason to be overly concerned yet, I would be interested to see how the next few reports look before being worried about a potential recession in the near term.

Job openings declined in the month of June

The June Job Openings and Labor Turnover Survey, commonly referred to as the JOLTs report, showed job openings declined to 7.4 million, down 275,000 from the prior month. While this may sound problematic, it is important to remember this is still a historically healthy level for job openings and it comes against a back drop of a historically low unemployment rate. I have said this for many months, but I believe there is even further room for job openings to decline without there being a problem for the labor market. Taking that concept one step further, I would be quite surprised to see growth in job openings from here. The main reason for that is there just aren’t enough people to fill those openings especially since it appears many companies are choosing to retain employees rather than look for new ones. I say this because layoffs continue to remain quite low. In the month of June, they totaled 1.6 million and really since 2021 they have maintained that level with the average monthly total since January 2021 standing around 1.57 million. If we look pre-covid, from December 2000 (when the data first started) to February 2020, layoffs averaged 1.91 million per month. Even though you will always hear news about various companies implementing layoffs, I believe we remain in a healthy labor market with good unemployment and low layoffs. This healthy labor market remains one of the key reasons for why I believe the economy will remain in a good spot for the foreseeable future.

GDP came in stronger expected, another good sign for the economy!

While Q2 gross domestic product, also known as GDP, jumped 3% and easily topped the estimate of 2.3%, the numbers were not as strong as the headlines indicate. With the tariffs having a large impact on trade and business inventories, this report is the opposite of Q1 when actual results were much better than the headlines showed. In Q1 companies were likely trying to get ahead of tariffs so they were trying to load up on inventory and import a lot more foreign goods than normal. This led to a 37.9% increase in imports during Q1 which subtracted 4.66% from the headline GDP number. In Q2 we saw a complete reversal as imports fell 30.3% and added 5.18% to the headline GDP number. The change in private inventories was also extremely volatile during these last two periods considering it added 2.59% to the headline number in Q1, but subtracted 3.17% from the headline number in Q2 as many businesses were likely working through excess inventory. I bring all this up not to say that the GDP report was bad and in fact it was still a good number, but rather to show the messiness in the numbers for the first two quarters. We should not see the type of volatility that we have seen in trade going forward as it normally has a small impact on the overall report. The main reason I see Q2 GDP as a good report is because the consumer, which is the main driver in the long-term, held up well. There was a small 1.1% increase in services spending and goods saw an increase of 2.2%. Considering we are primarily a service driven economy; I do worry the goods spending could have been further pull forward in demand as consumers try to get ahead of price increases from tariffs. This could have a negative impact on consumer spending going forward as they may not need to purchase as many goods. With many areas of the report normalizing as we exit the year, I’m still looking for GDP growth that would likely be in the 1-2% range.

Should Banks be responsible when their customers get scammed?

It’s a sad thing to see someone in their 60s or 70s get scammed out of their life savings. Unfortunately, there are many online scams now and it appears they just keep growing. According to the FBI, in 2024 online scams totaled $16 billion, which was a 33% increase from 2023. A big question that people have been asking is should banks be the ones that are held responsible when it comes to preventing their customers from making poor investment decisions or losing money in online romance scams? Banks are already trying to prevent money laundering, terrorist financing and other types of fraud that is costly for the banks to maintain. Adding another oversight would be another expense for the banks, which could lead to costs elsewhere in the banking system to make up for those added expenses. From the consumer standpoint this could also lead to frustration when trying to get money for legitimate purposes as it could lead to longer review periods for certain transactions or if your account were to get flagged who knows how long it would take to get that resolved. As an example, let’s say a teller sees the same person coming in taking out large sums of money on a regular basis, should the teller stop the activity? Again, if it was for legitimate purposes, wouldn’t that be frustrating? What something like this would likely mean for banks is they would have to set up departments to review the situations of potential scams and take many hours to discuss with bank employees, the customer and maybe even family members why the withdrawals are taking place. No surprise here, but attorneys in some states have begun going after the banks saying it is their obligation to protect their clients’ assets. There are laws that were passed in the 70s that requires banks to report suspicious money laundering activity and even required banks to screen for fraudulent activities and reimburse customers for stolen funds. However, it’s limited to criminal impersonations of a customer to get unauthorized access to their accounts. This is different than many of the scams we are seeing today where the customers themselves are taking the money from their own account and sending it to the scammer. In my opinion, the best thing to do is educate people about these scams and if you have parents, be sure to have conversations with them about them before they happen.

Financial Planning: The Secondary Benefits of Roth Accounts

While the primary advantage of Roth accounts lies in their tax-free growth and withdrawals in retirement avoiding potentially higher tax rates, there are several powerful secondary benefits worth considering. First, Roth IRAs are not subject to Required Minimum Distributions (RMDs), which means retirees can keep their money growing tax-free for life. In contrast, traditional pre-tax retirement accounts force RMDs beginning at age 75, whether the funds are needed or not. These mandatory withdrawals must be taken as taxable income and cannot be reinvested into another tax-advantaged retirement account. The most similar alternative is a regular taxable brokerage account, where earnings such as interest, dividends, and capital gains are subject to annual taxation—ultimately reducing the net return over time. By avoiding RMDs, Roth accounts allow retirees to maintain greater control over their tax situation and preserve more wealth in a truly tax-advantaged environment. Second, Roth accounts are far more advantageous for heirs. While both Roth and pre-tax retirement accounts are now subject to the 10-year rule—requiring inherited accounts to be fully distributed within 10 years of the original owner's death—the tax treatment is vastly different. Pre-tax inherited accounts are fully taxable to beneficiaries, which can push heirs into higher tax brackets as they’re forced to withdraw large sums over a relatively short period. In contrast, inherited Roth accounts allow for the same 10 years of tax-free growth, but the entire balance can be withdrawn tax-free at the end, providing greater flexibility and preserving more value. Third, for individuals whose estates exceed the federal estate tax threshold, Roth accounts offer superior after-tax value. Both Roth and pre-tax accounts are included in the taxable estate, but Roth funds retain their full value since they are not subject to income tax when withdrawn. These features make Roth accounts not just a retirement planning tool, but also a strategic asset for legacy and tax-efficient estate planning.

Companies Discussed: Hasbro, Inc. (HAS), Chipotle Mexican Gill, Inc. (GMG) & Baker Hughes Company (BKR)

Every quarter we get excited about listening to and reading about how things went for the big banks in the most recent quarter as they release their earnings. I’m primarily talking about JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. We have held a couple large banks in our portfolio for years and they have provided very useful information along with great returns as well. Overall, the big banks were happy with the low rates of consumer delinquencies and writing off debt that was unrecoverable stayed around the same rate as last year. One banker made a comment that with a 4.1% unemployment rate it’s not likely to see a lot of weakness in their portfolio. This is something we have said for quite a while now, but we believe as long as the employment picture stays strong, the economy should do well. Deal making for the banks looked pretty good across the board and all of them had profit increases compared to one year ago. The overall tone from the bankers was largely upbeat, but a couple banks did call out some concern around commercial real estate and office buildings. There are certain cities with economies that are doing well, but there are other areas that are more problematic and the banks generally have commercial real estate in many markets across the country. To summarize, it appears the bankers feel pretty good, but they still remain somewhat cautious as bankers always should.

Understanding new legislation on cryptocurrencies

Last week new legislation on cryptocurrencies was announced as the Genius Act, which stands for Guiding and Establishing National Innovation for US stable coins, made its way through Congress and to the President’s desk. The legislation is supposed to provide licensing and oversight for stable coins as issuers must obtain licenses through either a national trust bank charter with the OCC, which stands for the Office of the Comptroller of the Currency, or a state level money transmission license. The Genius Act is supposed to provide consumer protection in the case of the issuer of a stable coin becoming insolvent. The solution in the Genius Act is to prioritize stable coin holder claims so the holders of those coins should be able to get their money back. This is nowhere near the safety one has in a bank where your deposits are insured by the FDIC should that bank fold. I feel this law will give people a false sense of security and I don’t believe it will prevent a major collapse of stable coins. There’s also a conflict of interest from President Trump‘s promotion of digital currencies since he himself has a coin and his sons Donald Trump Junior and Eric Trump run a bitcoin mining firm called American Bitcoin and are heavily involved in the crypto space. I believe the whole thing is just adding to the bubble of cryptocurrencies. Keep in mind that a bubble can last 10 to 12 years, if not longer, but the bigger it gets the bigger the financial disaster it causes.

What is better for investors stock dividends or stock buybacks?

Unfortunately, there’s no hard and fast rule based on performance figures in terms of what is better for stock investors, but I would have to lean towards stock dividends. If you look at the right companies paying dividends over a 10-year period you can find that perhaps the company you invested in is now giving you a yield of maybe 7-8% based on your initial investment. Those dividends can be a really great tool for long-term investing and while companies could always stop the dividend, most companies that have paid a dividend for the long-term do not like to stop or even reduce paying that dividend. This can help stabilize returns during downturns and may help investors be less emotional. A problem with stock buybacks is they can be announced and the stock may see a little bounce, but then it’s possible that management does not fulfill the commitment to buy back all the shares they had planned to. Also, if the company or the markets were to hit a rough patch many times the first thing to go is stock buybacks. It is also possible that the company could do a stock buyback, but within a year or two the stock might drop below the price where the repurchases occurred, which would make those investments a questionable use of capital. Benefits to stock buybacks include the fact that there’s no taxes for shareholders when they occur and they do increase your ownership of that business. While dividends are generally taxed, they are tax favored and depending on one’s tax bracket you may pay very little or no tax at all. And don’t forget about the compounding effect of reinvesting those dividends back into another investment. Unfortunately, it has become harder to find good quality companies paying dividends for a reasonable price. Looking at the S&P 500 index, the yield is now only 1.2%, which is near the all-time low that was hit during the dot-com bubble. Over the long-term history of the S&P 500, it’s yield is generally around the 10-year Treasury and I was surprised to learn that up until the 1960’s, the S&P 500 actually generally yielded more than the 10-year Treasury. Even looking just 10 years ago they were both yielding around 2%, but currently the spread between the two is about 3%. This comes as the S&P 500 has seen its forward P/E based on the next 12 months of earnings expand from 17 to around 22 during that time frame. Could this be another warning sign that the S&P 500 index is overvalued?

Financial Planning: New Tax Rules for Tips and Overtime

Starting in tax year 2025 and through 2028, the One Big Beautiful Bill Act exempts up to $25,000 in tip income and up to $12,500 in qualifying overtime pay per individual from federal income tax—doubling to $50,000 and $25,000 respectively for married couples filing jointly. The tip exemption applies only to workers in occupations where tips are customary and must be properly reported through W-2s. The overtime deduction applies only to the premium portion of overtime wages—i.e., the extra pay above an employee’s standard hourly rate—and must be paid in accordance with Section 7 of the Fair Labor Standards Act (FLSA), meaning it only covers overtime worked in excess of 40 hours per week under federal rules. Overtime paid under state laws or union contracts does not qualify unless it also meets the FLSA criteria. The full exemption is available to taxpayers with modified adjusted gross incomes up to $150,000 (single) or $300,000 (married filing jointly) and begins to phase out above those levels. To claim the exemption, workers must file a new IRS Form 10324-T with their annual tax return. Keep in mind Social Security, Medicare, and state taxes still apply to the tip and overtime pay. The policy begins with wages and tips earned on or after January 1, 2025, with claims first filed on 2025 tax returns in 2026.

Companies Discussed: Union Pacific Corporation (UNP), Toast, Inc. (TOST), American Eagle Outfitters, Inc. (AEO) & Abbot Laboratories (ABT)

The Consumer Price Index, also known as the CPI, in the month of June showed an annual increase of 2.7%, which was in line with expectations. Core CPI, which excludes food and energy, came in at 2.9% and was also in like with expectations. It was slightly above May’s reading of 2.8%, but given all the news around tariffs I think most would be surprised to see the limited change in prices given all the concerns. Some economists that tried to find evidence of the tariffs pointed to areas like apparel that had an increase of 0.4% compared to the month May. My concern with pointing out limited areas like that is prices can be quite volatile when looking at single areas, plus if you look at prices for apparel compared to last June, they actually decline 0.5%. Shelter is becoming less of problem for the report, but it is still the largest reason why inflation remains stubborn considering the annual increase was above the headline and core numbers at 3.8%. I’m still looking for these tariffs to have an impact on inflation, but as a whole they didn’t seem to have a large impact in the month of June. I also want to point out I don’t think they will be as problematic for consumers as some economists have illustrated.

Is the market in a bubble?

I have been hesitant to use the word bubble when describing the current state of the market, but as valuations get more and more stretched, I must say I believe we are now in bubble territory. Apollo’s chief economist, Torsten Slok, released a graph showing the 12-month forward P/E today versus where we were in 2000 and other 5-year increments. The forward P/E for the market as a whole is higher than it was back in 2000, but Torsten raised further concerns that valuations for the top 10 companies in the index are now more stretched than during the height of the tech boom. This is problematic considering these ten companies now make up nearly 40% of the entire index. Even looking at just the top 3 companies: Nvidia, Microsoft, and Apple, those now account for nearly 20% if the index. I recently heard a gentleman say on CNBC that valuations don’t cause bubbles to pop and while that may be true, when a catalyst comes the larger the bubble, I worry the larger the pop. All I can say at this time is be careful if you are investing in the index as a “safe”, diversified investment as I believe it is far riskier than many people believe.

Retail sales show another strong economic data point

Even though people remain concerned about a slowdown in the economy, their fears haven’t showed up yet in their spending habits. In the month of June, retail sales climbed 3.9% compared to the previous year. Due to the lower price for gasoline, gas stations were a large negative weight in the month and actually declined 4.4% compared to last June. If gas stations were excluded from the headline number, retail sales grew at a very impressive annual rate of 4.6%. Strength was broad based, but I was surprised to see areas like health & personal care stores up 8.3% and food services & drinking places up 6.6%. These are two areas that show me people are still getting out and spending money, which generally wouldn’t happen in a weak economy. There are some areas where consumers may be trying to get ahead of tariffs like motor vehicle & parts dealers, which saw an annual increase of 6.5% and furniture & home furnishing stores, which saw an increase of 4.5%, but it has now been a few months of strong sales in these categories. It will be interesting to see if there is a slowdown in those specific categories in the coming months as there could have been some pull forward in demand with consumers trying to beat those tariffs. Even if that is the case, spending still looks strong in areas not impacted by the tariffs, so I anticipate the consumer will remain healthy. Given the current state of the consumer, I still believe the economy is in a good spot overall. While I’m not looking for blockbuster growth, I’d be surprised to see anything close to a recession given all the recent data.

Financial Planning: What’s the Deal with These “Trump Accounts” for Kids? Under the new One Big Beautiful Bill, children under 18 are eligible to open special long-term savings accounts, nicknamed “Trump Accounts”, with a unique blend of benefits and caveats. Kids born between 2025 and 2028 will receive a $1,000 seed deposit from the U.S. Treasury, regardless of family income. Parents, relatives, and friends may also contribute up to $5,000 per year in after-tax dollars. The account grows tax-deferred, and extra contributions (but not the Treasury seed or earnings) can be withdrawn tax-free. However, like a non-deductible IRA or non-qualified annuity, withdrawals of earnings or seed money are taxable at ordinary income rates, and early withdrawals (before age 59½) face a 10% penalty unless used for qualified purposes like a first-time home purchase or education. While the free $1,000 should be taken advantage of, families may find that 529 plans, Roth IRAs for teens with earned income, custodial accounts, or even accounts in a parent’s name offer better long-term flexibility and tax treatment for ongoing contributions.

Companies Discussed: Circle Internet group (CRCL), Archer-Daniels-Midland Company (ADM), Kenvue Inc. (KVUE) & Shake Shack Inc. (SHAK)

At first you may be saying I thought Bitcoin has been increasing in value? While that is true, you have to remember that is only one of the many thousands of cryptocurrencies that are available. According to the FBI in 2024, there was 149,686 complaints for total losses of $9.3 billion. It was somewhat surprising to learn that people over 60 years old, who I thought knew better than to gamble with cryptocurrencies, was the most with losses totaling nearly $3 billion. If you live in California, Texas or Florida that’s where the most complaints came from with a cumulative loss of $3 billion. Mississippi was also largely impacted as the number of crypto scams per thousand was the highest at 42.1. Even though there are a far higher number of investors and larger dollars in stocks, the SEC reported nationwide just 583 enforcement actions for stock scams or stock complaints in 2024. These complaints included charges against advisors for untrue or unsubstantiated statements. Interesting to note there’s now something called AI washing, which charges firms for making false or misleading statements about their use of artificial intelligence. It is hard to make a comparison of stock scams and fraud versus cryptocurrencies, but with the far higher number of people investing in stocks vs cryptocurrencies I think it is safe to say that your risk of being scammed in stock investments is far lower than being scammed when dealing with cryptocurrencies. So not only are you taking a higher market risk by investing in cryptocurrencies, but you are also taking on the risk of being ripped off as well.

Have ETFs become too complicated?

The first ETF, which stands for exchange traded fund, was launched about 30 years ago. They were simple in design and you generally bought them because they held a set group of stocks or bonds using an index and charged a low fee. Today, there are now over 4000 ETFs that are listed on the New York Stock Exchange. This is more than the 2400 individual stocks listed on the exchange. In 2024 alone, 700 new ETFs were launched and 33 of those tracked cryptocurrencies. The assets have ballooned to $11 trillion and now account for 1/3 of money invested in long-term funds. Some of that growth has come from open end mutual funds, which have lost $1.2 trillion in the past two years. There are now 1300 active ETFs, which actually manage the portfolio for you like a mutual fund. A big difference is those funds can now be sold during market hours. With open ended mutual funds, you have to wait until the close of the market and then sell at the closing net asset value for the day. Nearly half of the 1300 active ETF were launched last year. It gets difficult for investors with over 4000 choices to decide which is best. Back in 2020, Cathie Wood grew to fame with her actively managed ARK Innovation ETF. The fund shot up 150% that year and assets hit $28 billion. Today, the NASDAQ composite has a five-year cumulative return of 108% and the ARRK fund has seen a decline of 2% and the assets are now under $7 billion. If you’re investing in an ETF to benefit from commodities, understand generally they use future contracts to track the underlying commodity. Commodity futures are not a perfect vehicle and they generally work better for speculators that do short-term trading. One exception to this is the SPDR gold shares which is a trust that holds the actual gold. In my opinion, it is far easier to analyze one company to invest in and then build a portfolio rather than trying to understand some of these ETFs that can use leverage or future contracts or whatever. I worry investors could be blindsided when they least expect it. 

What is a dark pool exchange?

A dark pool exchange is an off the exchange platform where institutions can trade without broadcasting their buying or selling intentions publicly. People wonder why when we invest at Wilsey Asset Management we buy a company with the intent of holding it 3 to 5 years. For those who think they can do better by trading you are taking a toothpick to a gun fight. Exchanges and market makers make up nearly 87% of the daily trading volume, but these dark pools are trying to step in and do more of the trading, which I believe will leave the small investor in the dark and they might not know what certain stocks are trading at. I’m getting rather disgusted with how Wall Street is acting like the Wild West. FINRA another regulatory body seems to be OK with this and will be collecting fees from the dark pools. Fortunately, for the past two years, the SEC has not approved this form of trading, but with the new administration and the new SEC chairman, who seems to love the Wild West of trading, I’m sure we’ll see more of this craziness going forward. This does not mean that investors on Wall Street cannot do well. To be frank, I don’t care if we miss a penny or two on a trade since we are looking down the road 3 to 5 years, but if you’re doing multiple trades per day that penny of two adds up. This also seems to be adding a lot more volatility to the markets. This volatility will scare investors out of good quality investments because of what they are seeing on a daily basis and not understanding what is going on behind the scenes. Remember if you are investor, you are investing in a small piece of a large company and there are millions if not billions of shares that are trading so don’t worry about the short-term movements. Instead, make sure the investment you made was of good quality with sound earnings and a strong balance sheet that can weather any storm, even these dark pools.

Financial Planning: Is Social Security Now Tax-Free?

One of the major topics surrounding the One Big Beautiful Bill (OBBB) was the taxation of Social Security. Now that the bill has been signed into law, we know that the method used to tax Social Security remains unchanged—but many seniors will still see their overall tax liability go down. Most states, including California, do not tax Social Security. Federally, between 0% and 85% of benefits are reportable as income, meaning at least 15% is always tax-free. The taxable portion is based on a retiree’s combined income, which includes adjusted gross income, tax-exempt interest, and half of their Social Security benefits. This formula was not changed by the OBBB. However, the standard deduction is increasing substantially, which reduces taxable income and, in turn, lowers overall tax liability. Prior to the bill’s passage, a married couple aged 65 or older would have had a standard deduction of $33,200 in 2025 ($30,000 plus $3,200 for age). Starting in tax year 2025, that deduction can be as high as $46,700—a $13,500 increase. This results from a $1,500 increase to the base deduction for all filers, plus an additional $6,000 per person for those over age 65. Importantly, this extra $6,000 per senior (up to $12,000 per couple) is not technically part of the standard deduction—it is an above-the-line deduction that can be claimed even by those who itemize. This add-on begins to phase out when Modified Adjusted Gross Income exceeds $150,000 and is fully phased out above $250,000. As a result, taxpayers in the 10%, 12%, and 22% brackets are most likely to benefit. So, while Social Security is still taxable, more of that income may now be shielded from taxes due to the expanded deductions. Additionally, the bill prevents the federal tax brackets from reverting to higher 2017 levels in 2026. The brackets will now remain at 10%, 12%, 22%, 24%, 32%, 35%, and 37%, instead of increasing to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. For retirees with taxable Social Security or other ordinary income, this means lower effective tax rates moving forward. In short, Social Security is still taxable—but seniors will likely pay less, or even nothing, thanks to these changes.

Companies Discussed: Tripadvisor, Inc. (TRIP), Johnson & Johnson (JNJ), AMC Entertainment Holdings, Inc. (AMC) & KeyCorp (KEY)

I want to be clear; I wouldn’t say this was a bad report, but the headline number that showed an addition of 147,000 jobs in the month of June doesn’t show the full picture. The number did come in well above the estimate for 110,000 jobs and it follows upward revisions in the months of April and May that have totaled 16,000 jobs, but the concerning part I saw was government accounted for 73,000 new jobs in the month of June. This did not come from the federal government as that actually saw a decline of 7,000 jobs, but rather it was state and local governments which added a combined 80,000 jobs in the month, most of which came from education. The speculation is that this had something to do with seasonal adjustments and that obviously gains of that magnitude will not continue moving forward. Other areas that were strong included healthcare and social assistance, which was up 58,600, leisure and hospitality, which was up 20,000, and construction, which was up 15,000. Many of the other areas in the report were quite muted and manufacturing and professional and business services actually saw a decline of 7,000 jobs each in the month. There was good news on the unemployment rate as it ticked down to 4.1%, which was the lowest level since February and came in below the expectation for 4.3%. Unfortunately, this largely came due to the decline in the labor force participation rate, which dropped to 62.3%. This was the lowest level since late 2022. The problem here is the working age population continues to shrink, while the retirement population continues to grow. In fact the prime working age participation rate was recently near a record high of 83%. A potential problem to future job growth is the fact that we are running low on workers in their prime. This report largely erased any chance of a Fed rate cut in July, but I would say there was more positive news on the inflation front as average hourly earnings saw a manageable year over year increase of 3.7%. As I said, this wasn’t a bad report and in fact I would say it continues to show that the labor market is in a good spot for the most part, but it definitely wasn’t an overly strong report in my opinion.

Job openings remain strong

The Job Openings and Labor Turnover Survey, also known as the JOLTs report, showed job openings rose 374,000 in the month of May to 7.769 million. This easily topped the estimate of 7.3 million and it also comes during a month where layoffs declined 188,000 to 1.601 million. While this is positive for the economy and shows the labor market remains resilient, it does hurt the chances of a July cut from the Federal Reserve. Fed chair Powell during a panel said, ““In effect, we went on hold when we saw the size of the tariffs and essentially all inflation forecasts for the United States went up materially as a consequence of the tariffs.” With the labor market staying strong and many Fed members likely waiting for more data on how tariffs are impacting inflation, I would be surprised to see a cut in July. Although there have been a couple members saying a cut in July is possible, I still believe it would come as a surprise as many other members have expressed their desire to remain patient. I can see the case for a July cut, but I believe it is more likely we will see one in a couple months at the next meeting in September, if inflation remains in check.

Why did Apple produce the new movie F1?

Apple is obviously known for the iPhone, the iPad and the Mac, but a top producer of mega hit movies, not so much. Since 2019 they have tried to produce big hit movies like Killers of the Flower Moon in 2023 that starred Leonardo DiCaprio and Robert DeNiro, but the world box office receipts were only $159 million. Another hit movie they tried for that ended up as their top movie in 2023 was Napoleon with $221 million in box office receipts. So why did Apple agree to spend almost $250 million more to produce F1, which stars Brad Pitt? No one seems to understand. Brad Pitt will be paid $20 million for this movie and will get a cut of the films revenue if it’s a hit. It does have some chance for success since it was directed by Joe Kosinski and produced by Jerry Buckheimer, who were successful with Top Gun Maverick as that movie grossed $1.5billion in 2022. This past weekend F1 was the top box office hit with $55.6 million, but it appears to be struggling with the mass audience as most viewers were older men like myself who love cars and racing. I have not seen the movie yet but would like to soon. Apple seems to struggle in this space as it is spending billions of dollars annually but continues to lose on the development of hit movies. Apple TV+ only has roughly 27,000,000 subscribers and is known for subscribers canceling their subscription after watching a particular show or movie. Netflix has a 2% cancellation rate while Apple’s is 6% in any given month. It’s also interesting to note that the big movie production house Warner Brothers is responsible for distributing F1 and will receive a percentage of box office revenue that increases as ticket sales rise. There is some concern that in less than two weeks, Warner Brothers will be releasing their hit movie Superman and that could override the promotion of F1. If you want to see the movie F1 and you have Apple Pay you can get a discount on the tickets, which is something Apple has never done before. I won’t make any judgments on the movie till I see it myself, but I don’t see this boosting the lagging stock price of Apple and I do not understand why they’re in the movie business.

Don’t be fooled by ultra-high-income ETF’s

I wouldn’t think I would have to warn people that if you’re being offered a yield of 100% or more on a fund, the risk has to be extremely high and there is probably a good chance for loss. However, with that said this year alone $6.4 billion of new money has been placed into these high-risk funds that I assume are unsuspecting buyers who don’t really understand how these funds work. Regulatory filings show that at least 95% of these ETFs are held by individual investors or small financial advisors. The way they generate this high income is by trading options contracts on a single stock. It is misleading how they come up with those ultra-high yields of 100% plus as they take the ETF’s payout from option trading in the most recent month then multiply it by 12 and divide it by the fund’s net asset value. As an example, we can go back to November 2022 when a fund called the YieldMax TSLA Option Income Strategy ETF (TSLY) sold options on Tesla stock and promoted the yield was 62.8%. The fund has now dropped down to under $9 a share, roughly a 80% drop in the fund. This is somewhat surprising to most since during that timeframe Tesla stock is up around 70%. Sometimes people think just because there’s income or a nice yield that the fund is safer, but investors should remember that in most cases, the higher the yield the higher the risk.

Financial Planning: Pension lump sum vs monthly income?

When deciding between taking a pension benefit as a lump sum or monthly payments, it's helpful to compare the guaranteed income stream to the return you'd need on the lump sum to generate the same income yourself. Monthly payments offer steady, reliable income for life, essentially acting like a personal pension annuity, but most pensions do not include inflation adjustments, meaning the purchasing power of those payments may decline over time. Additionally, choosing a joint life annuity to continue payments to a surviving spouse will offer a lower monthly amount compared to a single life annuity. Since Social Security income drops when the first spouse passes, a joint annuity is usually more appropriate than a single life annuity to help maintain household income for the surviving spouse. In contrast, rolling over the lump sum into a retirement account gives you full control and the potential for growth. It also provides flexibility to structure income in a tax-efficient way allowing you to manage taxable distributions around other income sources, perform Roth conversions, or plan for inheritances and legacy goals. To make an apples-to-apples comparison, it is helpful to calculate the internal rate of return (IRR) you'd need to earn on the lump sum to replicate the monthly pension payments over your expected lifetime. For example, if your lump sum is $500,000 and your pension offers $3,000/month for life, you'd need to earn a little over 5% on the lump sum to match that income.  Keep in mind, the lump sum is also an income source and this return calculation can help clarify whether the guaranteed income or potential flexibility and growth better align with your overall financial plan.

Companies Discussed: The Goldman Sachs Group, Inc. (GS), Robinhood Markets, Inc. (HOOD), Centene Corporation (CNC) & Columbia Sportswear Company (COLM)

Yes, there’s another scam out there trying to part you from your hard-earned money. This has happened many times in recent years and it’s occurred in very small Chinese stocks that are vulnerable to manipulation. For some reason some US investors see these and think they’ve hit it big. US regulators try their best, but typically cannot get access to information in China to go after these people. They’re so good they trick people who should know better like businesspeople and even a university professor lost $80,000 in the scam. Their advertisements show up on social media or in messages on WhatsApp and they contain investment advice that looks very convincing with the alure of big, quick returns. They trick investors into thinking that this company is on the verge of something very big and they show that there are already short-term gains, which are engineered by the scammers through manipulative trading. The hucksters come from Malaysia, Taiwan and other places around the world. Some have been so bold that for some investors who lost money, they come back with a second better offer to make up losses on the first investment. Obviously, these people have no shame and the only thing I can recommend is to stay away from small Chinese stocks, especially if you see them advertised on social media. Remember the old saying if it sounds too good to be true, it probably is.

Is The Current 401K System Out of Date?

The current 401(k) system was first established 42 years ago in 1978 when the use of normal pension plans was in place and when people still worked for a single employer for most of their career. This change in 1978 was beneficial to both the employees and employers, because it gave employees control over their retirement plan and reduced the long-term financial risk for many companies with underfunded pension plans that caused multiple problems form companies during the 2008 financial crisis. Today, times have changed and employees might experience over their 40 years plus work career different jobs that may include side gigs, the launch of a business or two and potentially a change in their job that could take place as much as 12 times over their career. The benefit for employees of the 401(k) is it gives people the ability to control their retirement. If they do leave an employer, they can take their retirement with them and invest it as they see best. The problem of today with changing jobs so many times is unfortunately these employees decide to take and use the money, even though the penalties and taxes due are sometimes as high as 50%. In my opinion, there is not one good reason why you should be taking your retirement money early as you’ll pay for it many times over if you reach retirement with little or no retirement funds. Believe me, it is hard being older, but it is devastating to be older with no retirement funds. It has been estimated that frequent job changes over a career can cost as much as $300,000 in retirement savings. I like the new system that has made auto enrollment the default for employees starting a new job, but there is talk that they also want to require when a worker leaves an employer that their 401(k) automatically follows them to the new job and it should contain the same contribution rates as well. I think this is a terrible idea as it could get employees that are changing jobs locked into a terrible new 401(k). It could perhaps be additional administrative work for the new employer who already has enough to take care of when you include all the regulations, they have along with health insurance and current retirement plan administration. Being an employer myself one would not believe how much employers have to do already. 

The Unknown Risk of the S&P 500

Many people love investing in the S&P 500 because the recent performance has been very strong. We have talked in the past about the over concentration of technology in the index, but I was shocked to learn that 71% or roughly 351 companies in the index report either non-GAAP income or non-GAAP earnings-per-share. This is dangerous for investors because you’re not comparing apples to apples and 89% of those 351 companies that made adjustments had results that appeared better. Wall Street has forced companies to continue to report higher and higher earnings each year and sometimes each quarter or else the stock gets pulverized. Non GAAP numbers were supposed to be allowed to explain extenuating or extraordinary circumstances like a factory fire or a sale of a division, but companies have abused the rule and exclude items like stock based compensation, amortization of intangible assets and currency fluctuations. The one that bugs me the most is restructuring charges that occur every year. For example, Oracle has had a restructuring charge for the past five years. Unfortunately, the SEC is absent on enforcing the rules and non-GAAP earnings have just about become the standard. The problem for investors is with no standard, you cannot compare true earnings of a company. If you have been investing as long as I have, you’ll remember the last time the abuse of non-GAAP earnings was during the tech boom and bust. Some people say we are too conservative with our investing and we are missing out on some big gains, but I do believe fundamental investing and understanding the true numbers of a company is far safer and it should produce better returns in the long run.

Financial Planning: What is the Net Investment Income Tax?

The Net Investment Income Tax (NIIT) is a 3.8% federal surtax that began in 2013 under the Affordable Care Act, targeting high-income individuals. It applies to any net investment income that exceeds a single taxpayer’s modified adjusted gross income (MAGI) of $200,000 or $250,000 for married couples filing jointly. Crucially, these thresholds are not indexed for inflation, so while they may have seemed high in 2013, today they would equal roughly $270,000 and $337,500 in 2025 had they been indexed for inflation, meaning more taxpayers are caught by the tax over time. Net investment income includes interest, dividends, capital gains, rental income, passive business income, and the earnings portion of non-qualified annuity distributions. While non-investment income sources such as wages, IRA withdrawals or conversions, and active business profits aren't directly subject to NIIT, realizing large amounts of those sources can push your MAGI above the threshold, thereby exposing your investment income to this additional tax.  Also keep in mind, most investment income is still taxed as ordinary income as well. Only long-term capital gains and qualified dividends receive the lower capital gain tax treatment, but all investment income may trigger the NIIT if income exceeds the thresholds.

Companies Discussed: Fiserv, Inc. (FI), Pinterest, Inc. (PINS), Duke Energy Corporation (DUK) & General Mills, Inc. (GIS)

After seeing headlines from several media outlets, I was worried May retail sales were slowing to a problem point, but I would say they actually looked quite strong. Compared to April, sales did fall 0.9%, which was larger than expectations for a 0.6% decline. It’s important to point out though that consumer rushed to auto dealers in April to try and beat the tariffs. This led to a 3.5% decline in motor vehicle & part dealers when comparing sales in the month of May to April. Gas stations have also seen declining sales largely due to lower gas prices and actually fell 2% when compared to the previous month. Excluding these two categories, sales would have fallen just 0.1% when compared to April. While the month over month numbers point to a slowing consumer, when we look at the annual comparisons the numbers are impressive. Headline retail sales climbed 3.3% compared to last May, but if we exclude motor vehicle & parts dealers & gas stations, sales climbed 4.6%. It was largely impacted by the 6.9% annual decline at gas stations. Areas of strength in the report included nonstore retailers, which were up 8.3%, food services & drinking places, which were up 5.3%, and furniture and home furnishing stores, which were up 8.8%. Overall, I’d say this report still shows a healthy consumer. I am still looking for the consumer to slow, but I believe people still have the ability and desire to spend in this economy, which should allow for continued growth, albeit at a slower rate.

Why are big retailers looking at issuing stable coins of their own?

Stable coins seem to be the new buzzword for 2025. It seems at least once a week when I pick up the Wall Street Journal, I see something about stable coins. I recently read that Walmart and Amazon may be looking into using stable coins to get away from using traditional payment systems, which is costing billions of dollars in fees each year. This includes interchange fees that occur when customers make purchases using their credit cards. If you’re not sure what a stable coin is, briefly, it is a coin that is supposed to be backed by a one-to-one exchange ratio with dollars or other government currencies. In other words, reserves of cash and dollars would have to equal the value of the stable coins that were in the market. Who would be hurt most by this? Visa and MasterCard, who collect billions of dollars in fees from the merchants, would likely be most at risk. I believe if the stable coins were to become a reliable source of transactions, you will see huge declines in the stock prices of Visa and MasterCard. Merchants have tried in the past to somehow get around the card-based systems from Visa and MasterCard, but each time they have failed. I personally still don’t have a clear comfortable feeling or understanding of stable coins, which is true of many regulators and others as well, but it does appear new technology is coming and if Visa and MasterCard are replaced, I wonder who will get the benefit of those billions of dollars in transaction fees? Will it be the retailer or the consumers?

ChatGPT and Perplexity are hurting the Internet

You may not think about it, but Alphabet’s Google search engine is seeing huge declines. This is not just hurting Google, but it also hurts many companies who get their business from people searching on Google. This could have a major impact on companies like TripAdvisor as it gets 58% of its global visits from search. If people get the answer, they need right away from ChatGPT, there’s no need to continue searching and you’ll not see any other ads directing you to other sites that may want to do business with you. Many companies from Netflix to US travel and tourism companies are seeing declines in traffic to their websites by 10 to 20% from one year ago. For example, search referrals to top U.S. travel and tourism were down 20% year over year last month and news and media sites saw a decline of 17%. ChatGPT had 500 million weekly active users in March and that was up almost 70% from the 300 million they saw in December. The reason this is hurting Internet search is since you get your answer from one platform, you close the book and move on. You don’t need to do any more searches on other sites. Google‘s lawsuit for being a monopoly with the federal government will still not disappear even though things have changed as they are being penalized for what they have done in the past. I have noticed when I’m using Google now the AI search function now pops up. The big question is will this help Google retain their search business? This is extremely important considering more than half of Alphabet’s business still comes from Google search ads. For investors, you may want to be aware of how much business the company you’re investing in gets from search off the Internet because there could be a decline in the business if it is a large amount. One company that could benefit from the decline in search is Meta. This would come from the Facebook and Instagram platforms because that’s still a way for businesses to be online and in front of potential new customers and clients. There’s still some concern on copyright infringement from many companies and this could be something that really hurts the advancement of AI. Are you finding yourself using AI more and doing less Google searches?

Financial Planning: The “Widow’s Penalty”

When a spouse passes away in retirement, the surviving spouse typically transitions from filing taxes jointly to filing as a single taxpayer in the following year, a shift that often triggers what’s known as the “widow’s penalty.” This penalty arises because single filers face higher tax rates at lower income thresholds and receive a smaller standard deduction, which can significantly increase their tax liability even if their income stays the same. To make matters worse, household income often drops after a spouse’s death.  For example, if both spouses are collecting Social Security, only the higher of the two benefits continues. This combination—less income and higher tax rates—can lead to a surprising and painful spike in effective tax burden and reduction in cashflow. To mitigate this risk, couples can take proactive steps such as performing Roth IRA conversions while both spouses are alive to lower future taxable income, carefully coordinating Social Security claiming strategies to maximize long-term benefits, and planning pre and post death retirement withdrawals to keep cashflow consistent. Thoughtful retirement planning can help soften the financial blow and preserve more wealth for the surviving spouse.

Companies Discussed: Adobe Inc. (ADBE), T-Mobile US, Inc (TMUS), Jack in the Box Inc. (JACK) & Celsius Holdings, Inc. (CELH)

I remember using that same terminology back before the tech bust about 25 years ago. I was maybe a little bit early back then, but the house of cards collapsed. The more I read about alternative assets the more I scratch my head and ask how is Wall Street getting away with this? In the end, I believe the small investor will end up paying dearly for investing in these alternative assets. I learned something new over the weekend, a company called Hamilton Lane Private assets can buy private stakes from other holders at a discounted price, but then they can magically increase the value to the net asset value. This also reminds me of the mortgage crisis in 2008 with collateralized mortgage obligations better known as CMO‘s that also had major difficulties. Hamilton Lane Private assets can disregard the discounted price they paid no matter how they paid for it, even if it was in a competitive auction and again mark it up to net asset value. In 2024 there were $162 billion in secondary deals with an average discount of 11%. My question is how can they magically create $18 billion of value on those secondary deals. The incentive fees that private equity firms like Hamilton Lane earn range from 10 to 12 1/2%. If it sounds complicated, it is and if you don’t understand something, you should not be investing in it no matter how simple your broker tries to make it sound. The greed on Wall Street appears to be running rampant, I would highly caution investors to avoid any type of private equity in their portfolio.

Tariffs Are Still Not Impacting Inflation

The May Consumer Price Index, also known as CPI, showed little impact from tariffs. Headline CPI came in at 2.4%, which was right in line with expectations and core CPI, which excludes food and energy, came in at 2.8%, which was actually below the expectation of 2.9%. The headline CPI continues to remain softer than core CPI due to falling energy prices. Compared to last year, energy prices were down 3.5% and gasoline in particular fell 12.0%. The core prices do remain a little bit stuck at the 2.8% level considering it was at that level in both the March and April reports as well, but considering the concern around tariffs I would say this was a really strong report. It will be interesting to see the coming months as economists are pointing to the fact that companies brought in excess inventory before the tariffs were implemented so they are still working through pre tariff inventory and have not needed to raise prices yet. I do wonder if inflation does not substantially increase at what point will economists say that the tariffs maybe aren’t as impactful as they once thought? My belief remains that we will see a small uptick in inflation in the coming months, but there are other forces reducing inflation in some areas so I think it will be more muted than many believe. 

Health and Human Services Is Receiving a Major Makeover

Back in the 60s, the world looked to America’s health regulators for guidance because they had a reputation for integrity, scientific impartiality and a strong defense of patient welfare. Today and for probably the last couple of decades, HHS has lost trust among many people. This week, a major shakeup of the advisory committee for immunization practices known as ACIP is retiring all 17 of the current members on the committee. In the past, the committee had many persistent conflicts of interest and approved every vaccine that came through. The committee met behind closed doors and without transparency the public had no faith in their decisions. Some of the members had financial stakes or received substantial funding from the pharmaceutical companies. I’m happy to report with all 17 of the committee members being forced into retirement we should see big changes on the approval of vaccines and hopefully in a few years, the HHS and the committee can regain public trust. This could have an impact on some pharmaceutical stocks if vaccines go through a more rigorous approval process. 

Financial Planning: What If There’s a Recession While in Retirement?

With 8 in 10 Americans already changing their spending habits and 58% expecting a recession, it’s clear that economic uncertainty is weighing heavily on people’s minds. But the reality is if you're retiring soon, or already retired, you should assume you'll face multiple recessions, market corrections, and bear markets during your retirement. It’s not a matter of it, but when. Historically, recessions occur about every 6 to 10 years and typically last 10 to 18 months. Market corrections, defined as a drop of 10% or more, happen about once every 1 to 2 years, and bear markets, declines of 20% or more, occur roughly every 5 to 6 years, lasting on average about 10 months, though the recovery to previous highs can take up to 2 years or more depending on the severity. The point isn’t to try and time retirement around these events, it’s to build an income strategy that expects them. A well-structured retirement income plan includes diversified investment portfolio that will provide long-term growth, cash reserves to avoid selling investments at a loss, a sustainable withdraw rate, and flexibility to adjust withdrawals from various sources when needed. By accepting volatility as a normal part of retirement, you can build a plan that weathers it and sleep better when the markets are volatile.

Companies Discussed: Lululemon Athletica Inc. (LULU), Petco Health and Wellness Company, Inc. (WOOF), Brown-Forman Corporation (BF.B) & DocuSign, Inc. (DOCU)

Headline nonfarm payrolls increased 139k in the month of May, which was above the estimate of 125k, but below April’s reading of 147k. A big negative in the report was the fact that March and April saw negative revisions that caused payrolls in those months to decline by a combined 95k versus what was previously reported. Even with that, if you zoom out and look at the big picture the economy is still adding jobs at a healthy rate given the fact that the unemployment rate has remained at 4.2%. I would also say it was a big positive that the private sector saw good growth since federal government payrolls declined by 22k in the month of May and are now down by 59k since January. I still expect losses to accelerate in the coming months for government payrolls since employees on paid leave or receiving ongoing severance pay are still counted as employed. Areas that saw major growth in the month included health care, which added 62k jobs and leisure and hospitality, which added 48k jobs in the month. Many of the other major industries saw little change. Wages were also positive in the month for workers as average hourly earnings grew 3.9% compared to last year. This was above the forecast of 3.7% and last month’s reading of 3.8%. I believe this is a good level for wage growth as it is healthy for workers, but not overly concerning on the inflation front. I would say this jobs report did little to change the narrative on the economy as it showed it remains healthy, but it definitely appears to be slowing. 

Office space may be harder to find in the coming years 

For the first time in at least 25 years, office conversions and demolitions will exceed new construction, which means there will be less space available. CBRE Group found that across the largest 58 U.S. markets, 23.3 million square feet of space will be demolished or converted to other uses by the end of this year while just 12.7 million square feet of space is expected to be completed by developers in those markets. We do have an office REIT in our portfolio and they recently talked about how leasing has continued to exceed expectations. I continue to believe the office has a valuable place in business and we have continued to see more and more companies implement return to office mandates. With less supply out there and demand remaining strong, we should see owners of office space benefit from stabilizing rents and increasing prices in the coming years. On the other side of coin, I have continued to express concern about the long-term dynamics for multifamily housing due to the construction boom in the space and potential oversupply. It’s not just the new construction though as developers have another 85 million square feet of office space being readied for conversion in the next few years. This comes after office conversations to multifamily residences that have generated roughly 33,000 apartments and condominiums since 2016. It is estimated by CBRE that each conversion on average produces around 170 units. As a contrarian investor I many times like to go against the grain. With that being said I am definitely much more interested in the office space over the residential space at this point in time.  

 Facebook scams are out of control 

There’s no way of tracking the exact number of scams or the dollar amount lost from scams on Facebook and Instagram, but JP Morgan Chase said between the summers of 2023 and 2024 they accounted for nearly half of all reported scams on Zelle. An internal analysis from 2022 found that 70% of newly active advertisers on the platform are some forms of scam or low-quality products. Meta, the owner of Facebook and Instagram, does over $160 billion in advertising and is hesitant to put any restrictions that could prevent growth in their ad business. In 2024, the Wall Street Journal discovered documents that advertisers can be hit with anywhere between eight and 32 automated strikes for financial fraud before their accounts are banned. On top of that, Facebook Marketplace, which is its online secondhand market, has now passed Craigslist as the most heavily used platform for free classified ads and it has become a great place for scams. The scam that most people fall for is the sale of pets. This comes even though Meta bans the peer-to-peer sale of live animals. Meta has as argued in court it is not their legal responsibility to deal with the issue. Section 230 in the US telecommunications law relieves platforms like Facebook and Instagram from liability of users who create their own content. This is currently being tested by an Australian mining billionaire because Facebook failed to remove fraudulent investment advertisements that used his image and AI cloned voice. Hopefully he wins the case. In the meantime, I would have to recommend that people stay away from using Facebook or Instagram for buying from advertisers on their platforms because you could be dealing with someone from China, Vietnam, or the Philippines, who have stolen pictures of a familiar company that you think you know, even including its address. And once you give them your credit card information or any other financial information, they have you and your problems will begin.

Financial Planning:  Retirement Savings Rate Hits Record High; How Do You Compare? 

The average 401(k) savings rate, including employee contributions and employer matches, has reached a record high of 14.3%, nearing the widely recommended target of 15% for a secure retirement. This milestone reflects growing awareness of the importance of long-term financial planning, especially as traditional pensions continue to disappear. However, the ideal savings rate isn’t one-size-fits-all. Individuals who begin saving in their early 20s may be able to retire comfortably with a lower contribution rate, while those who delay investing until their 30s or 40s often need to save well above 15% to catch up. Starting early allows compound interest to do more of the heavy lifting, highlighting the value of consistent, proactive saving from a young age. For example, someone who starts at the beginning of their career might be okay saving as little as 7% of their income and still retire on time. This means if they save the minimum necessary to receive the full company match (5% contribution + 4% match = 9%) they likely will be fine. However, waiting until their 40’s may require a savings rate of 25% or more to produce the same retirement income. 

Companies Discussed: Salesforce, Inc. (CRM), The Gap, Inc. (GAP), Wells Fargo & Company (WFC) & Steel Dynamics, Inc. (STLD)

With the high cost of housing and higher interest rates, people trying to get their first home dropped to a record low around 23% in 2024. The average age of the first-time homebuyer has increased 10 years over the historical average to 38 years old. The median income is now $97,000 and the first-time home buyers are coming up with an average down payment of 9% of the value of the home. Many of these young buyers are using FHA loans, which require a very small down payment and according to research roughly 30% of all FHA mortgages have a debt service ratio of over 50%. This means more than half of these buyers’ incomes is going toward servicing debt. This could be a hard pill to swallow for young buyers with not much money left over for luxuries like vacations and new cars. However, if when they buy the home, they understand that if they really tighten their belts for the next three to four years, they will probably be fine. New home builders are doing what they can to try and get rid of the largest inventory of unsold homes on their lots since 2009. The median price of a new home is currently less than one percent higher than the median price of existing properties, which historically has seen a 17% premium. The home builders are using profits from their homes to buy down mortgages. Even though the 30-year mortgage was recently around 6.8%, home builders can buy these mortgages down which led buyers of new homes to a rate around 5%. Buying down these rates has cost home builders about 8% of the purchase price of the home. This reduces their profits but better than the alternative of sitting on unsold homes with a carrying cost for the builder. I don’t see this situation getting better anytime soon because I’m not looking for a large decrease in mortgage rates and incomes over the next year will probably increase somewhere around 3 to 4%. We continue to believe the rapid increase in the price of homes over the last few years will not last and it will now take some time to get back to normal market. Maybe we will see a better real estate market in 2027 or 2028.

Is Bitcoin coming to your 401k?

I have been concerned with bitcoin and crypto as a whole for several years for many reasons including fraud, illicit activity, and the fact that there is really no way to derive an intrinsic value for it since there is no earnings, cash flow, or anything really backing the asset class. I was disappointed to see the current Labor Department removed language that cautioned employers to exercise “extreme care” before making crypto and related investments available to their workers. They cited “serious concerns” about the prudence of exposing investors’ retirement savings to crypto given “significant risks of fraud, theft, and loss.” While this isn’t necessarily a full-on endorsement for placing crypto in 401k plans, it definitely seems like the administration is continuing on its path to try and normalize crypto as an established asset class. Even with this change in language I would be surprised to see a huge surge in cryptocurrencies within 401k plans. Ultimately, ERISA bestows a fiduciary duty on employers and company officials overseeing 401k investments and that means legally employers must put the best interests of 401(k) investors first and act prudently when choosing which investments to offer (or not offer). Given the extreme volatility within crypto I believe it would be a huge risk for these companies to offer it as it could open them up to lawsuits if there are major declines. We’ll have to see what other changes are made as time progresses, but I don’t believe crypto has any place within a 401k plan at this time.

Inflation report shows continued progress

The personal consumption expenditures price index, which is also known as PCE and is the Federal Reserve’s key inflation measure, showed an annual increase of just 2.1%. Core PCE, which excludes food and energy, showed a gain of 2.5%. Both results were 0.1% below their respective estimates. Overall, inflation has continued to cool and is now quite close to the Fed’s 2% target. The question that remains is how will tariffs ultimately impact inflation? An economist from Pantheon Macroeconomics said that he believed core PCE would peak later this year between 3.0% and 3.5%, if the current mix of tariffs remained in place. I would say it is difficult to forecast the tariff impact since we don’t know what will ultimately be passed on to the end consumer. It will definitely be interesting to see what numbers look like in the coming months, but ultimately, I believe most of the concerns around inflation are overblown and even if the rate for PCE is around 3%, I don’t see that as being problematic for the economy.  

Financial Planning: What it Means to be an Accredited Investor

An accredited investor is someone who meets specific income or net worth thresholds—such as earning over $200,000 annually ($300,000 with a spouse) or having over $1 million in net worth excluding their home—and is allowed to invest in private securities offerings not registered with the SEC. These investments, which include private REITS, private equity, hedge funds, and startups, often promise high returns but carry significant risks such as illiquidity, limited transparency, and the potential for total loss. While many of these offerings are only available through fiduciary advisors—who are legally obligated to act in their clients’ best interest—investors must still exercise caution. Fiduciary duty applies only in certain contexts (such as investment advice) and may not extend to related areas like insurance or commission-based products. Additionally, what qualifies as “acting in your best interest” is often subjective and open to interpretation. Working with a fiduciary does not guarantee protection, and investors should remain vigilant, ask questions, and independently evaluate any recommendation. Also, private investments aren’t necessary better than public investments, so just because you qualify as an accredited investor doesn’t mean you should be investing in private securities.

Companies Discussed: Regeneron Pharmaceuticals, Inc. (REGN), Intuit Inc. (INTU), Target Corporation (TGT) & Toll Brothers, Inc. (TOL)

Last week, Moody’s announced it downgraded the United States sovereign credit rating from AAA to Aa1. While a downgrade is important to understand and can have negative consequences for interest rates, this downgrade did not seem too problematic. I mainly say that because Moody’s was the last major credit rating agency to have the U.S. at the highest possible rating. The first downgrade carried the most weight in my opinion as it had the highest shock value. Standard & Poor’s was the first to move in August 2011 and the stock market fell 6.66% the session after the announcement. Fitch then lowered its rating on U.S. debt in August 2023 and the stock market lost 1.38%. After this Moody’s downgrade the stock market seemed to have little reaction as it actually had a small increase following the news. While this downgrade may sound scary, I don’t believe it will have long term consequences considering the fact that US debt is still viewed as a very safe asset. With that said, the US does need to address the growing deficit problem as further downgrades from these credit agencies could cause problems.

Demand for electric vehicles is falling dramatically

Electric vehicle sales in the month of April declined 5% while the overall car market grew by 10%. This is only the third monthly decline in four years for electric vehicles. The reason for the decline is consumers are watching their spending more than they have in a while and many of the deals and promotions for electric vehicles have disappeared. It was not just Tesla who had difficulty because of Elon Musk’s political association, but even Kia, Hyundai and Ford experienced drops. Rivian was hit hardest on their R1T pickup truck as it saw a 50% decline in sales for April. With some of the crazy electric vehicle lease deals gone, consumers are also asking the question about charging related concerns. There are some car buyers who were considering buying an electric vehicle but they said it’s not worth the stress of charging your vehicle all the time. It’s just much easier to pull into a gas station that is always easy to find. This is only one month of electric vehicle sales and not a trend that has been going on for a while, but with the increased production of oil from OPEC and a large potential supply of oil in the future, gas prices should decline which takes away the incentive of paying more for an electric vehicle.

High risk, private market investments are showing up in more 401(k) plans

Another big 401K provider called Empower who oversees $1.8 trillion in 401(k) assets for about 19 million people has decided it will start allowing private credit, equity and real estate in some of the accounts they administer later this year. I think this is a terrible idea for investors. I have seen the back end of these private deals and many times investors have made no money from them and can only get out a little bit of their money at a time, while they are suffering from low returns and high fees. No surprise Wall Street loves these private market investments because of high fees, which range anywhere from 1% to 2% of the portfolio balance on an annual basis. One way they are trying to sneak in the private market funds is with a 10% allocation in the popular target date funds. This is pretty sneaky because you may be thinking you’re getting a pretty conservative stock and bond fund that becomes more conservative as you get older, but with a 10% allocation in these private assets I believe it will increase the funds risk and lower the returns going forward. As always, the bankers on Wall Street only care about generating more fees, and don’t care if investors lose money as long as they bring in their billions of dollars in profits. If you see these in your 401(k) options, cross them off the list and stick to the traditional long-term investments that have worked for so many years now.

Financial Planning: Who Benefits from the new SALT proposal?

The current SALT deduction allows taxpayers who itemize to deduct up to $10,000 of certain state and local taxes, most importantly their state income taxes and property taxes, from their federal taxable income. The new proposal in the House bill would raise this cap to $40,000 for households earning under $500,000, with a phaseout that fully eliminates the expanded deduction at $600,000. Married and single tax filers alike with incomes over $600,000 would be subject to the $10,000 SALT limit. This change is intended to benefit middle- and upper-middle-income taxpayers in high-tax states, while limiting the benefit for higher earners. The proposal also includes annual 1% inflation adjustments beginning in 2026. If the bill is signed into law in its current form, the larger deduction would apply beginning in tax year 2025. If passed, tax payers who make less than $600k in high tax states who own a home with a mortgage will see the biggest tax benefit and they may want to adjust their tax withholdings or estimated tax payments to account for it. However, the bill has not passed the Senate, and the final terms are likely to change.

Companies Discussed: CAVA Group, Inc. (CAVA), First Solar, Inc. (FSLR), Levi Strauss & Co. (LEVI), & UnitedHealth Group Incorporated (UNH)

Exports from China have dropped dramatically which has weighed on China’s economy. This has caused protests due to lost jobs and wages in their economy. Exports from China to the United States dropped 20% in April, but China did pick up exports from other countries like Indonesia, Thailand and Africa. While this may help a little, the export dollars for China to these other countries pales in comparison to the mighty consumption of the US consumer. China’s economy depends on exports considering the fact that in 2024 1/3 of GDP growth came from exports. The Chinese government is panicking a little bit with the central bank in China saying it would cut interest rates and inject more liquidity into the financial system. Some factories in China are pausing their production and laying off workers until things pick up again. Goldman Sachs estimates that roughly 16,000,000 jobs in China come from exports to the United States. With the news that tariffs are being lowered for 90 days it will be interesting to see how companies and these countries react. The US will still have a 30% tariff on many Chinese products, but that is much more manageable than the 145% that was in effect. It is important to remember this is a pause and that rhetoric could pick back up as negotiations continue. I do believe a reescalation in the trade war would really hurt the Chinese economy more than ours and I’m optimistic we will see a trade deal reached, but it will likely take time. I believe it is worth waiting for as a better trade agreement will benefit us for decades down the road.

Inflation continues to cool

The headline Consumer Price Index (CPI) for the month of April came in at a 12-month rate of 2.3%, which was below the estimate of 2.4% and marked the lowest reading since February 2021. Core CPI, which excludes food and energy, came in at 2.8% which matched expectations and was in line with March’s reading. Energy was a major help to the headline number as it fell 3.7% compared to last year with gasoline in particular down 11.8% over that timeframe. While this is all great many economists are worried about what the next few months will look like on the inflation front due to tariffs. Joseph Gagnon from the Peterson Institute for International Economics said he believes a 10% average tariff rate would add as much as 1 percentage point to the CPI after about six to nine months. While I would agree with the idea that inflation will likely increase in the months ahead, I still don’t believe it will be to a problematic level for two reasons. First, we should remember there are several players that can absorb the costs from these tariffs. You have to consider the companies importing products can reduce their margin, there would be shipping/transportation companies that can reduce their costs, the company’s manufacturing products can lower their prices, and then yes, the consumer is the last piece of the puzzle that could now have higher prices. With all that said I don’t believe a 10% tariff would result in a 10% increase in prices due to all the places in the supply chain that can absorb some of the cost. The second reason I wouldn’t be overly concerned is I wouldn’t see the tariff as embedded inflation and it could likely be viewed as a one-time lift to prices that would then be lapped next year. Nonetheless this story will be interesting to monitor in the coming months to see what the actual impact is, but I do remain optimistic about our economy and the inflation outlook.

Could artificial intelligence create more jobs?

Many people think that artificial intelligence, also known as AI, is going to reduce jobs for people. The CEO of IBM, who admits that AI has replaced hundreds of workers, said it has created more jobs than it has eliminated. He went on to say it frees up investment that the employer can put to other areas that include such jobs as software engineering, sales, & marketing. Normal things like creating spreadsheets and other routine tasks can be done with artificial intelligence, but it still takes a human to do the critical thinking on how to use that data to enhance business for the company. If you’re working for a company and you don’t have much contact with other workers that relate to your job, your job could be at risk of being replaced by AI. Make sure your job involves using data to work with other people, which should give you job security in the growing world of AI.

Oil at $50 a barrel?

There is talk that we could see oil drop from around $60 a barrel down to $50 a barrel, which would be a big benefit for consumers at the pump. The reason for this is that OPEC and its allies are increasing production of oil faster than anyone expected. By June they could be producing nearly 1,000,000 more barrels of oil per day compared to current levels. The United States is currently the number one producer of oil in the world with production of nearly 15,000,000 barrels per day. If you’re wondering does that meet our consumption? It does not as that stands at 19.6 million barrels per day. OPEC is not taking this sitting down and they want to regain market share. To do it appears they’re willing to see lower oil prices. The reason why oil prices are expected to drop is that the demand is about the same as it was just one year ago, so the increase in production means we’ll probably have an oil glut for a while. At $50 a barrel most oil companies can still make money off of producing oil, but US oil companies might stop doing stock buybacks and could no longer build new wells. What this would do is hurt supply in the future and oil would turn around and increase once again. If you invest in oil companies, you have to realize that supply/demand of oil will rule the price of the stock. But fortunately, most of the big oil companies pay a good dividend, which makes it a little bit easier to hold on when the stocks have a temporary decline. For consumers, this means the average cost per gallon of gasoline across the country, which is now around $3.20 per gallon, could drop to levels around $2.50 per gallon. Consumers in California may not see declines in the prices at the pump as California continues to drive refiners out of the state and reject refined gasoline from other states that do not meet a ridiculously high standard. If you want to blame someone for higher gas prices in California you can blame the governor and Sacramento for ridiculous policies on gasoline.

Financial Planning: Trusts and Retirement Accounts Do Not Mix

Naming a living trust as the beneficiary of a retirement account—such as an IRA or 401(k)—is generally not a good idea due to potential tax inefficiencies and administrative complexity. Under the SECURE Act, the "stretch IRA" option has been largely eliminated for most non-spouse beneficiaries, and replaced with a 10-year rule requiring the entire account to be withdrawn within a decade of the original owner's death. If a trust is named as the beneficiary and it isn’t specifically drafted to be the beneficiary of a retirement account, it may not qualify for this 10-year treatment and could face even faster distribution requirements, such as a 5-year distribution period, accelerating taxes significantly. Instead, it’s typically better to name individual beneficiaries directly on retirement accounts to preserve flexibility and minimize tax impact. For those needing control over distributions—for example, to protect minor children or spendthrift heirs—a carefully drafted trust designed to meet IRS requirements should be used with the help of a qualified estate planning attorney. For most other cases, listing actual people or charities as beneficiaries is a much simpler and more efficient strategy.

Companies Discussed: Dick’s Sporting Goods, Inc. (DKS), Charter Communications, Inc. (CHTR), Krispy Kreme, Inc. (DNUT) & Lyft, Inc. (LYFT)

When I’m out in public many times people ask me what my opinions are when it comes to investing, the markets or individual stocks. I have to say the one stock that people seem to be asking the most about recently is Palantir Technologies, their ticker symbol is PLTR. I believe I’m asked about this company because investors look at the hype of the past performance and the fact that this stock is up over 1,000% since going public in 2020. That creates excitement for investors, but is it worth buying now? The company currently trades around 60 times next year’s estimated sales, and again that is sales not earnings! That makes it the most expensive stock in the S&P 500. There are signs that growth outside of the US is slowing and I don’t like that they have three unnamed companies that accounted for 17% of the total revenue last year. Usually hype like this goes the same path, which ultimately results in large losses for buyers at this point in the cycle. A more recent example comes from the company Snowflake. In 2021, Snowflake hit an all-time high over $400 per share. Today that stock is down nearly 60% and trades around $167 per share. You don’t hear much about it now, but I remember back in 2021 many people were asking about this company as well. I’m also not thrilled with Palantir’s CEO, Alex Karp, who during an interview just a few months ago had some pretty nasty comments about analysts who don’t agree with him on the stock price. He said “I love the idea of getting a drone and having light fentanyl laced urine spraying on analysts who’ve tried to screw us.” Maybe I’m old school, but I don’t think that is anyway for the CEO of a company of any size to talk about anyone that does not agree with the CEO’s position. Especially considering many times they aren’t knocking the business, just the fact that this company’s valuation is extremely crazy! I will also try my best to refrain from making any comments on Mr. Karp’s hairstyle, but it just seems a little bit outlandish for a CEO to have that type of hairstyle. As far as the stock goes, maybe the craziness will continue and perhaps it does go higher, but if people ask me if they should buy, sell, or hold the stock, I would definitely say sell! I guess I now have to be careful of drones flying above my head that could be spraying fentanyl laced urine on me.

Good news, only 26% of big money managers are bullish

A recent poll from Barron‘s magazine, which they conduct twice a year, found that only 26% of big money managers were bullish and thought stocks would go up while 74% were either neutral or bearish on stocks. They said 32% of respondents were bearish and that was the highest percent since 1997 while the 26% that were bullish marked the lowest reading since 1997. I think Barron’s Magazine is a good source of information, but I was disappointed that they did not list the years of experience of the managers that were being polled. The reason for my concern is that the last big negative in the economy and the market was in 2008, which was 17 years ago. A current manager that graduated school at age 23 would now be 40 years old and they did not experience managing money through 2008. Living through and managing money through a challenge like that provided me with extremely valuable lessons that younger managers would not understand. But why is this negative report a good sign in my opinion? Their current asset allocation is only 64% in equities with 36% in other investments like fixed income and cash. They will not stay bearish forever and if they change direction in the next 6 to 12 months, they will start buying equities again, which will push up prices. If you’re looking for value, the least attractive sectors were energy, real estate, and utilities. I have talked about my concerns around the Magnificent Seven and now only 10% of these managers think the Mag Seven will lead the market over the next six months. Even looking out 12 months only climbed 32% thought the group would lead the market. When asked about the strength of the US dollar going forward 12 months, 68% of the money managers said it will be weaker, which I agree with. Only 15% of the managers think it will be stronger a year from now. These surveys also provide an interesting insight into what other money managers are thinking.

Apple’s stock continues to amaze me

There seems to be so much negative news that continues to come out against Apple, but the stock continues to remain relatively steady given the amount of negativity. We all know about the tariffs and the delayed AI rollout, but I was definitely concerned by a couple announcements that would have large impacts on Apple’s service revenue. This segment has been a bright spot for Apple, but in the most recent quarter it missed expectations and grew at just 11.6% compared to last year. The big concern I have is around Alphabet’s estimated payment of around $20 billion annually to be the default search engine. There is concern if this will hold up given the ruling that Alphabet holds a monopoly and the need for remedies, but also this week Apple executive, Eddy Cue, added additional concerns. He stated the searches in Apple’s Safari browser fell for the first time in April, something that has never happened in 20 years. He then added that the iPhone maker is looking at adding AI search options to the Safari browser. If they did this, would Alphabet really want to keep paying $20 billion a year for that right? I don’t think so! The other major concern that seemed to get little attention was the fact that in a recent ruling a judge ordered Apple to immediately stop imposing commissions on purchases made for iPhone apps through web links inside its apps. This has enabled developers like Amazon and Spotify to update their apps to avoid Apple’s commissions and direct customers to their own website for payments. This commission rate was around 27% for Apple and it could cost Apple billions of dollars annually. All this comes with the fact that Apple still trades around 25x 2026 earnings even though revenue is only estimated to grow low to mid-single digits. In my opinion, Apple really needs some good/exciting news to get this stock moving higher and at this time I don’t see where that is going to come from.

Financial Planning: Breaking Down Retirement Income Taxation Retirement income varies widely in tax treatment, with some sources being far less tax-friendly than others. In order from worst to best, pension payments and traditional IRA withdrawals are among the least favorable—they're fully taxable as ordinary income at both the federal and state levels. Interest income from bonds, CDs, and savings accounts, as well as annuity earnings from non-retirement accounts, are also taxed as ordinary income at both levels and can trigger the additional 3.8% Net Investment Income Tax (NIIT) if income thresholds are exceeded. Rental income is similarly taxed but allows deductions and depreciation to offset some of the tax burden. Long-term capital gains and qualified dividends receive preferential federal tax rates—as low as 0%—but are still taxed as ordinary income in California and many other states. Social Security is partially taxed at the federal level—between 0% and 85% is included as taxable income depending on total income—but is not taxed in most states, including California, making it relatively tax-favorable. Roth IRA withdrawals are the most tax-friendly, being completely tax-free at both the federal and state levels if qualified. Understanding how each income type is taxed can help guide investment decisions during working years and inform how to structure withdrawals in retirement for optimal tax efficiency.

Companies Discussed: The Scotts Miracle-Gro Company (SMG), Block, Inc. (XYZ), Amazon, Inc. (AMZN) & McDonald's Corporation (MCD)

At first thought with all the craziness of the trade war it sounds like delisting all the Chinese companies from the American stock markets may be a good idea. It is important to know that there are 286 Chinese companies listed on major US stock exchanges. You’ll recognize some of the names like Alibaba, Baidu and JD.com. It is estimated by analysts at Goldman Sachs that US institutional investors currently own about $830 billion worth of Chinese stocks. That is more than two times what the Chinese own of US stocks as that is estimated around $370 billion. But a quick sell off could bring down stock valuations and make it difficult to get out of many of these stocks on both sides. An important piece of information I brought up a couple years ago was the Accountable Act which came to be in 2020. This allows the Securities Exchange Commission to ban foreign companies from trading if American regulators are not allowed to inspect the auditors for three years in a row. I always worry about Chinese companies because of what I call government accounting. They are not held to the same accounting standards there and I believe companies may list financial statements based on what the government tells them. There have been some Chinese companies that delisted themselves rather than going through an audit. I think that tells you quite a bit. My feeling is we should not delist all the Chinese stocks that trade on American stock exchanges under what is known as ADRs, but be sure that the Chinese companies have the same transparency as American companies when it comes to their financial statements. If we can’t get that transparency, then those companies should be delisted. 

Jobs report shows more evidence the economy is in good shape

US nonfarm payrolls grew by 177k in the month of April, which easily topped the estimate of 133k. Jobs remained robust in health care as the sector added 51k jobs in the month of April and employment in transportation and warehousing and financial activities was also strong as the groups added 29k and 14k jobs respectively in the month. Other categories like construction, manufacturing, leisure and hospitality, and retail trade saw little or no change in payrolls, while government declined by 9k jobs in the month. Government jobs are now down by 26k since January, but remember employees on paid leave or receiving ongoing severance pay are still counted as employed. This likely means we will continue to see losses accelerate in this category as the year continues. Negatives in the report included the fact that employment numbers were revised down by a total of 58k in the previous two months. Also, April’s reading was lighter than March’s reading of 185k, but considering the unemployment rate remains at 4.2%, I still see these jobs gains as impressive, especially with all the negativity that people have been discussing. With that said, I still do anticipate weaker numbers in terms of the payroll additions in future months, but if the unemployment rate remains low I don’t see that as a problem. On the inflation front, we also got good news with average hourly earnings rising just 3.8%. I see this as a healthy increase that does not put pressure on inflation like when wages were growing over 5% in 2022.  

Job openings look problematic on the surface

In the March Job Openings and Labor Turnover Survey, job openings totaled 7.2 million. This was below February’s reading of 7.5 million and the estimate, which also stood at 7.5 million. This is still not super concerning to me. We tend to forget how strong the labor market has been and while we continue to see a softening, there is plenty of room before I see cause for concern. Just for reference, job openings in 2019 averaged approximately 7.2 million, in 2018 they averaged approximately 6.8 million, and in 2017 they averaged approximately 6.2 million. Compare that to where we are today and that should give you more comfort. Another area I saw as positive in the report was the fact that quits totaled 3.3 million, which produced a quit rate of 2.1%. This is important because if people were truly concerned about a major slowdown and thought they would not be able to find work elsewhere, I don’t believe they would be quitting their jobs. These quit numbers are still quite close to 2019 levels, which many considered as a very strong economy. That year quits averaged approximately 3.5 million and there was an average quit rate of about 2.3%. Also in the report, we saw layoffs remained quite low at 1.6 million. Back in 2019, layoffs averaged around 1.8 million per month. There is no doubt that uncertainty remains and that will have some impact on businesses and their hiring plans, but in terms of it pushing the economy into a major recession, since we are coming from such a healthy level, I just don’t see that happening.

Are we in the middle of a recession?

The first reading of Q1 GDP showed a decrease of 0.3%. A recession is generally defined as two consecutive quarters of declining GDP, so some may argue we are half way there. Let us not forget in 2022 we did see two consecutive quarters of declining GDP as Q1 declined 1.4% and Q2 showed an advance estimate that was down 0.9%. After further research the second quarter ended up seeing a total reversal and it is now reported to have actually grown by 0.3%. Even with the difficult start, that year ended with a 2.1% growth rate. We also can’t forget that the National Bureau of Economy Research (NBER) makes the official call on recession and they use a broader set of indicators that led them not to declare a recession in 2022. I say all of this because I still believe even if we hit a technical recession, if employment remains strong, I don’t believe we would have an “official” recession. I am still unsure that we will even see Q2 GDP decline and we could also see revisions to Q1 that lift it to a positive reading. I say this because if you look at the actual underlying numbers in the report, it is not nearly as bad as the headline decline. On the positive front, consumer spending actually grew 1.8% in the quarter as services showed a nice increase of 2.4%. Also, private domestic investment saw a surge of 21.9%, this was led by investments in equipment as they grew 22.5% in the quarter. You might be asking with numbers like these how did we see a negative GDP? To start, government spending fell 1.4% in the quarter. This was led by a decline of 5.1% in spending by the federal government. The group as a whole ended up subtracting 0.25% from the headline GDP number. While this was impactful, the real reason for the decline in GDP was trade. Companies were trying to get ahead of looming tariffs and imports surged 41.3%. This compared to an increase of just 1.8% for exports. The huge discrepancy caused the trade component of GDP to decrease the headline number by 4.83%! While the economy is no doubt digesting these trade conversations and the tariffs, I still believe the economy is in alright shape when you look at the underlying numbers. I did also want to mention more good news on inflation as the March headline PCE showed an increase of 2.3%, which compares to last month’s reading of 2.7% and core PCE came in at just 2.6%, which was a nice decline from February’s reading of 3.0%. I believe these numbers will likely increase with the tariffs, but underlying inflation looks to be quite healthy.

Financial Planning: Protecting Yourself from Home Title Theft

Home title theft is a type of real estate fraud where someone illegally transfers the ownership of your home by forging your name on title documents.  This is often done using stolen personal information to file fraudulent deeds with the county recorder’s office. Once the title appears to be in their name, the thief may try to take out loans against the property, sell it to an unsuspecting buyer, or use it in other schemes that could put your home and finances at risk. This crime can go undetected for months if property owners aren’t actively monitoring their title.  Having a mortgage or HELOC on your house can make it more difficult for a thief to steal your title since the bank has a lien against the property, but it is still possible. There are private companies that charge monthly fees to alert you of changes to your home title, but they do not prevent the title from being stolen.  You can also purchase home title insurance that will help pay for legal fees if you have to go to court if your title is stolen.  Homeowners in San Diego County can access a free alternative called “Owner Alert”. Jordan Marks who is the San Diego County Assessor/Recorder/County Clerk was behind this, and it is a great benefit that all San Diego property owners should take advantage of.  This service works by notifying you by email whenever a document is recorded against your property, helping you catch potential fraud early.  Signing up is simple and can be done on the San Diego County Assessor’s website. You just need your name, email address, and parcel number and it provides the same type of monitoring offered by paid services, making it unnecessary to spend money for peace of mind when this tool is already available for free.

Companies Discussed: Zimmer Biomet Holdings, Inc. (ZBH), Take-Two Interactive Software, Inc. (TTWO), Northrop Grumman Corporation (NOC)Alphabet Inc. (GOOG)

Gold has been a great asset to hold over the last year, but I remain a skeptic of investing in gold long term. I personally don’t own any gold nor would I recommend buying gold at this point in time. While the recent gains in the price of gold look attractive, given the fact it is up over 20% so far this year in a difficult market, the long-term results aren’t enticing. There are periods of time where gold has been a strong performer, but trying to guess those periods is extremely difficult. If we look at January 1980 gold reached $850 per ounce, but the important number here is that the inflation adjusted price was $3,486 per ounce. This means it was not until recently when gold hit $3,500 per ounce, we see an all-time high on an inflation adjusted basis and essentially you made no real gain for over 45 years. At the end of the day gold is just a piece of metal worth only what the next person will pay for it. It has no earnings, no interest, no rents. This makes it extremely difficult to value and given the added expenses for trading and holding gold, it just does not make sense to me. I will continue to invest in good strong businesses at fair prices as I believe that is the best strategy for long term wealth creation.

Why is the government supporting universities with large endowments?

I’ve never really thought about this before. I have known that some big universities have multibillion dollar endowment funds, but I did not realize that 658 institutions have approximately $874 billion, which is nearly $1trillion in endowment funds. When I dug a little bit deeper, I discovered that in addition to these universities receiving money from the federal government via grants, some pay little or no income tax and also get a waiver on property taxes. If you’re starting to get a little bit irritated at this point because your hard-working dollars are going to universities like Harvard that has a $53 billion endowment or Yale with a $41 billion endowment, you might be like me and think it’s time that things change. The cost of tuition at Harvard is $57,000 per year and the President makes about $1.3 million a year. The president of San Diego State University has a salary of $531,000 and the cost for one year of tuition is about $8700. I’m sure the students at Harvard do receive a more prestigious education than at San Diego State University, but is it 6 1/2 times better? Do the students that graduate from Harvard make a salary that’s 600% more than a graduate from San Diego State University? I don’t think so. I wondered where money from these endowments goes and basically 48.1% of endowment distributions go to fund student financial aid, 17.7% goes to academic programs and research, 10.8% is used for endowment faculty positions and nearly 17% of the endowment funds are used for other purposes. Wouldn’t it be nice to know what those purposes are? I think we need to take a hard look at what universities have in their endowment funds, their tax benefits and grants, and let’s have more students here in the United States benefit from those billions of dollars to get a good education as opposed to the fat cats in the Ivy League towers of the universities. One other point I found interesting was the investing philosophy for these endowment funds. The goal is to earn around 8% per year and pay out 4.5% to 5% to fund those various expenses. This should then allow the endowment fund to continue growing. A big problem is many have not been able to achieve that goal with only 25% of 152 schools that were surveyed being able to meet the 8% return over the last 10 years. The other concern is if they can’t cut expenses if there is a lack of grants, many endowments are not liquid. Harvard for example had 39% in private equity, 32% in hedge funds, 5% in real estate, 3% in real assets, and just 3% in cash. With all this said I really believe this system should be reviewed to better the entire country, rather than just the Ivy League system.

Could the trade wars hurt home prices?

We are starting to see some cracks in the housing market, such as the delinquency rate on FHA mortgages, which cater to the high-risk borrowers who can’t qualify for a conventional mortgage because they either have a small down payment or weak credit. The delinquency rate for FHA currently stands at 11% according to the Mortgage Bankers Association, it has not been at this level for 12 years. Unfortunately, and we warned against it, but many people have stretched themselves too far financially to get into a home over the last few years. Because it’s only been two or three years since they bought their home, after fees and commissions they may not have much if any equity built up in that home. Another area of weakness that is being seen is with the homebuilders who have really increased their incentives because they have more completed but unsold homes. The builders are getting a little bit worried because they have not seen this many homes sitting on their lots with no buyers since 2009. The average incentives for homebuilders is usually around 5% of the total value of the home, but we are starting to see some incentives around 13% from big builders like Lennar. The volatility of the 10-year treasury, which mortgages generally trade off of, has not been helpful because it has had a wide trading range lately. This then makes it difficult for homebuyers to lock in a good rate. At this point in time, I think I would be waiting to buy a home until maybe late summer. I think there should be some good deals at that point in time as the tariff war should continue to progress and we should have a clearer picture of the economy by that time.

Financial Planning: Why converting 100% of pretax is bad

Roth conversions can be a powerful tax planning tool, but like any tool, using it the wrong way can do more harm than good. One of the most common mistakes we see is the idea that you should convert all of your pre-tax retirement savings, like a traditional IRA or 401(k), to a Roth account. Everyone loves the idea of a tax-free retirement. When you convert money from a traditional IRA to a Roth IRA, you're moving it from a pre-tax account to a tax-free account, but there’s a price, the converted amount is considered income and you must pay ordinary income tax in the year of the conversion. Once converted funds grow tax-free. The best way to think about money in a pre-tax account is that it is deferred income.  It will be taxed, it’s just a matter of when.  When you make contributions to a pre-tax account, you are not receiving a tax deduction, you are deferring income to a future year. When performing a Roth conversion, you are voluntarily deciding to pay tax on that income, even though you don’t have to yet.  This only makes sense if you are able to convert at a lower tax rate than you would otherwise be subject to if you did not convert.  This most commonly happens between the beginning of retirement, typically in your 60’s, and the beginning of your required distributions at age 75. During that period taxable income is generally lower which means conversions may be done at a lower tax rate than when required distributions begin at 75. Required distributions can be a problem because if you have too much in pre-tax accounts, your required taxable distributions may push you into a higher tax bracket and trigger IRMAA.  Roth conversions help this by shifting funds from pre-tax to tax-free, therefore reducing the level of taxable distributions beginning at 75.  However there is an efficient amount that should be converted for every person.  Converting 100% of pre-tax funds means you will likely be in a lower tax bracket after the conversions, and will potentially not have any tax liability at all.  This doesn’t sound bad, but it means you likely paid too much in tax to convert the funds in the first place.  Again, money in a pre-tax account is deferred income that will be taxed.  The goal is to have that income taxed at the lowest rate possible.  If you convert too aggressively you may be settling for a higher tax rate on the money coming out and not receive enough tax-free income from the Roth to justify it.  Instead, structuring withdrawals and conversions to keep your taxable income consistently low all through retirement will result in a higher level of after-tax income.

Companies Discussed: Netflix (NFLX), The Walt Disney Company (DIS), Albertsons Companies, Inc. (ACI) & UnitedHealth Group Inc (UNH)

The heartland states are 20 states pretty much in the center of the country. They have been regaining economic strength over the years and currently about 39% of the US population lives in these states, according to the census bureau for 2024. The population growth in this area was above the rest of the country for the last five years with numbers that have not been seen in over 65 years. Employers in this area grew by 13.2% between 2020 to 2023 and business capital expenditures totaled $76.9 billion in 2023 and have seen an average annual growth of 9.43% since the beginning of Covid. These 20 states on average have established more business-friendly policies along with tax incentives and grant programs that draw businesses to their area. The East and the West Coast just can’t seem to compete with the affordability of states in the middle of America. These mid America states have lower cost for land and utilities are far less being as much as 1/3 less than the rest of the country. This is according to the Energy Information Administration (EIA). The overall cost of living is lower, so wages can also be lower and still provide a good standard of living for their employees. In my opinion, states like California and others need to wake up and realize that perhaps stats in Middle America are on to something with policies that are attracting new residents. It would appear that foreign companies coming to the United States would build and prosper in one of these 20 states rather than states that are against business or have high taxes and other costs.

Consumer actions aren’t matching their words

We continue to see negative surveys about consumer confidence and sentiment, but you wouldn’t think consumers feel bad after looking at the recent retail sales report. March sales climbed 4.6% compared to last year and if gas stations, which fell 4.3%, are excluded the report was even more impressive as it climbed 5.3%. Some of this is likely due to concerns over looming tariffs as consumers pull forward demand before expected price increases. Some areas that are likely more impacted did see large gains as motor vehicle and parts dealers saw an increase of 8.8% and sales at furniture and home furnishing stores climbed 7.7%. With those said gains were quite widespread in the report and areas that would not see a pull forward in demand like food services and drinking places still saw a nice gain of 4.8%. If people were truly worried about the economy, they would not be spending money at restaurants, especially considering the fact that dining out has gotten quite expensive. While I am expecting the tariffs to have a short-term impact on the economy, we must remember the consumer is coming from a point of strength with relatively low debt levels, a low unemployment rate, and balance sheets that have seen asset prices significantly increase over the last several years. I continue to believe that our economy and the consumer will be able to whether this volatility, but the numbers will likely decelerate from here. We will continue to watch these reports closely, but I again remain confident we will get through the concerns about these tariffs.

Are TV networks tapped out on sports deals?

Last year Disney signed a $2.6 billion a year deal with the NBA; however, ESPN said goodbye after a 35-year relationship with the MLB where they were paying $550 million a year for their package of games. One area of growth that surprised me was Formula One car racing as over the last six years it has seen viewership double to 1.1 million viewers in a season. Liberty Media, who owns F1, is trying to get a rights package between $150-$180 million a year and all they’re hearing is crickets. Research firms estimate that it is worth over $100 million but it is not at the $150-$180 million that Liberty wants. Netflix, Warner Bros. Discovery, Fox, Amazon and NBC are not showing much interest in the asset. Netflix will probably not bid since there’s no real gain for them considering the estimate that 75% of F1 fans already have Netflix subscriptions. With so many people having Netflix, multiple big dollar sports packages probably don’t make much sense for the company. In a couple of months around June, Warner Brothers is distributing an Apple film called F1, starring Brad Pitt. If you want to watch this movie, which is projected to be a blockbuster, you must subscribe to Apple TV. I almost feel like I want to add Apple TV to the five or six other subscriptions I have, but I can’t watch everything I have access to now, so I should probably resist.

Financial Planning: Why Life Insurance Is a Poor Retirement Vehicle (And What to Do Instead)

Cash value life insurance is often pitched as a tax-free retirement strategy. On the surface it sounds great. You get tax-deferred growth, tax-free loans, no contribution limits, and a death benefit, but when you look under the hood the numbers often don’t work out. First, the returns simply don’t compare. With Indexed Universal Life (IUL) or Whole Life, your cash value growth is limited by caps and participation rates, and you miss out on dividends. Add in the cost of insurance, admin fees, and other hidden charges, and the actual return on cash value often falls well below the market. Second, the fees get larger over time. The older you get, the higher your cost of insurance becomes which directly eats into your cash value. If you’re taking policy loans and the policy lapses, you could even get hit with a massive tax bill in retirement. Third, the opportunity cost is huge. The high premiums needed to fund a policy could instead be invested in assets with better returns, more liquidity, and lower fees. Meanwhile, better tools for tax-free retirement income already exist. Most 401(k)s now offer a Roth option, allowing you to contribute after-tax dollars and grow your money tax-free, exactly what cash value life insurance offers. You can pair this with a Roth IRA or even a Backdoor Roth IRA if your income is too high to contribute directly. Together, these vehicles allow for substantial tax-free retirement savings without the complexity, high fees, or risk of policy lapse that come with life insurance. Don’t let marketing hype cloud your long-term strategy. Run the numbers and stick with what works.

 Companies Discussed: Nvidia (NVDA), Hertz Global Holdings (HTZ), Car Max, Inc. (KMX) & (DOW)

You may be thinking I’m a little bit crazy or blind to what is happening now, but I really wish people would be a little more patient and give this a few months to see the benefits. I want to remind people that the path we were on could’ve led to a collapse just like the great Roman Empire in 476 A.D. The United States in 2024 helped other countries grow their economies by sending them over $1 trillion in trade, not even close to fair trade and that is money we will never see again. Also in 2024, we saw our national debt climb to $35.5 trillion, an increase of roughly $2.5 trillion dollars in just one year! If that continued for the next 10 years, we would have debt of nearly $60 trillion, which would be unsustainable. Let’s not even talk about the interest payments on a debt level that high. What is already starting to happen is not the foreign countries, but rather the foreign companies themselves want to continue to be profitable and understand they must produce and be located in the United States. Companies like Siemens from Germany, Taiwan semiconductor and Foxconn along with others have already made huge financial commitments that will benefit their companies and also our country as well. As the days, weeks, and months pass along, I believe you will be hearing about more companies coming to the United States. I believe immigration will also change because we simply do not have enough workers to fulfill all these new jobs. This could lead these foreign companies to bring their workers along, which would make them part of the US consumer base that buys houses, cars, and simple things like go to the grocery store and go out to dinner and even get haircuts. This is quite a bit different from the problems we have with immigration now as it has become a big burden on the US economy. I believe this would create a major win for our country, please be patient!

Good luck if you are trying to time the market

If you have sold out of strong companies at good valuations during this market pullback, I believe you have made a huge mistake. As I have said there will be positive news that comes about and moves the market higher, which then leaves you with the question of what do you do now? Get back in? Wait for it to pull back? These trading mistakes can cost you immensely in the long run. I was surprised to see that going back over the last 20 years, seven of the top 10 days in stocks came within a two-week period of the worst 10 days. Which means many people that sold during the worst 10 days likely also missed those great days and the eventual recovery. A great example showing how quickly the tide can turn came on Wednesday after the announcement that there will be a 90-day pause on the full effect of tariffs since more than 75 countries have contacted US officials to negotiate a solution. There was also news that there is an “on the water clause” for cargo entering the US ports. This means any cargo “loaded onto a vessel at the port of loading and in transit on the final mode of transport on or after 12:01 a.m. EDT April 5, 2025, and before 12:01 a.m. EDT April 9, 2025, and (2) are entered for consumption, or withdrawn from warehouse for consumption, before 12:01 a.m. EDT on May 27 2025, are subject to the 10% additional rate in lieu of the country-specific rate of duty.” This is important as it will give companies more time to plan for elevated tariffs. These announcements led to a huge gain in stocks with the Dow climbing 7.87% on the day and the S&P 500 climbing 9.52%. The thing that surprised me was many companies that have China ties also rebounded substantially, but the tariff charged to China will be 125%, effective immediately. I’d be careful buying the dip here on all companies, but the important point I want to show is that the tide can turner quicker than you think!

How does the United States collect tariffs?

It is quite the system and it’s not as simple as a country/importer sending a check to the United States. The US doesn’t do the calculation for every shipment that comes into the country. No matter how it comes in, if it is by truck, plane or ships the country doing the importing is the one that calculates the tariffs and sometimes they use what are known as customs brokers to do the calculation for them. It may surprise you that it is somewhat on the honor system. Before a shipment approaches the border, the importer or the customs broker files electronically the paperwork and says what they are bringing and how much they owe. When the ship pulls into port, the information is reviewed by customs agents before they allow the goods to be unloaded and released. It is kind of like when we file our tax returns. It is on the honor system that you put in all the correct information and just like you may be audited on your tax return, customs do perform random inspections to verify what is being brought in and that the tariff amount is correct. Importers have an account with customs and pay the duties to them. If they use a licensed customs broker, then that broker would make the payment. After all this is completed, whoever imported the goods has 10 days to pay the duties. The penalties are pretty hefty if the importer does not pay within 10 days as they will be hit with admin fees, interest, and other penalties along with the biggest concern which would be suspension of deliveries to the United States. I would definitely say it is in the best interest pf these importers to pay the United States customs within 10 days.

China may look at other avenues to hurt the US in this trade war

I’ve said this before, but the tariffs on Chinese goods hurts them more than their tariffs on our goods. The simple math on it is the U.S. exported $143.5 billion of goods to China in 2024, while importing products worth $438.9 billion. Trade is way more important to their economy considering the fact they are a net exporter and a large one at that. In 2024, China exported roughly $3.58 trillion worth of goods, while importing just $2.59 trillion worth of goods for a surplus around $1 trillion. This makes trade a huge part of GDP as net exports contribute around 20% of GDP. The US on the other hand is a net importer so our trade deficit actually subtracts from GDP. What else can China do to harm the US? China did issue an alert warning its citizens of the potential risk of traveling to the US and attending schools there. Although there were approximately 1.6 million Chinese tourists that visited the US in 2024 and more than 250,000 students enrolled in schools, I don’t see this advisory as too problematic especially considering there was an estimated 77.7 million people from other countries that visited the US in 2024. The big concern people have is China selling our debt to drive up borrowing costs. I was disappointed by an article that said China could crush our housing market by selling mortgage-backed securities. Seemed a little dramatic to me considering foreign countries only owned 15% of the total outstanding mortgage-backed securities. Top owners did include China, Japan, Taiwan, and Canada, but I don’t see those other players selling at this point in time to harm US markets. It appears China holds just around 2-3% of these mortgage-backed securities and has been selling them over time with holdings down 8.7% year over year in the month of September and down 20% by the start of December. Even looking more broadly at U.S. treasury securities, China owned just $760.8 billion as of January 2025, which would represent about 2.2% of the total U.S. federal debt. Be careful falling for click bait, as I don’t believe China has the ability to “crush” our housing market. It would likely cause interest rates to increase slightly, but an outright crash would be extremely unlikely. Overall, while this trade war may hurt us, I still firmly believe it will have a far larger negative impact on the Chinese economy!

Why You Should Never Buy a Certificate of Deposit (CD) Again

For decades, certificates of deposit (CDs) have been a go-to option for savers looking to earn a little extra interest while keeping their money safe. However, in today’s financial landscape, CDs have become nearly obsolete, offering little to no advantages over more flexible and higher-yielding alternatives. One of the biggest drawbacks of CDs is their lack of liquidity. When you lock your money into a CD, you typically agree to keep it there for months or years. Withdrawing early results in penalties, often forfeiting several months' worth of interest. High-yield savings accounts, on the other hand, offer similar or even better interest rates while allowing you to withdraw funds at any time. Many online banks now offer savings accounts with yields that rival or exceed CD rates, giving you the best of both worlds: competitive returns and unrestricted access to your money. Another option is U.S. Treasury Bills (T-Bills) which are one of the best alternatives to CDs, offering higher returns with even greater security. Backed by the U.S. government, they are virtually risk-free and often yield more than CDs of similar durations. Additionally, T-Bills offer tax advantages, as the interest earned is exempt from state and local income taxes—something CDs cannot provide.  Money market accounts provide another strong alternative to CDs. They often have rates similar to or higher than CDs but come with added flexibility and liquidity. Additionally, money market funds that hold federal or municipal debt come with some tax-exempt income as well.  CDs may seem like a safe, simple choice, but in reality, they are an outdated savings vehicle that rarely makes financial sense anymore. Whether you choose a high-yield savings account, T-Bills, or money market funds, there’s always a better alternative that offers higher returns, more liquidity, or better tax advantages.

Companies Discussed: RH (RH), Caterpillar Inc. (CAT), Harley-Davidson, Inc (HOG) & Warner Bros. Discovery, Inc (WBD)

In an effort to balance trade relationships across the globe, several new tariff announcements were made on April 2nd. This caused the markets to decline sharply in Thursday’s session with the Nasdaq closing down nearly 6% and the S&P 500 closing down nearly 5%. I must say I was not necessarily surprised by that decline, but was more surprised by the run up in the market in the days leading up to the announcement. The administration has been talking about these tariffs for months and I for one was not necessarily surprised by the actions they plan on taking. The U.S. will be implementing a baseline tariff rate of 10% on all countries and that goes into effect on April 5th. After research into trade practices from other countries including tariffs, currency manipulation, and trade barriers the U.S. will also be implementing higher duties on several countries. This includes an additional 34% on China, which comes on top of the previous tariffs for a new effective rate of 54%. According to the administration, this compares to a calculated tariff rate of 67% from China. Other tariffs included a 20% rate on the European Union vs a 39% calculated rate on our goods, a 46% rate on Vietnam vs a 90% calculated rate on our goods, a 32% rate on Taiwan vs a 64% calculated rate on our goods, and a 24% rate on Japan vs a calculated rate of 46% on our goods. This is just a small sample as more than 180 countries and territories will be facing these reciprocal tariffs. The problem here is the bottom for stocks might not be in as there will likely be continued announcements from other countries with their response. Some countries like China, France, Canada, and Germany have responded with a combative tone and a promise to fight back. I continue to believe this trade war will not be solved overnight, but I must say with the pullback there definitely appears to be some opportunities surfacing. I’d be careful waiting for the all clear on this as by the time that comes, you may have missed some great opportunities.  

Trade barriers increase around the world

It is not just the US that is increasing tariffs, many countries around the world are also increasing their tariffs. There are some economists predicting that we could be headed to the biggest increase in protectionism since the 1930s, when the Smoot-Harley tariff act was in place. Back then the average tariff rate in the US was nearly 30%. Today it is around 8.4%. When it comes to the group of 20 leading economies in the world, there are roughly 4650 import restrictions, of which the US has roughly 1000. The EU, China, Canada, Mexico account for roughly 700 restrictions with the other 15 countries accounting for 3000 restrictions. Some people feel the United States is being aggressive by adding all these tariffs to products coming in to our country, but when you look at the numbers and the facts, it appears we are just playing catch-up and we are way behind the rest of the world as they have been putting tariffs on our products going into their countries. I don’t understand why we are singled out as being such a bad country and unfriendly to other countries just because we want free trade in the world. I’m sure if they dropped their tariffs, we would do the same.

Jobs Report shows some positive news on a difficult day for the market

With all the news around tariffs and trade, it’s almost like everyone forgot that a jobs report was released on Friday. Job growth remained very healthy with nonfarm payrolls increasing by 228,000 in the month of March. This easily topped the estimate of 140,000 and was a nice increase compared to February’s reading of 117,000. The previous two months did see negative revisions of 34,000 in the month of February and 14,000 in the month of January. The unemployment rate did tick higher to 4.2% from last month’s reading of 4.1%, but this was largely due to an increase in the labor force participation rate. A major positive on the inflation front was wage inflation came in at annual rate of 3.8%, which was down from last month’s reading of 4.0% and was more in line with a healthy level that creates growing wages but puts less pressure on inflationary forces. I was surprised to federal government positions declined by just 4,000 in the month, but yet a report Thursday from Challenger, Gray & Christmas indicated Doge-related layoffs have totaled more than 275,000 so far. Apparently, the BLS noted that workers on severance or paid leave are still counted as employed, which would have a large impact on the employment numbers. It will be interesting to see how the employment situation shakes out in this category and if the private sector can absorb those lost jobs. It’s hard for some to look through the noise of all the trade announcements, but I still believe the economy is in alright spot and the growing concerns for recession may be overblown.

What is a Solo 401(k)?

A Solo 401(k) is a retirement savings plan designed for self-employed individuals or business owners with no employees. Also known as an individual 401(k), this plan offers significant tax advantages and higher contribution limits compared to other retirement accounts, such as SEP-IRAs.  One major advantage of a Solo 401(k) is the ability to contribute as both the employer and the employee. For 2024, the contribution limit as an employee is $23,000 (or $30,500 if age 50 or older), which can be made on a pre-tax or Roth basis. For employer contributions, the limit is up to 25% of compensation, bringing the total maximum contribution to $69,000 (or $76,500 for those 50+). Many plans now allow employer contributions to be made on a Roth basis as well. To be eligible, you must be a business owner with no full-time employees, which includes sole proprietors, independent contractors, freelancers, and small business owners. However, spouses of business owners may also participate, effectively doubling the possible contribution. Another key benefit is that a Solo 401(k) can be paired with backdoor Roth contributions, making it an attractive option for high-income earners looking for additional tax-advantaged savings. This offers a distinct advantage over Traditional IRAs and SEP-IRAs, which can trigger taxes on backdoor Roth conversions. A Solo 401(k) is an excellent retirement savings tool for self-employed individuals due to its high contribution limits and tax benefits. Additionally, some business owners may still be eligible to make a 2024 employer contribution if completed before the tax filing deadline.

Companies Discussed: LPL Financial Holdings Inc. (LPLA), Deckers Outdoor Corporation (DECK), Apple, Inc. (AAPL) & Delta Air Lines Inc. (DAL)

I believe it is good news retailers are not pushing back against the US, but against countries where they buy products from. Companies like Home Depot, Walmart and Target are pushing back against production coming out of China. If a tariff is 10% the companies are pushing for the country to pick up the total cost and when tariffs jumped to 20%, they are getting push back on reducing costs by that amount but still having China producers pick up at least half. The companies are also looking at their profit margins and what they are doing is not increasing prices across the board, but perhaps raising prices on other items that are in higher demand and only raising the price slightly on products with less demand. The companies are also absorbing some of the cost themselves as opposed to passing the entire cost onto the consumer. In the end, the producer, the company, and the consumer will all absorb part of these tariffs and there may not be that much of an increase in price for many of these products. Unfortunately, I’m sure the regular media will find some products that went up dramatically and only discuss those. The big companies are also pushing for alternative places to produce products if China will not negotiate any reduction at all. Some companies are looking at producing the products here in the United States, which would be a win all the way around and I believe it would be the best thing for the United States.

Are 401(k) investors starting to panic?

A 401(k) is designed to be held for many years and should not be traded based on short term news. Unfortunately, the past month has seen the most trading activity in almost 5 years for 401(k)s. Individual investors added over $30 billion to money market funds in the first week of March alone. That type of activity in money markets has not been seen in the past year. In the first couple weeks of March, trading in 401(k)s was 400% above the normal level as people watched the market decline and they let their emotions take over as they headed to money markets. This is a huge mistake! Decision making seems to be politically driven. If people like the current administration, investors are seeing it as a buying opportunity. On the other hand, if they hate the new administration investors are either looking at going to cash or maybe shifting their investments internationally. Your retirement account is for the rest of your life and an investor should not be making decisions based on the current administration’s actions considering it’s such a small blip in the timeline of 30, 40 maybe 50 years of investing. Investors should go back to the basics and realize they are investing into American companies based on their earnings and what they are paying for those earnings. The country and the economy will always ebb and flow, but to try and figure out the best time to sell and buy has always been a losing game in the long term. If you have in your 401(k) good quality investments that are not overpriced, don’t worry about the short-term movements on a month-to-month basis. You should think about your investment plan not just year to year, but 5, 10, 15 years down the road, maybe even longer.

Inflation readings and consumer expectations are telling two different stories

The Fed’s preferred measure of inflation known as the core PCE showed an increase of 2.8% in the month of February, which was above the expectation of 2.7% and last month’s reading of 2.7%. Headline PCE includes the volatile categories of food and energy and showed an increase of 2.5%, which was in line with expectations and matched January’s reading. While the core PCE was a little hot, I don’t believe that rate of inflation is overly problematic. It would likely not be enough to get the Federal Reserve to lower rates, but it also would not be concerning enough for them to even consider increasing rates. Their wait and see approach is likely still in place and I’m optimistic, even with upcoming tariffs, there should be room to lower rates as we procced through the rest of 2025. Many consumers on the other hand seem very concerned about inflation with the final reading of the University of Michigan’s consumer sentiment survey showing expectations for inflation at a 5% rate one year from now and over a five-year horizon, the outlook now is for 4.1%. This marked the first time since February 1993 the reading was above 4%. I do believe these respondents are way off on their forecast and would be shocked if it came to fruition as that would be more than double the Fed’s 2% target. We talked about why we don’t like this survey in the past, but in case you missed it, the survey is tiny. It appears the survey typically interviews around 600 households each month for the preliminary report and around 800 for the final report. Considering there are over 130 million households in the US, I just don’t see the survey as a strong indicator.

US retailers push back against tariffs

I believe it is good news retailers are not pushing back against the US, but against countries where they buy products from. Companies like Home Depot, Walmart and Target are pushing back against production coming out of China. If a tariff is 10% the companies are pushing for the country to pick up the total cost and when tariffs jumped to 20%, they are getting push back on reducing costs by that amount but still having China producers pick up at least half. The companies are also looking at their profit margins and what they are doing is not increasing prices across the board, but perhaps raising prices on other items that are in higher demand and only raising the price slightly on products with less demand. The companies are also absorbing some of the cost themselves as opposed to passing the entire cost onto the consumer. In the end, the producer, the company, and the consumer will all absorb part of these tariffs and there may not be that much of an increase in price for many of these products. Unfortunately, I’m sure the regular media will find some products that went up dramatically and only discuss those. The big companies are also pushing for alternative places to produce products if China will not negotiate any reduction at all. Some companies are looking at producing the products here in the United States, which would be a win all the way around and I believe it would be the best thing for the United States.

Are 401(k) investors starting to panic?

A 401(k) is designed to be held for many years and should not be traded based on short term news. Unfortunately, the past month has seen the most trading activity in almost 5 years for 401(k)s. Individual investors added over $30 billion to money market funds in the first week of March alone. That type of activity in money markets has not been seen in the past year. In the first couple weeks of March, trading in 401(k)s was 400% above the normal level as people watched the market decline and they let their emotions take over as they headed to money markets. This is a huge mistake! Decision making seems to be politically driven. If people like the current administration, investors are seeing it as a buying opportunity. On the other hand, if they hate the new administration investors are either looking at going to cash or maybe shifting their investments internationally. Your retirement account is for the rest of your life and an investor should not be making decisions based on the current administration’s actions considering it’s such a small blip in the timeline of 30, 40 maybe 50 years of investing. Investors should go back to the basics and realize they are investing into American companies based on their earnings and what they are paying for those earnings. The country and the economy will always ebb and flow, but to try and figure out the best time to sell and buy has always been a losing game in the long term. If you have in your 401(k) good quality investments that are not overpriced, don’t worry about the short-term movements on a month-to-month basis. You should think about your investment plan not just year to year, but 5, 10, 15 years down the road, maybe even longer.

Inflation readings and consumer expectations are telling two different stories

The Fed’s preferred measure of inflation known as the core PCE showed an increase of 2.8% in the month of February, which was above the expectation of 2.7% and last month’s reading of 2.7%. Headline PCE includes the volatile categories of food and energy and showed an increase of 2.5%, which was in line with expectations and matched January’s reading. While the core PCE was a little hot, I don’t believe that rate of inflation is overly problematic. It would likely not be enough to get the Federal Reserve to lower rates, but it also would not be concerning enough for them to even consider increasing rates. Their wait and see approach is likely still in place and I’m optimistic, even with upcoming tariffs, there should be room to lower rates as we procced through the rest of 2025. Many consumers on the other hand seem very concerned about inflation with the final reading of the University of Michigan’s consumer sentiment survey showing expectations for inflation at a 5% rate one year from now and over a five-year horizon, the outlook now is for 4.1%. This marked the first time since February 1993 the reading was above 4%. I do believe these respondents are way off on their forecast and would be shocked if it came to fruition as that would be more than double the Fed’s 2% target. We talked about why we don’t like this survey in the past, but in case you missed it, the survey is tiny. It appears the survey typically interviews around 600 households each month for the preliminary report and around 800 for the final report. Considering there are over 130 million households in the US, I just don’t see the survey as a strong indicator.

Companies Discussed: Nike (NKE), Stanley Black and Decker (SWK), Wingstop (WING) & Viasat (VSAT)

How much more do top consumers spend?

When looking at consumer spending it is obvious that is not a constant level straight across the board and people making more money would obviously be spending more money in the economy. But just how much more is the high-end consumer spending than the average consumer? The top 10% of consumers account for 49.7% of consumer spending. If you’re thinking that sounds high, you are correct. You would have to go back to 1989 to match that type of imbalance for consumer spending. Is it a bad thing? Not really. The high-end consumer is what is keeping the economy going overall as it creates jobs and allows for the continued movement of money.

Holding stocks long-term doesn’t always pay off

You probably have heard that you should hold stocks for the long-term and you’ll be fine. I generally I agree with this statement, but there are always exceptions to the rule and that holds true here. If you look at different 10-year holding periods, you will see more losing periods than you probably expected. As an example, the 10-year period ending February 2009 had a loss of 37.4%. There are other 10-year holding periods such as the ones ending September 1974, August 1939, June 1921, October 1857 and April 1842 that all had losses ranging from 23 to 37.3 percent. Those losses are in real terms adjusted for inflation. One reason these periods had great losses is they were generally periods when there was high speculation that then caused prices to rise to elevated levels just to see them fall back to reality. This is why it is important for investors to not just buy into a story of a stock, but to understand what they are paying for the earnings, sales, book value, and cash flow of the business. If you don’t keep your eye on these valuation ratios, you would not realize when the stock becomes overpriced and you could end up with a big loss and then be left wondering what happened. I’ve been managing money for over 40 years and have continued to keep my eye on the ball as far as what we pay for any investment whether it is stock, real estate or bonds. If you invest blindly just based on the stock going up and the hype around the story, you could end up with a period of 10 years where you made no gains and then think stocks are risky or a bad investment. In a situation like that, it is similar to driving down the street with a bag over your head not seeing what is around you.

Financial Planning: What is Form 5498?

When funds are distributed from a retirement account, a 1099-r is generated and used to file your taxes to report what kind of distribution it was.  This is true whether the distribution is taxable or not.  For example, if you rolled money from a 401(k) to an IRA, it is a non-taxable rollover, but a 1099-r is still created since funds left the 401(k) which needs to be reported.  A Form 5498 is generated when funds are received by any type of IRA for any reason.  So, if you made contributions, conversions, or recharacterizations with a traditional, Roth, SEP, or Simple IRA, you will receive a 5498 stating what happened.  Depending on what you did, you will likely need to report the activity on your taxes.  The problem is, in many cases the Form 5498 is not ready until May of the following year, even though taxes are due the previous month, on April 15th.  Here are some examples where this can create problems. If you did an indirect rollover where you withdrew retirement funds and replaced them within 60 days, the withdrawal should not be taxable.  However, if only the 1099-r from the distribution is reported because there is no 5498 that shows money was replaced, it may be reported as a taxable distribution rather than a rollover.  If you are doing backdoor Roth contributions, a 1099-r is generated when the funds are converted from the traditional IRA to the Roth.  If it is not also reported that a non-deductible contribution was first made to the traditional IRA, the conversion may be treated as a taxable conversion.  Lastly, if you have been making deductible traditional IRA contributions, but there is no 5498 showing the contributions, you may not receive the tax deduction.  I don’t know why this form comes later than other tax forms, but this is necessary to be aware of to correctly report tax information and avoid unnecessary tax.

Companies Discussed: Tesla, Inc (TSLA), Lockheed Martin Corporation (LMT), Lear Corporation (LEAR) & Gilead Sciences, Inc.

70 million Americans have roughly $12 trillion in retirement accounts and the high fee private equity firms want a piece of that. Private equity comes with higher risk than traditional stocks and bonds that are found in retirement accounts. The big difference with private equity is they are generally illiquid investments in companies that are too small or risky to issue publicly traded shares. The businesses they invest in don’t issue quarterly reports on earnings and the valuations can at best be called questionable. It should be noted that private funds can tie up investors’ money for years and may give you some type of loose valuation of what your investment is worth. The fees that these funds charge is around 2 1/2%, which is well above the average fund of a half percent or so in current 401(k)s. Private equity tries to claim their investments far outperform the stock and bond markets, but a study from Boston College in 2024 found that long-term returns for pension funds, which allow alternatives, generated about the same investment return as a 60/40 split of stocks and bonds. Wall Street and the owners of these private equity funds just want to generate more fees even if it means putting your 401(k) in danger with high-risk investments with little to no liquidity. I’m in hopes that private equity’s pursuit of trying to get their hands on your retirement accounts hits a brick wall and the regulators protect your retirement plan. 

A bitcoin strategic reserve is a terrible idea

Last week there was an executive order signed to create a strategic bitcoin reserve for the United States. Crypto enthusiasts were pleased by the action, but disappointed that the order did not specify a buying schedule or clear strategy to buy more bitcoin. In the current fashion, the reserve will include coins that are already owned by the government that it seized from past law enforcement actions. The US currently owns more than 198,000 bitcoins that are worth about $17 billion. Given our large debt and the current deficit, I think it is just silly to borrow money and buy a volatile asset like bitcoin. The government is not here to make investment profits with our taxpayer dollars, if that were the case why wouldn’t they also buy individual stocks? Something like the Strategic Petroleum Reserve makes sense as that commodity plays such an important part in our day to day lives. Bitcoin has no impact on our day to day lives and I just can’t see what the strategic benefit would be outside of shooting for investment gains. We should be focused on paying down debt and reducing deficits rather than trying to generate investment returns with taxpayer money. I think even the action of keeping seized bitcoin is a mistake as that could be used to reduce debt. As for the price of bitcoin, I believe it could keep falling. There seems to have been a lot of catalysts that took place last year including the launch of ETFs and a more crypto friendly administration taking office. I don’t see many new catalysts in the near future, which could lead to steeper declines. For me, I don’t want my own dollars or my tax dollars in bitcoin or any other cryptocurrency for that matter.

Inflation report puts stagflation risks at ease

The headline Consumer Price Index (CPI) for February came in at 2.8%, which was below the estimate of 2.9% and less than January’s reading of 3%. Core CPI, which excludes food and energy came in at 3.1%, which was also below the estimate of 3.2%. This reading was less than January’s reading of 3.3% and it marked the lowest increase since April of 2021 when we saw inflation rise 3%. That was really the beginning of the inflation problems as the March 2021 core CPI rate was 1.6%. I’ve said it before, but with inflation at these levels I really don’t see it as a problem. There are some areas like eggs that increased 59% compared to last year, but outside of that most categories are quite tame. Shelter also continues to lift the inflation numbers as the index rose 4.2% in the month of February. This was the smallest increase for the shelter index since December 2021, but it still remains above both the headline and core numbers, which means it is putting upwards pressure on those reports. This report would have shown limited impact from the recent tariffs, so it will be interesting to see in the coming months what the numbers look like as the tariffs work their way through supply chains. I still believe inflation will not be a problem in 2025 and that the Fed will be able to cut rates a few times this year.

Another win on the inflation front

The February Producer Price Index (PPI) showed no change in the pricing level when compared to January. For the 12-month period it rose 3.2%, which was much better than last month’s reading of 3.7%. Core PPI, which excludes food and energy actually fell 0.1% from January and the annual increase of 3.4% was down from last month’s reading of 3.8%. This report helps us breathe a sigh of relief as December and January produced hotter readings. As we’ve been saying, inflation will not go down in a straight line and month to month the readings will be bumpy, but the general trend should be lower. As we said with CPI, it will be interesting to see how the tariffs impact these inflation reports in the coming months. One thing that does not get much coverage is that we had tariffs back in 2018 and inflation did not see a major spike. Hopefully that will be the case again and we can move on from this battle against inflation that has lasted a few years now.

Who Benefits from Repealing the “SALT” limit?

One of the more controversial changes in the Tax Cuts and Jobs Act of 2017 was the $10,000 limit placed on the State and Local Tax (SALT) itemized deduction.  Prior to 2018, those who itemized could deduct the full amount of state income taxes and property taxes on their federal tax returns.  Under current law through the end of this year, only the first cumulative $10,000 of these taxes is deductible.  This obviously hurts high earners in states like California.  Someone making half a million dollars per year and paying $40,000 in California income taxes only receives a deduction on the first $10,000 and receives no additional deduction for any property taxes they pay. While there isn’t as much public sympathy for high-income earners paying more tax, this limit also impacted California homeowners, especially first-time homebuyers.  When buying a home in California, property taxes are about 1.2% of the purchase price of that home. Thanks to Prop 13, property taxes increase minimally after purchase and generally much less than the property value increases. This means the longer you own a home, the lower your property taxes are relative to the fair market value of the property.  This also means that property taxes are most expensive when first buying a home.  In California, home values are high, mortgage rates are high, insurance costs are high, utilities are high, and because of the high value of homes, property taxes are also high. Virtually everything about homeownership in California is expensive, so it’s no wonder people are struggling to afford a house. This phenomenon has gotten worse in recent years, but it’s not new.  Regarding the SALT deduction, it is common for homeowners to have state income taxes and property taxes that exceed the $10,000 limit even if they’re not really “high-earners” because of the income needed to simply afford a home and its corresponding property taxes.  A young family could easily be looking at $20,000 to $25,000 just in state and local taxes, most of which would not be deductible due to the SALT limit.  While the SALT deduction is mainly thought of as a high-earner issue, a lot of normal people in California would benefit from its repeal, especially if federal tax rates do not increase back to their pre-2018 levels.

Companies Discussed: DoorDash, Inc (DASH), Rocket Companies, Inc. (RKT) & Verizon Communications Inc. (VZ)

I hate to say this because we all want to believe that one of the safest places to go is church. Unfortunately, there are church pension plans like Saint Claire’s Hospital in Schenectady, New York and Saint Joseph Hospital in Rhode Island that had no or very little money left for retirees when it was time for their retirement. You may be wondering how can that be? Pension plans should be safe especially under federal law where there are protections from the Employee Retirement Income Security Act of 1974, which is commonly known as ERISA. You may also think if you know something about pension plans that employers must pay into the pension benefit guarantee corporation or what is also known as the PBGC. Unfortunately, when the government came up with the federal law on pension plans to protect retirees, there was concern about the constitutional separation of church and state and they did not want to cross that line. So they exempted churches and employers related to the church, which would include schools, hospitals and publishers. Church pension plans are allowed to contribute to the pension benefit guarantee corporation, but they’re not required to and unfortunately most do not. It is sad that we cannot trust some of our religious leaders to protect our financial future. If you or someone you know works for a type of association related to a church and they have a pension plan they may want to dig deep into it to make sure it’s really there. Unfortunately, there have been church pension plans that have exaggerated the returns on their investments in their pension plan and ultimately collapsed when people began retiring. It may be unfortunate but it could be wise to have a secondary retirement plan if you work for a church just to be on the safe side so you have something there in your golden years! 

Structured products are back from 2008

Structured products that destroyed the economy in 2008 are back once again. In 2008 there was nearly $1.8 trillion of structured products issued. For 2025, the experts are forecasting structured product issuance of $2 trillion. If you don’t understand what a structure product is, it is nothing fancy other than Wall Street creating loans that hide their true value. In 2008 these were mainly mortgage-backed loans that Wall Street sold and told people there’s no way that these borrowers would default on their real estate loans. Today, they are even riskier with the loans backed by weak assets such as credit card debt, lease payments on cars, airplanes, golf carts and even plastic surgery loans. Recently in Las Vegas there was a convention for four days that was packed with bankers from Wall Street and around the country that were all in the buzz about the hype of the profits they can make off of these structured products. So far investors have been safe and have not had any losses, but that will change in the years to come especially if the economy weakens. With higher demand, prices for these products are now higher and I believe overpriced. The higher demand also creates riskier investments that look similar to products with less risk but make no mistake, they have far greater risk. It appears to me that the greed on Wall Street is back and the bankers are trying to tell you that stock investing is out. They tell you that you should be putting your money into these structured products for diversification to avoid market fluctuations, but the real reason for this is the fees they make are so much higher than if you just invested in good quality equities that pay dividends and grow over the long-term. Wall Street makes nothing off of that!

Jobs report seems uneventful, which is a good thing

February nonfarm payrolls increased by 151k in the month, which was less than the estimate of 170k. While I wouldn’t say that’s a positive, it was better than last month’s reading of 125k and it still shows the labor market remained healthy. Revisions to the previous two months were extremely minor as December was revised up by 16k and January was revised down by 18k for a net impact of -2k. Many areas remained strong with health care and social assistance adding slightly over 63k jobs, construction saw growth of 19k jobs, transportation and warehousing was up close to 18k jobs, and manufacturing increased by 10k jobs. Some areas were a little disappointing with professional and business services declining by 2k jobs, retail trade fell by a little over 6k jobs, and leisure and hospitality was the biggest drag with a decline of 16k jobs. The big question many people had was if the cuts from the Department of Government Efficiency, also known as DOGE, would be felt in this report. It appears there was a minor impact as government jobs actually increased by 11k in the month, but that was in spite of a decline of 10k federal jobs. My estimation is that we will see the declines for government jobs increase in future months as the survey data came largely after many of these announced job cuts. In a separate report from outplacement firm Challenger, Gray & Christmas there were 62,242 federal job cuts in the month of February. The report also showed U.S. employers announced 172,017 layoffs in the month of February, which was the highest monthly amount since July 2020. Announced layoffs through the first two months of the year totaled 221,812, which was the highest for the period since 2009 and up 33% compared to the same period last year. While this may sound concerning, the big question that we will have to follow is can the private sector replace these cuts with new hiring? Based on the continued strength we have seen in job openings; I believe the labor market will remain in a good place. With that said, the data should definitely be much more eventful in the months to come.

Avoid State Taxes from Federal Debt

Interest rates have been higher than normal for the last several years, and many investors have been taking advantage of this by placing cash in areas that pay higher rates of interest.  A great way to do this is by buying U.S. Treasury Obligations such as Treasury bills, notes, and bonds.  These are guaranteed, often pay a higher interest rate than high-yield savings accounts or CDs, and the interest is exempt from income tax at the state level. By purchasing a money market mutual fund that holds exclusively U.S. Treasury Obligations, you keep all those benefits while also maintaining liquidity.  While this should not be viewed as a long-term investment, it is a great place for short-term cash.  However, in order to receive the tax benefit, the interest income must be property reported.  Every year investors receive 1099-INT’s for interest income and 1099-DIV’s for dividend income which includes interest from U.S. Treasury Obligations.  However, the tax-exempt status of the interest is not always obvious on the 1099 form, especially when the interest came from a fund.  Every year, custodians like Schwab, Fidelity, and Vanguard produce a supplementary tax information form that breaks down how much of their funds’ income was from non-taxable government debt.  This form along with the 1099 can be used to calculate exactly how much tax-exempt interest you had so that you can correctly report your investment income.  Whether you do your taxes yourself, or work with a tax preparer, make sure you are aware of any federal debt interest so that you don’t overpay on your state income taxes.

Companies Discussed: Sempra (SRE), The Mosaic Company (MOS), Zoom Communications Inc. (ZM), & Discover Financial Services (DFS)

Last week we saw the release of existing home sales in the month of January and the decline was far bigger than expected. The number of units sold on an annual basis was 4.08 million, which was a decline 4.9% compared to the prior month. Analysts were expecting a smaller decline of 2.6%. While inventory remains tight at a 3.5-month supply, it is improving. Month over month inventory increased 3.5% and when compared to last January, we saw an increase of 17%. For now, it appears that housing prices are stable with the median price of a home sold in January at $396,900, an increase of 4.8% over last January. The number of cash buyers slipped from 32% one year ago to now only 29%. What is more disturbing is the numbers on first time homebuyers. Over history, first time homebuyers have generally made up around 40% of home sales, but January data shows that has slipped to only 28%. I don’t see a crash in the housing market coming, but I do believe people buying a house thinking they will make 10 to 20% on their investment over the next year or so is a mistake as I’m pretty confident those days are gone. If you’re going to buy a home, buy it as a place to live and raise your family, do not try to make a quick investment return on the short term.

Some home sellers are giving up

As a whole, the US home selling market has had some cracks, which we have talked about in the past. The rising interest rates have kept buyers on the sidelines and people selling their homes still think they’re worth more than what they can get in today’s market. Also, sellers have been spoiled over the past few years thinking you put your house on the market and you should be able to sell it in less than a month. Over a longer period of time, which looks out further than just the last few years, it used to maybe take 3 to 6 months to sell a home. Home sellers really became discouraged in December as delistings soared 64% in the month compared to last year after not finding an interested buyer to purchase the home. At 73,000 delistings, this was the highest level since 2015. We could see that change if interest rates come back down, but at this point in time there’s no indications that that will happen in a major way. I’m still looking for a low growth environment for the price of real estate in the coming years.

Another comparison showing AI is overpriced

Many people have used the comparison of the tech boom and bust when looking at the high prices for a lot of these AI stocks, which I believe has a lot of relevance. But if you go back 100 years, there’s another comparison with Radio Corp. of America, which was a booming technology back then. If your company put radio in the name somewhere, you got to ride along on the upward trend. Sound familiar? RCA stock rose 200 times its value during the 1920s, but then by 1932 it fell 98%. What is even more amazing is in 1986 General Electric acquired RCA for about 72% higher than the price peak back in 1929. It has never been a wise investment strategy to overpay for any investment, which seems to mostly happens in technology. Over the years this hype cycle has happened with cannabis, electric vehicles, and 3-D printers just to name a few. No one knows where the top will be for AI, but one thing I know for certain is many people will lose far more than they could even imagine, which unfortunately will destroy their retirement portfolios.

Berkshire Hathaway historically high cash balance It is no secret that Warren Buffett’s company, Berkshire Hathaway, is sitting on over $300 billion in cash, which is invested mostly in T-bills. As a percent of assets, it is now just over 25%, which has never been seen before. The excess cash is caused by two things, first reducing ownership of Apple and some other stocks. Last year alone Berkshire sold 605 million shares or about 70% of its holdings in the stock. It now has a market value of only $75 billion. The second reason for all the cash is likely because of his philosophy to invest when others are fearful and sell when they are greedy. We are definitely in the greedy stage, which we have been talking about at our firm for probably over a year now. No one knows when this will change, but it will. With the expensive nature of many companies and the markets, Warren Buffett likely cannot find anything on sale that he believes is worth buying. I don’t see a major crash coming in the near future, but I also don’t see any big gains coming either. I do continue to believe we will likely see a correction that leads to a short-term pullback of 10 to 20%. I hope you’re prepared for a few months of volatility, as I believe it is coming.

What’s so Special about your “Full Retirement Age”?

The Social Security Administration references your “full retirement age” quite often, so it is important to understand why that matters, and why it doesn’t. The main reasons this age is important is because at that point you are no longer subject to the earnings limit, and your benefit amount at that age is used to calculate spousal benefits. If you begin collecting Social Security before your full retirement age, you are subject to an earnings limit of $23,400.  For every $2 of wage or self-employment income you have above that limit, $1 of your Social Security benefit will be withheld from you.  Other income sources do not count and this rule no longer applies after reaching you full retirement age, meaning you can work and earn as much as you want.  If you do have Social Security withheld due to the earnings limit, you will receive a credit for that when you reach your full retirement age. As a spouse if you had a limited earnings history, you may collect a spousal benefit from the record of your higher earning spouse.  The spousal benefit is ½ of the higher earning spouse’s full retirement age benefit amount.  The age that the higher earning spouse actually collects does not change the spousal benefit.  In order to receive the full spousal benefit, the lower earning spouse needs to collect at their own full retirement age.  Waiting beyond that does not increase the spousal benefit, but collecting before full retirement age will reduce the spousal benefit. For those reasons full retirement age matters, but there are plenty of situations where it doesn’t. If you stop working before your full retirement age, then the earnings limit is irrelevant, and if you and your spouse both have an earnings history, then spousal benefits are irrelevant. Many retirees have the belief that something special happens to their benefit amount at their full retirement age, but the truth is, your Social Security window is from age 62 to 70.  Every month you wait to start, your benefit amount increases slightly.  There is no additional increase upon reaching a specific calendar year, birthday, or even your full retirement age.  For some it may be best to collect at their full retirement age, but for the majority of retirees it is more beneficial to collect at an age other than their full retirement age based on their individual income, asset, and tax situation.

Companies Discussed: Freeport-McMoRan Inc. (FCX), Qualcomm Incorporated (QCOM), Super Micro Computer, Inc. (SMCI) & Eli Lilly and Company (LLY)

Investors may think with the population getting older that investing in senior housing could be a great investment going forward. They could be right as the oldest boomers turn 80 at the end of this year. What’s even more amazing is that the US population of 80-year-olds and older will hit 18.8 million in the next five years, that is a 27% increase from today. Senior housing hit a brick wall when the pandemic hit in 2020 and with the high infection rates, loss of life, and social distancing restrictions the demand fell drastically for senior housing. Both the high cost of labor and the shortage of it did not help either. It is estimated in five years they will need 560,000 new units to meet the expected demand. However, due to the high cost of development and the concern that about half of the seniors won’t be able to afford private senior housing costs, it’s estimated that only about 191,000 units will be added. The good news is more than 40% of seniors could afford senior housing on their income alone, which increased from 30% eight years ago. Unfortunately, those who can afford senior housing would rather not use it and prefer to age at home. Developers are willing to risk their capital on the higher end of the wealthiest seniors building luxury senior housing with fine dining, spas and movie theaters. One high end luxury senior housing project is expected to break ground this year at Rancho Santa Fe in San Diego with 172 units available. I think this sector for investing at this point is worth watching, but I don’t think I’d want to commit any capital at this time given there seem to be some substantial risks.

Are young investors taking too much risk?

A comparison of Gen Z, who were born between 1997 through 2012, versus baby boomers, who born from 1946 to 1964, show that Gen Z is taking on much more risk compared to when baby boomers were their age. In a study from the FINRA Investor Education Foundation, 36% of respondents between the ages of 18 to 34 had traded options. This compares to 8% of investors who were 55 years and older. Also revealed in the survey was younger and new investors were more likely to use margin when investing. This came at a surprisingly high rate with 23% of investors between the ages of 18 and 34 saying they had used margin when investing. This compares to just 3% of respondents age 55 and older. What was also interesting and informative is the lack of investing experience as 19% of investors with less than two years of investing experience stated they had used margin. However, just 6% of investors with experience of 10 years or more have used margin. I think many of these older investors are more cautious because they had learned their lesson. There’s no doubt that the younger investor today is taking on more risk than the more experienced investors. I believe this is for two reasons. First off, the access to trade and invest is so easy and it can be done on the phone in your hand at essentially any point in time. Compare that to 25-35 years ago when investors had to go through a broker to trade. The second reason I see is the Great Recession in 2008 was 17 years ago and the young investors today were only 5 to 15 years old and had no interest or care about the economy and the crash of the stock market. Investing successfully long-term involves many years of experience and research and unfortunately, I believe the younger investors will learn by experience that the risk they are taking today will not end well.

Weak consumer sentiment brings down stocks

Stocks fell on Friday after the headline consumer sentiment index came in at 64.7, which was down 9.8% from January and below the estimate for 67.8. This reading was also down 15.9% compared to this time last year. I was surprised to see the one-year expectation for inflation came in at 4.3%, which was the highest level since November 2023. The five-year outlook increased substantially to 3.5%, which would be the highest reading since April 1995. It was not a major surprise to see sentiment fall for Democrats and stay unchanged for Republicans, but it did fall for Independents. While I think it is important to look at various economic data, I wouldn’t say this survey is overly troubling. This survey comes from the University of Michigan and when I was researching how many people it encompasses, I found it includes at least 600 households and is conducted by phone each month. It is designed to be representative of all US households, excluding Alaska and Hawaii, but with such a small data set compared to total US households as of 2023 at 131.43 million, I must say I question how indicative of all US households it truly is. As I said, I don’t want to completely disregard this data point, but given the limited insight I would not be overly concerned. I do believe this shows how fickle the market is at this point and even an inkling of bad news could send stocks lower given the high valuations.  

Beware the tax trap of renting out your house

If you’re moving out of your current house, you may be considering converting your home into a rental property.  This may seem like an attractive way to generate additional income. However, before making this move, it’s important to be aware of the tax implications, especially the potential loss of the Section 121 capital gain exclusion.  When you sell a primary residence, you may exclude up to $250,000, or $500,000 for married couples, of capital gains if you owned and used the home as your primary residence for at least two out of the previous five years.  When renting out your home, you still own it, but it is no longer considered your primary residence.  If you decide to sell the property more than three years after beginning to rent it, it no longer qualifies for any capital gain exclusion, resulting in a potentially large tax bill, exceeding $185,000 in some cases.  Not only that, but while renting a property you claim depreciation each year.  This reduces your taxable income while owning a rental, but that accumulated depreciation must be “recaptured”, which means taxed, at ordinary income rates when the property is sold.  This recaptured depreciation tax also cannot be offset by the Section 121 exclusion regardless of the timing of the sale. If you want to rent out your home, make sure you either sell it before losing the exclusion, or be committed to being a real estate investor for the long haul.

Companies Discussed: Intel Corporation(INTC), Illumina Inc.(ILMN), The Kraft Heinz Company(KHC) & Him & Hers Health, Inc. (HIMS)

Mag Seven capital expenditures could be a big problem!

The Mag Seven, which includes Apple, Alphabet, Amazon, Microsoft, Meta, Nvidia, and Tesla has been a group that has dominated the stock market the last couple of years. Much of the excitement around the stocks have been tied to advancements in AI, but there has still been little evidence these companies (outside of Nvidia) have been able to profit from the trend. A major concern I have is these companies are investing tons of money and the big question is how profitable will these investments be? It is estimated Alphabet, Microsoft, and Meta will spend $200 billion on artificial intelligence this year alone and their budgets have continued to grow. If we look at total capital expenditures, also known as capex, the budgets have grown immensely for many of these companies. Amazon is projected to spend around $105 billion on capital expenditures in 2025, up 27% from 2024, which came after a 57% increase over 2023. Microsoft has guided to $80 billion in capex for its fiscal 2025, up 80% from 2024, which was up 58% from the year before. Alphabet estimated capex of $75 billion in 2025, up 43% from 2023, which was up 63% from 2022. Meta has a forecast of $60 billion to $65 billion of capex in 2025, up 68% at the midpoint from 2024, which was up by 37% from the year before. The big problem with major capex is investors won’t see much of a difference in earnings, but there will be major hits to free cashflow. Capex is generally expensed or depreciated over time, which means it won’t hit earnings in a major way initially, but it could weigh on earnings growth over time as that expense remains for years to come and potentially grows if capex budgets continue to climb. As an example, Meta is projected to see $68 billion of net income this year, but free cash flow could slide 25% to $40 billion. Investments of this magnitude need to pay off, especially considering the high valuations for these stocks. Time will tell if these investments work out for all these companies, but I must say I’m skeptical they will all be winners from this movement 5-10 years from now. Investors need to look at the full picture and understand all the moving parts, which includes how all the financial statements work together. At our firm we don’t just look at earnings, we also want to see good cash flow and a strong balance sheet.

Producer Prices come in hotter than expected   

The Producer Price Index, also known as the PPI, showed prices in January climbed 0.4% compared to last month. This topped the expectation of 0.3% and led to an annual increase of 3.5%. Core PPI, which excludes food and energy, produced an annual gain of 3.4%, which was lower than last month’s reading of 3.5%. While these data points were a little hotter than expected, economists now have inputs to estimate the closely followed PCE report. It is interesting that after the release of the CPI and PPI, which were both higher than expected, estimates for core PCE actually look quite favorable. On a monthly basis core PCE is expected to show a 0.22% increase, which would be a nice deceleration from December’s reading of 0.45% and on annual basis estimates are looking for a reasonable 2.5% increase. We will have to see what the actual results look like for the PCE later this month, but with these reports now in hand I continue to believe that while inflation is not at the Fed target, I still don’t see it as a major problem.

The True Cost of Credit Card Interest

Everyone knows that paying credit card interest is a bad thing, but it’s less well known how that interest is accrued.  Interest is calculated using an average daily balance method, which means every single purchase begins accruing interest immediately.  Purchases made on a credit card throughout a monthly statement period increase the outstanding balance.  After a month of spending, if the full statement balance is paid by the due date, which is generally 20 to 25 days after the statement period ends, no interest will be due, even though it was accruing during that time.  This is known as the grace period which is essentially an interest-free loan on those purchases. For example, if you spend a total of $5,000 through a statement period during January, you will not need to make a $5,000 payment until the end of February to avoid any interest. However, if you do not make that full payment by the due date in February, your grace period is void and you will owe accrued interest from the date those purchases were made in January, not from the due date in February.  Also, any additional purchases made in February and afterward begin accruing interest immediately without a grace period, even though those statement periods have not ended yet.  Since interest is calculated using the average daily balance method, the unpaid balance and interest compounds on itself making it more and more difficult to pay off. Credit cards have a monthly minimum payment, which is usually $25 to $50 dollars, which paying prevents a mark on your credit report, but it does not stop interest from accruing.  Credit cards can be a great tool as they can give you points and fraud protection, but those benefits are greatly outweighed when a balance is being carried.

Companies Discussed: Dollar Tree, Inc. (DLTR), Grand Canyon Education, Inc. (LOPE), Mondelez International, Inc. (MDLZ) & Phillips 66 (PSX)

The Job Openings and Labor Turnover Survey, also known as the JOLTs report, showed job openings of 7.6 million in the month of December. This was below the estimate of 8 million and the reading of 8.09 million in the month of November. While this may sound disappointing, this still leaves the ratio of open jobs to available workers at 1.1 to 1. A softening labor market is still not a bad thing considering it is coming from such a strong spot where workers have had an immense amount of power over employers for a couple of years. The Fed wants to make sure the labor market isn't too strong as it could cause inflationary concerns, so I actually see this as a positive considering it is still a good report, but not too strong. I still believe the labor market could soften further without it being problematic for the economy.

Jobs growth still looks positive

Although the nonfarm payrolls growth of 143,000 in the month of January missed the expectation of 169,000, I still see the number as healthy for a growing economy. This number also came after upward revisions of 100,000 for December and November. The January number was slightly off the average of 166,000 in 2024, but I would expect to see a lower total in 2025 given the fact that the unemployment rate is extremely healthy at 4%. I was surprised to see wage growth accelerate to 4.1% in the month, which was higher than last month’s reading of 3.9% and was at the highest level since May 2024 when it also registered 4.1%. At this level I wouldn’t say wage inflation is problematic, but I would say it is worth watching. If it reaccelerated to a higher level that could pose problems for the battle over inflation. I would say overall the job report looked healthy with no major surprises and for the most part it would point to a labor market that is continuing to soften, which I believe is good for our economy as a whole.

Redemptions are high for climate mutual funds

Climate mutual funds, sometimes called green funds, grew quite rapidly from 2019 through the beginning of 2024. Apparently, investors began realizing that the equity concentration in these mutual funds really hurt their returns in 2024. Redemptions of $30 billion means investors wanted to leave these climate sensitive mutual funds to invest elsewhere. It is estimated worldwide that climate focused mutual funds are approximately $534 billion. Redemptions of $30 billion is a pretty big hit considering that equates to around 5 to 6% of fund assets. Based on how times are changing, I believe going forward investors should not expect their returns to keep pace with the overall market. Another problem for investors is when redemptions in these funds are high, the fund manager must sell off assets to raise cash, perhaps at lower prices which can really hurt the performance of the fund going forward. This is because the stocks have been sold out of the portfolio to raise cash and if the stocks rebound, the fund performance will lag because of the missing equities that had to be sold. On the other side, if they sell positions with a gain, this will create tax consequences for investors. 

Behind the curtain of private equity

Private equity over the last few years has become the cool thing in investing. Investors have been trying to get into private equity as an alternative asset, which I personally do not believe in because of the behind the curtain details no one knows what’s going on. Over the last 10 years, private equity assets have increase 300% to around $4 trillion. What’s even more amazing is that the fees collected by these private equity firms has increased 600%! A trade group by the name Institutional Limited Partners Association has had enough. They are pushing for new guidelines to standardize financial reporting for private equity investors including public pension plans, university endowments, and charitable foundations. What I thought was crazy is that private equity firms will vary how much they disclose to their clients based on how much they invest. The small investors will get less information than the bigger investors. In my opinion, it is not a wise place to put your money as I like to know what is going on with my investments. There are ways that the private equity firms are enhancing returns by using certain types of financial engineering as opposed to the old way of selling the companies they buy and returning cash to the investors. The most revealing thing I could find was the median fee that the small investors pay is somewhere around 2%. I have said many times in the past if your broker is trying to sell you or put you into the hot private equity market, I recommend saying no thank you and find another broker.

Are 401(k) Loans a Good Idea?

Taking a 401(k) loan may seem like an attractive option for quick access to cash, but it often comes with significant financial drawbacks that make it a bad idea. When you borrow from your 401(k), you are essentially taking money out of your retirement savings, which means losing potential investment growth and compounding returns that are crucial for long-term wealth accumulation. Although you repay yourself with interest, the interest rate is usually lower than what your investments could have earned if left untouched. Additionally, 401(k) loans must be repaid within a set timeframe, and if you leave your job, either voluntarily or involuntarily, the outstanding balance becomes due. Failure to repay results in it being treated as a distribution, triggering income taxes and, if you are under 59½, an additional 10% early withdrawal penalty, plus a 2.5% penalty in California. This can lead to a significant tax burden and further reduce your retirement savings. Moreover, and this is the biggest drawback in my opinion, when you repay the loan with interest, even though you are paying that interest to yourself, you are paying that interest with after-tax dollars which means you are being taxed twice.   First you have to earn that money and pay taxes on it in order to pay the interest, and you are taxed again when you withdraw that money in retirement. Many people also fall into the trap of taking multiple loans, which can create a cycle of dependency and derail long-term financial security. While a 401(k) loan might seem like a convenient way to borrow, the risks of lost investment growth, tax consequences, and potential repayment difficulties make it an unwise financial move in most situations.

Companies Discussed: Fox Corporation (FOXA), PVH Corp. (PVH), Dollar General Corporation (DG), United Parcel Service, Inc. (UPS)

Most big bank earnings are out now and the news and the guidance did lean on the positive side. A concern was revealed, which was no surprise to us that loan growth was only up 1.1% from a year ago. It is expected to see loan growth for 2025 of around 2.6%. Bank of America was the big winner here reporting loan demand grew 5 % from last year, but regional bank KeyCorp disappointed investors with their guidance as they are estimating loan balances would drop 2 to 5% in 2025. A positive in their report was net interest income would rise 20%. That was not good enough for the analyst community as the stock sold off following the report. Net interest income, also known as NII is the difference of what a bank pays for money and what they loaned it out at. This is a big factor when one is investing in banks considering it is such a large part of their profits. We have talked before that we do expect to see more mergers and acquisitions, also known as M&A going forward. This could help banks like KeyCorp and other smaller banks that go on sale as their stock drops, as there may be a floor to the fall with bigger banks potentially having some interest in scooping up the smaller banks as they go on sale. There are over 4500 banks in the United States, that is a lot of potential for bank M&A. Expected reductions in regulations for banking would also be a great benefit to Wells Fargo and some other banks as well. I do believe in having a strong balanced portfolio and if you don’t have some type of financial bank or financial institution in your portfolio, I believe you are missing out.

DeepSeek news sends US AI stocks into freefall!

DeepSeek AI is a Chinese artificial intelligence start up that rivals US companies like ChatGPT, Anthropic, and several others. DeepSeek has seen it’s popularity surge after releasing its reasoning model known as R1. This model apparently tops or is in line with the US competition and on Monday the DeepSeek app took over OpenAI’s spot for the most downloaded free app in the US. Many of you can probably guess my thoughts on this after my concerns with TikTok, but I do feel this is extremely dangerous and users must be careful in understanding what type of data they are giving to China. The main reason this news sparked panic in the markets was DeepSeek was apparently able to launch its free, open-source large language model in just two months at a cost of under $6 million. That is million with an M and that is important considering all these US businesses that are spending billions and billions of dollars on AI. The first big question here is was all that money a waste and is there a more efficient way to achieve AI success like DeepSeek? Also, there have been curbs to insure China didn’t receive the best chips. Did they steal trade secrets, find a way to get their hands on the chips, or most troubling would be, did they create their own technology that would rival a company like Nvidia? Personally, I was not too troubled by the decline on Monday considering we have no exposure to the AI space. I continue to believe it is just way too early to invest in this space and there could be other future competition that comes in that we don’t even know of yet. I do also believe this points to how fickle the market can be and with a news story like this being able to take down some of the most beloved winners from 2024, the extremely high valuations for the market should concern investors in the broad-based S&P 500 or Nasdaq. I am still looking for value stocks to do well in 2025, but could this be the beginning of a decline for these overpriced tech names?

Custodians are not Fiduciaries, why that’s important to you?

Your financial advisor may be a fiduciary, but their custodian might not be and it could cost you money. Being a fiduciary registered with the SEC for around 20 years now, we take seriously our obligation to always do what’s best for our clients. That also includes choosing a custodian to hold our clients’ assets. We spent a lot of time looking for the right fit to make sure our custodian doesn’t charge any unnecessary fees. This may come as a surprise to you, but not all custodians are the same. There are custodians that advisors use that may charge little fees like trading fees or maintenance fees that are passed on to you the client, that the advisor should make you aware of. Something recently came to light called an asset shift where some custodians encourage investment advisors to switch out of certain funds so that the custodian will make more money off of the assets they recommend. Unfortunately, this may not be best for the client and they may receive a lower yield. Keep in mind this is not illegal because the custodian does not have a fiduciary responsibility to do what is best for the client. Also, if the custodian forces the investment advisor to switch some funds into funds where the custodian will make more fees off of the new recommended fund, it could also cause a taxable situation for the client. This may be more prevalent in your smaller advisory firms with maybe fifty to hundred million dollars in assets under management. The custodian could tell the advisor either you need to increase your assets with us or begin paying an annual custody fee of anywhere from $200-$400 a year. That fee could really hurt the advisor, as an example if the advisor had 100 clients and they were charged $400 a year per client that would cost them $40,000 a year. More than likely, the advisor would probably have to raise their management fee to their clients to help offset the expense. Investors should ask their financial advisor, even if they are fiduciary if any of their recommendations are being forced by their custodian, which would cost you the client more money. I’m happy to report at our firm the custodian that we have chosen and have used now for ten years puts no pressure on us at all. This could be perhaps because we do have nearly $700 million in assets under management.

GDP growth shows the consumer was still strong in Q4

Gross Domestic Product or GDP missed expectations for 2.5% growth in the fourth quarter, but the growth rate of 2.3% was still ok. For the full year we did see a small deceleration in growth as GDP growth fell from 2.9% in 2023 to 2.8% in 2024. While none of this sounds overly optimistic, the consumer really carried the GDP growth in Q4, which I see as positive. Personal consumption expenditures saw growth of 4.2% in Q4 thanks to growth of 6.6% for goods and 3.1% for services. It was surprising to see durable goods really saw nice growth of 12.1% in the quarter, which compared to nondurable goods growth of 3.8%. The miss compared to the expectations can largely be attributed to the change in private inventories as that subtracted 0.93% from the headline GDP number. This category is quite volatile and considering it subtracted 0.22% from the headline number in Q3, I would not be surprised to see it actually benefit the headline number in the first quarter of this year. Considering the strength of the consumer, I was actually quite pleased with this report and I believe it is a good sign for our economy as we look forward. I do believe we will see some bumps in the road this year, but I still think we should see GDP growth in the 2-3% range for the full year.

Get Organized for Tax Time

Tax season is upon us which means you are probably starting to receive tax documents that will be used to file your taxes.  Whether you file taxes yourself, or work with a tax preparer, make sure you gather all the information needed and have at least some understanding of what it means.  The tax documents alone do not always provide the information required to complete a tax return.  For example, contributions to a traditional IRA can either be tax deductible or non-deductible, such as when making a backdoor Roth contribution.  However, no tax form is generated to tell the tax preparer that a contribution was made at all which means the tax deduction would be missed, or your basis in the IRA would not be reported. In both cases you would be paying more tax than necessary.  With tax-deferred retirement accounts anytime money is distributed, a 1099-r is generated, but it is not always clear whether the distribution is taxable or not.  If the tax preparer is not aware that the 1099-r is from a direct or indirect rollover, a qualified charitable distribution, or the conversion from a non-deductible IRA, they may incorrectly report the distribution as taxable income.  When you are gathering your documents, make sure you are gathering everything.  If you have a taxable brokerage account, even if you didn’t withdraw any money, you will still receive a 1099 because any interest, dividends, or realized capital gains are reportable.    If you have a mortgage, you will receive at least one 1098 and you may receive multiple.  If you refinanced during the year or even if your mortgage was sold from one lender to another, which is quite common, you will receive a 1098 from each lender.  If you don’t include all of them, you won’t receive your full interest deduction. Most people don’t like dealing with taxes and everyone hates paying them, but take the time to understand your situation enough so you don’t pay more than you need to. 

Companies Discussed: Electronic Arts Inc. (EA), CSX Corporation (CSX), Dole PLC (DOLE), Juniper Networks, Inc. (JNPR)

Reducing regulations saves companies both time and money and time is always money. Starting in 2025, it is expected that for every new regulation that goes on the books, 10 regulations must be eliminated. I was unaware of what is known as the congressional review where a new President along with Congress can undo certain rules that the previous administration put on the books in the last few months. At this time, we’re not sure which ones will be eligible for elimination, but you will likely see some rules that perhaps made no sense to many people could be reversed in 2025. There could be a fight brewing between California and the federal government over some of these changes in regulations and California could lose their waiver and authority to ban the sale of new gasoline powered cars by 2035. The federal government wants control back over the auto industry, and does not want to allow states to come up with separate rules. That could ease pressure on both the auto companies and consumers as well. One that I’m not sure on is eliminating bank watchdogs like the FDIC. I like the idea of pulling back on the regulations, but maybe this is one that should be controlled not eliminated? Be prepared in 2025 for many changes in business, I believe most will be helpful. 

History has proven in the recent past that tariffs can cause problems in the economy and the markets as well.

We have talked for the past month or so that we have been lightening up on our investments, which does not mean we went to 100% cash but a more reasonable level of around 20% in cash and 80% invested. A big reason for this is I believe currently the markets are incorrectly ignoring what the potential tariffs will do in the short term. It was only about six years ago when we had tariffs and that caused disruption in supply chains and rising manufacturing costs along with declining profits for some corporations. Our trading partners did not simply give in to the demands. Looking at China in particular, in September 2019, an additional $113 billion of tariffs were imposed on top of roughly $50 billion of tariffs that were already in effect. Each time the tariffs were raised, there was retaliation from China. This began to cause wild swings in the stock and bond markets. It is important as well for investors to understand when tariffs were imposed in 2018, the economy was doing well. That was because of recent tax cuts that reduced the corporate income tax from 35% down to 21%, which was a 40% decline. Now in 2025 there are no big tax cuts that the economy and businesses are benefitting from, which could hurt corporate profits in the short term. There is a potential tax relief bill that must go through Congress, but that would not be felt by anyone until the summer or late fall of this year. No one knows for certain how long it takes tariffs to benefit the economy because last time the world and trade fell apart as Covid changed everything. So for now, we will just have to wait and see how long it will take before the United States sees a benefit to tariffs, which I do believe long-term they are a good thing. With some potential short-term headwinds from these trade conversations, I think it’s important to not be overly aggressive with your portfolio and to make sure you’re holding strong businesses with low valuations that do not rely heavily on overseas trade.

Liquor sales are declining and the bourbon boom seems to have passed

It used to be investing in alcohol companies like Brown-Forman, who is famous for Jack Daniels, and other alcohol companies was a relatively safe investment over the long-term. But it appears that peoples liquor cabinets are still full from the Covid years when they over bought many types of booze for drinking at home and they still have a good amount of that alcohol left. No help to the industry is the anti- obesity drugs, the legal use of cannabis and some people switching to non-alcoholic drinks. The recent warning from the US Surgeon General recommending alcohol bottles should have a warning label on them about cancer could also hurt sales temporarily. We can’t forget about the tariffs that are coming as this will likely be another heavy weight on alcohol and bourbon sales and profits. While writing about the decline in bourbon sales, I thought I would go to my bar to see if I had any bourbon to try. I took a shot of it and it burned all the way down. I personally don’t know why Bourbon is so popular in the first place. With that said I guess maybe others are agreeing with me, US whiskey sales declined 1.2% in 2023, which was the first decline in 21 years. In the first nine months of 2024 there was additional drop of 4%. Your bigger distillers have the balance sheets to whether the storm, but your smaller craft distillery companies are beginning to close. I do believe this will probably change course maybe not in 2025, but perhaps come 2026 more distillers could quit the business, which will leave room for the big companies to pick up that slack and see their sales and profits increase.

What Really Matters when Getting a Mortgage

When getting a mortgage, everyone’s top priority is to get the best rate. However, it is equally as important to understand what it took to get that rate.  When you get a mortgage, there are origination costs called points that you can buy to reduce your mortgage rate.  In other words, you can buy down that rate for a cost, and this typically doesn’t get analyzed correctly.  Let’s consider an example using current market rates. For a well-qualified buyer, the par rate is about 6.75%, meaning there are no added point costs.  If the borrower wanted, they could pay a point, which costs 1% of the mortgage balance, in exchange for a lower rate of 6.375%.  On a $600k loan, this point would cost $6,000.  The question is, how long would it take for the interest savings from the lower rate to recoup the additional $6,000 point cost?  In this example assuming a 30-year mortgage, it would take almost 3 years.  That may not seem like a long time, but in the current interest rate environment, most experts agree that mortgage rates will be coming down at least slightly, especially within 3 years.  This means if you forgo paying the point and accept the higher rate and higher accompanying monthly payment, as long as you are able to refinancing into a lower rate within 3 years, you will come out ahead.  On the contrary by paying a point, you believe that right now mortgage rates are at their lowest point for the next 3 years, which is a strong stance to take.  I believe there will be opportunities to refinance into lower rates, meaning the overall cheapest way to structure a mortgage now is with a higher interest rate.  You can even take this a step further by accepting a rate above the par rate in exchange for credits from the lender that can be used to pay closing costs and some of the mortgage interest.  In our $600k mortgage example, taking a rate of 7.125% would come with approximately $7,500 of credits.  A rate of 7.125% might look expensive, but as long as you can refinance within 3 years, that rate option gives you the lowest overall cost of borrowing.

Companies Discussed: Costco Wholesale Corporation (COST), Oracle Corporation (ORCL), The Walt Disney Company (DIS) & General Dynamics Corporation (GD)

Looking back 30 to 40 years ago when families purchased a home, they did it as a place to raise a family and they weren’t so focused on how much money the house would be worth in the short term. Millennials who were born between 1981 to 1996 and are now between the ages of 29 and 44 years old are old enough to remember the 2008 Great Recession. In 2008 there were 2,330,483 foreclosures, roughly 3 times 2006 when it was 717,522. If at the time the young millennials who were between the ages of 12 and 27 were not affected personally by a foreclosure, it was likely they knew somebody who was. Fast forward 12 to 13 years and millennials have experienced a rapid increase in housing prices that is essentially unprecedented. Experiencing such a wide swing in boom-and-bust cycles is etched in some of these millennial’s minds. By the time baby boomers hit age 30 52% were homeowners versus 30-year-olds today at only 43%. Surveys show almost 50% of millennials have stated that owning a home is more trouble than it’s worth, which is nearly double the feelings of Gen X and baby boomers on homeownership. If millennial home ownership continues to decline, we could see an oversupply in future years, which would probably mean a fall in housing prices.

Better than expected inflation fuels the market higher

The Consumer Price Index, also known as CPI showed inflation was up 2.9% compared to last year. While this was in line with expectations, it was the core CPI annual rate of 3.2% that beat the expectation of 3.3% and likely excited the market. This report followed the Producer Price Index which was largely in line to slightly better than expectations. The annual rate for both headline and core PPI rose 3.3%. Looking closer at the CPI, shelter continued to be a heavyweight considering it makes up about one-third of the CPI. While it registered the smallest one-year gain since January 2022, it was still at a high rate of 4.6%. It’s important to point out that if shelter was excluded from the core CPI, the annual inflation rate was 2.1%, which is right in line with the Fed’s 2% target. I believe there will be a lot of movement in various price groups this year, especially with new government policies in place. With that said, I do believe it is much more likely we continue to move towards the 2% target rather than seeing a sustained reacceleration in inflation. This leads me to believe we will not see the Fed hike rates this year and I think it is still possible to see a couple rate cuts come December 31st, 2025.

The Supreme Court ruled against TikTok, why you should agree with them!

TikTok is very popular in America with 170 million people in the United States using the app. Many people love TikTok, but they don’t understand what the Supreme Court is seeing and why it unanimously confirmed the blocking of the app. It's important to understand the communist party of China ultimately has control of TikTok and that could be very dangerous as it believes in what was driven by Marxist Leninist ideology. The party believes that the CCP should silence dissent and restrict the rights and freedoms of Chinese citizens. This includes population control, arbitrary detention, censorship, forced labor, and very important pervasive media and Internet censorship. Do you really believe that China is our friend and they should be able to obtain data which they do on all the people using TikTok in the United States? Keep in mind that China does not allow Facebook or Instagram in their country. We would not let China own any of our major broadcasters because of the influence media can play and now social media also has that power. Think about this, China on a very low level begins to convince people in the US that it would be a good thing for China to take over Taiwan. Then, when they invade Taiwan, there’d be a backlash in the US of people who are siding with China against our government trying to keep Taiwan out of China’s hands. Taking over Taiwan would give China much more control and leverage over the United States. Think also about younger people today who post stuff that is there forever and when they are older it could be used against them as leverage. This could include future military leaders, perhaps members of our government or anyone else that when they became a more mature adult, they would not want those old posts to be released. I for one hope that TikTok is banned here in the United States or that it is purchased in full by a US company. At this point, China does not want that to happen because they do want to control the data and have access to it. What are your thoughts and why would you disagree with banning TikTok?

Navigating Capital Gains and IRMAA

If you are on Medicare or will be within the next two years, you will want to keep a close eye on your income because not only do you have to pay federal and state taxes on it, but you could also be forced to pay higher Medicare premiums because of it.  This is called IRMAA which stands for Income-Related Monthly Adjustment Amount, and your Modified Adjusted Gross Income, or total income, determines if you will be subject IRMAA and how much you have to pay.  This is basically an extra tax, but there are circumstances where it makes sense to pay it. Consider a situation where a married couple has income of $200,000 which means they are not yet triggering any extra Medicare premiums.  If they happen to hold some stock that was purchased for $450,000 and has a current market value of $500,000, selling would realize a $50,000 capital gain, push them into the next IRMAA tier, and cause them to pay about $1,800 in extra Medicare premiums.  Obviously, no one would want to pay an extra $1,800 if it is avoidable, but it may not be worth continuing to hold a $500,000 investment, especially if it’s an overconcentrated position or particularly risky.  An extra cost of $1,800 is less than half a percent of $500,000, so any market volatility has the chance to wipe out much more than $1,800.  We see people who are so concerned with IRMAA or paying other taxes that they never want to sell anything which causes them to lose more in the long run. Sometimes the best overall decision is to take profits and move on.

Companies Discussed: Moderna, Inc. (MRNA), Signet Jewelers Limited (SIG), Teladoc Health, Inc. (TDOC) & Qorvo, Inc.(QRVO)

Before we go into why the good report was bad, let’s talk about some of the data. The expected number of payrolls was 155,000, which came in well above that at 256,000 jobs for the month of December and also increased from November when it was 212,000 jobs. This high increase in payrolls caused unemployment to drop to 4.1% and came along with an increase in average hourly earnings of 0.3% for December. Over the last 12 months average hourly earnings have increased 3.9%, which is a decent number, but just under the expected growth in average hourly earnings. Job Growth was seen in healthcare with an increase of 46,0000 jobs. That was followed by leisure and hospitality which saw an increase of 43,000 jobs and government jobs, which includes Federal, state and local jobs were up 33,000. Because it was a holiday season there was an increase in retail jobs of 43,000 after the loss of 29,000 jobs in November. There are always revisions to the previous two months, but there was not much change here as October saw an increase of 7000 jobs and the November report was actually cut by 15,000 jobs which produced a total decline of only 8000 jobs for the past two months. Because the job report was so good compared to expectations, this put fear in the stock market and bond market that there may not be any interest rate cuts until the fall of this year. This also led to concerns that we could maybe see more inflation going forward. Maybe that makes sense for traders to sell, but investors should want a strong economy. That means your businesses will sell more goods and services and increase their profits. Interest sensitive equities like real estate were hit pretty hard with a good job report and banks also had a little trouble digesting the good report and declined as well. For investors I think this is a good report because it shows strength in the economy and based on the recent job openings from the JOLTS report, I think 2025 will be a good investment year for investors in fairly valued equities, but you will see a lot of scary volatility, which smart investors should use as a buying opportunity.

Job openings report sends the market lower!

The JOLTs report, which stands for Job Openings and Labor Turnover Survey showed an impressive increase in job openings in the month of November to 8.096 million. This easily topped the estimate of 7.65 million and October’s reading of 7.839 million, which was revised upward from the initial number of 7.744 million. While this points to a labor market that has continued to remain strong, there were some indications of softening. On a year-over-year basis, job openings fell by 833,000 and the quits rate moved from 2.1% in October to 1.9% in November. This indicates workers are less confident in finding another job if they quit their current one, which should put less pressure on wage inflation. The resiliency in the labor market is concerning for those that are looking for more rate cuts as a strong labor market allows the Fed to be patient and wait for inflation to cool further. The news paired with a December US services sector report that showed faster-than-expected growth and higher prices paid caused the ten-year Treasury to climb to around 4.7%. This spooked many speculative areas of the market including technology and cryptocurrencies.

Apple Intelligence, maybe not so intelligent?

Apple’s AI system, also known as Apple Intelligence, has been having some issues and has been spreading fake news. One of the AI features for iPhones summarizes users’ notifications, but some of the news stories it has been summarizing has been completely inaccurate. It recently attempted to summarize a BBC News notification that falsely claimed British darts player Luke Littler had won the championship. Unfortunately, this came a day before the actual tournament’s final, which Littler did end up winning. Maybe Apple Intelligence is so good it can predict the future? This was not the only false story though as Apple Intelligence has now wrongly claimed that Tennis star Rafael Nadal had come out as gay, Luigi Mangione, the man arrested following the murder of UnitedHealthcare CEO Brian Thompson, had shot himself, and that Israeli Prime Minister Benjamin Netanyahu had been arrested. The BBC in particular has been trying for a month to get Apple to fix the problem. In response, Apple apparently told the BBC it’s working on an update that would add clarification that shows when Apple Intelligence is responsible for the text displayed in the notifications. This compares to the current situation where generated news notifications show up as coming directly from the source. To me this doesn’t sound like a good solution as it doesn’t solve the problem and most people likely wouldn’t read past the headline anyway. This could still make the news organizations look bad, which I’m sure they are trying to avoid. Personally, I’m still not seeing the need to upgrade to the new iPhone, especially if these new AI features don’t provide any value. From an investment standpoint, as you likely know we still believe Apple is extremely expensive trading at nearly 30x future earnings and would not recommend the stock at this time.

The tariffs are coming, who could get hurt?

The retail industry will take a big hit on profits. It is estimated that about 23% of durable consumer goods like refrigerators, washers and dryers are connected to imported goods. About 19% of non-durable goods such as diapers, clothing, shoes and towels have some sort of dependency on imported products. These could be slightly higher because the only data available was from the Federal Reserve Bank of San Francisco that came out in a 2019 study. You may think that technology and the Mag Seven will be immune from the hit to profits, but even they could face problems. Nvidia has a 76% gross margin so they should be able to absorb most, if not all of any tariffs that come their way. Apple has half the gross profit margin of Nvidia at 37% and most of their products are built in China, which could be a huge dilemma for Apple. It is no guarantee but last time around the CEO of Apple, Tim Cook, was able to get an exemption on their products. Will that happen in 2025? That’s the big question. If they don’t get the exemption, their stock could take a massive hit that could be more than Apple investors have seen in a while. If you’re an Apple investor, you may want to use the sophisticated investing technique of crossing your fingers and anything else you’re able to cross as well and hope for the best. With the other Mag Seven such as Microsoft, Alphabet, Amazon and Meta, their products are safe but keep in mind that combined they spent roughly $200 billion in capital expenditures in the most recent quarter and about 60% was on imported equipment. The other industry that could take a big hit would be carmakers, such as Ford, General Motors and Stellantis and we could see hits to the operating profits anywhere from 20 to 30%. The big fear here is the estimate is between 50 to 70% of parts for the popular cars sold in the U.S. come from Canada or Mexico. Experts estimate that the consumers will see about a 6% increase in the price of new cars sold here in the US. I can’t even imagine what the increase on the price of a car will be if it’s a full import like a Porsche, Maserati or Ferrari. The good news is that the economy in the US is far stronger than Europe, China and Mexico, so we can weather the storm and be in a better negotiating position than those countries. With that said, I do believe we will go through some pain before things get better. I also believe if you have equities with high valuations in your portfolio that are affected by the tariffs, they could take a much larger hit than your low valuation companies that pay dividends.

Changes to Catch-Up Contributions

Every year the contribution limits for retirement accounts increase.  This year is a little different because one of the provisions from the Secure Act 2.0 is now active.  If you are under the age of 50, your contribution limit for an employer sponsored retirement plan like a 401(k) is now $23,500, an increase of $500 from 2024.  If you will be 50 or older by the end of the year, you may make an additional catch-up contribution of $7,500 which means your total contribution limit is now $31,000.  However, starting in 2025 thanks to the Secure Act 2.0, if you are between the ages of 60 and 63, you may make a catch-up contribution of $11,250 rather than $7,500, meaning your total contribution limit is $34,750.  This age range is based on how old you will be at the end of the year, so if you are turning 60 this year, you are eligible to contribute the entire $34,750.  However, if you are currently 63 but will be turning 64 this year, you may only contribute $31,000.  If you are wanting to max out your retirement plan, make any necessary adjustments to your payroll contributions now so you don’t have to scramble at the end of the year.  This addition catch-up contribution was implemented to help older workers prepare for retirement, but I don’t see how this will make much of a difference for anyone.  It increases the contribution limit by $3,750 for 4 years, which is a total of $15,000.  An extra $15,000 is not going to make or break anyone’s retirement, especially considering we already the option of funding non-retirement investment accounts after maxing out retirement accounts.

Companies Discussed: Expand Energy Corporation (EXE), Paychex, Inc. (PAYX), Cintas Corporation (CTAS) & United States Steel Corporation (X)

With technology, shopping has become so easy and set records in 2024 of around $5.3 trillion. While this by itself is a problem as some people are over shopping, it has also invited more fraud than ever before and for the first three quarters of 2024 there was an increase of 14.5% to $8.7 billion of shoppers who lost money to fraud. Two things are happening here. First, consumers may be too emotionally excited about the purchase and they forget to look for scams that could be happening to them. The second item is the scammers are becoming smarter about how to scam people and they are making it more difficult to detect. To avoid being scammed, it is always wise to deal with a company that you know. However, even that may not guarantee your safety. Scammers can now use names that look very similar to the names you know. They can do this by simply adding or deleting a period or a letter somewhere in the title. So before you make that purchase, be sure it is the correct site that you want to be at and you’re not sending your money to some scammer from across the world!

Should you be investing in airline stocks with the record year they’ve had?

It has been quite the year for airline stocks and there have been huge one-year gains for United Airlines at 138% and Delta Airlines at 49%. While it was a laggard compared with its peers, American Airlines still posted a strong return of 29%. It is forecasted for holiday travel between December 19th and January 6th, there will be a record number of travelers at 54 million. Since our economy was reopened after Covid, consumers continue to enjoy traveling, which has benefited the airlines. Even with the record number of travelers and the large gains for the airline stocks, they still trade at reasonable price to earnings ratios of 9.7 for United Airlines, 10.1 for Delta and 10.5 for American Airlines. My concern is could this be a value trap going forward? The low price to earnings ratio might suck you in only to see a slowdown in travelers in 2025. We could also see a little bit higher oil prices based on production not coming online quick enough to keep up with demand, which would hurt the profit margins for these companies. While they might look enticing, I wouldn’t be interested in adding these positions to my portfolio at this time.

Could you benefit from the private prison boom that may happen in 2025?

In 2025 there could be a huge demand for detention centers and investors may benefit from investing in the private detention center called CoreCivic Inc, trading under the symbol CXW. CoreCivic has a market cap of about $2.4 billion and a FFO on a forward basis of $1.79. The company could benefit from recent statements from ICE saying it will need enough beds to detain a minimum of 100,000 migrants. The agency already has funding for 41,500 beds. Their competitor GEO has a head start already housing about 40% of ICE detainees. It should be noted that CoreCivic was at $14 the day before the election and it climbed to $22 the day after. There was concern that some banks would withdraw funding from companies who participated in the immigrant detentions, however it appears that CoreCivic does not need any new capital to bring on new facilities or bring back idle facilities. The high estimate for deportation would be 1 million people in one year at a cost of $88 billion. It is estimated that there were 11 million undocumented migrants in the US as of 2022. These higher dollars could benefit the private prisons as a quick alternative if there is no room in the county jails. I was disappointed that the company does not pay a dividend, but it has pulled back from a recent high of $24.99 a share to under $22 a share. At the price the stock would trade at a reasonable 12.29x the estimated FFO for 2025. An executive from the private company GEO group spoke about an unprecedented opportunity for their company, it could be a good investment opportunity for the small investor as well.

“Big Social Security Changes Coming”

The Social Security Fairness Act is set to be signed into law next week and will impact Social Security benefits for millions of Americans.  This bipartisan bill will eliminate the “Windfall Elimination Provision (WEP)” and the “Government Pension Offset (GPO)” which currently reduce social security benefits for workers and spouses who have public pensions.  The Windfall Elimination Provision applies when someone has worked a job where they paid into Social Security and also a job where they did not pay into Social Security and receive a pension instead.  In this case, the Social Security benefits are reduced based on how many years they paid into Social Security.  The Government Pension Offset applies when a spouse is entitled to a Social Security spousal or widow benefit but they also worked a job where they did not pay into Social Security themselves.  In this case, the amount of their pension reduces the Social Security benefits they are entitled to receive.  With the passing of this new Social Security act and the elimination of the WEP and GPO, Americans who were having Social Security benefits reduced will no longer see a reduction.  This is one of the largest changes to Social Security in the last several years.  The downside is, the increased benefits will cause the Social Security trust fund to run out sooner, even if the elimination results in a fairer benefit system.

 Companies Discussed: Tidewater Inc (TDW), Constellation Brands, Inc. (STZ), Carvana Co. (CVNA) & VeriSign, Inc. (VRSN)

With oil trading under $70 a barrel, gas prices have continued to fall. But unless the world starts producing more oil in 2025, we could see a big reversal in the price of oil. I base that on an estimate from the International Energy Agency as they expect a huge increase in the demand of oil. They are estimating oil consumption of 1.1 million barrels per day, which would be a 31% increase from the 840,000 barrels in 2024. I know from recent reports that there is concern that if we pump more oil, the price could drop dramatically causing difficulties and lower profits for oil companies. However, if the International Energy Agency is correct on their 31% increase in oil demand, that could actually cause shortages at certain times throughout the year. Also, it is somewhat amazing with how long electric vehicles have been out that they still don’t seem to be having at this time much of an impact. I do know that car manufacturers are having some difficulty selling their inventory of electric vehicles. I believe part of this is because of the abundance of oil on the market and low gas prices. Is it possible that we got too aggressive trying to build and force consumers into electric vehicles? What happens if in 2025 the federal tax incentives for electric vehicles go away?

Understanding compounding is why you should be cautious about the overvalued market!

Investing is great when everything is going up and the emotions tell you to stay the course because that will continue to happen. For two years now the S&P 500 has posted really strong gains because of a heavy concentration in the Mag Seven. There are now investors who say the market could be up another 20% in 2025. In our portfolio we will continue to remain cautious next year as we understand that compounding can work for you, but also against you. What do we mean by that? Let’s say that for three years the S&P 500 is up 20% per year, your $100,000 investment would grow to $172,800 because of compounding. You probably would feel pretty good about that and think it will to continue to increase. While it is possible it’s like riding a roller coaster. What I mean by that is if you’ve ridden a roller coaster you know as it gets to the very top, it slows down and it feels like it’s almost going to stop, then you go over that peak and you hit that big decline. That happened in 1935 and 1936 as big gains were followed by a 39% decline in 1937. I did not want to use 2002 when the S&P 500 had lost almost 50% of its value. I thought I would use something else from history that was not the worst-case scenario. Back to the three-years of 20% gains and a portfolio value of $172,800. If we saw a 39% loss again like 1937, your account value will drop all the way down to $108,864. You might be questioning how can that be? It’s because as your account grew in value the percent decline is now on a bigger amount than the initial $100,000 you started with. So in other words after four years of investing, you’re $100,000 investment was only up 8.9%. This is why for long-term investors I can continue to stay the course on a more conservative investment style and not try to figure out what the top is for many of these expensive companies. The other problem as well is once people lost 37% of the money on their investment, they would probably leave the stock market for years missing future gains. I can tell you many people think they know where the top is and they’ll get out in time, but unfortunately many people stay at the party too long. I can tell you managing money through the tech boom and bust many people thought the party would continue in the early 2000’s and they did not foresee the major declines that we saw during the tech bust.

AI stocks performed well in 2024, there are problems in 2025 that could cause a reversal

It is estimated that for every dollar invested on the AI infrastructure, revenue of four dollars needs to be produced. The AI leader so far has been Microsoft with their Copilot product that has a cost of $360 per user each year. At first glance that doesn’t sound too bad until you realize you still have to pay for the other software at a cost of anywhere from a low of $72 to over $650 per year. At $1000 is the AI expense worth the reward? Currently, there are places where you can get AI for free, will people be willing to pay for AI when they’re used to getting it at no expense? In a combined survey on using AI, 32% of respondents had used it in the previous week. This is a fast adoption rate compared to the Internet or the introduction of the PC. However, when asked what services they were using, most were using free services like open AI’s ChatGPT or Google’s Gemini. If people won’t pay directly for AI, then the companies will have to somehow monetize it through some means of advertising. Another big question is will AI really produce results in productivity? In the last couple of years, the US Bureau of Labor Statistics reported labor productivity has risen at an annual rate of 2.3%, which is 3/10 of a percent higher than the historical average. To make AI valuable we would have to see labor productivity increase to at least 2.5 to 2.6%. One question on many people’s mind is will AI replace a lot jobs? The answer to that question is it will replace jobs, but the hope is new jobs and opportunities will be created that we have not even thought of yet. They will likely require creativity, judgment and decision-making. I still think AI will be used and it is not going anywhere, but I worry the hype has carried many stocks to excessive valuations. 2025 may be a prove it year for AI and if we don’t see progress towards monetization those AI stocks could struggle!

Beware of Double and Triple Taxation

At the end of the year, it is helpful to check where your income stands so any last-minute adjustments can be made.  These might be Roth conversions, IRA withdrawals, capital gain harvesting, capital loss harvesting, charitable donations, or retirement contributions to name a few. Before making any adjustments though, you need to fully understand the tax consequence of the transaction.  Income activity like IRA withdrawals or pensions are fairly straightforward as they are considered ordinary income on the federal and state level.  Income from Social Security or long-term capital gains and qualified dividends can be a little more complicated.  Of the Social Security you receive, some is taxable and some is tax free.  At most, 85% of Social Security benefits is reportable as income but it can be as low as 0%.  The more other income you have, the more your Social Security will be taxed.  Long-term capital gains and qualified dividends are subject to a different set of tax brackets and the tax is calculated after ordinary income sources are considered.  Depending on your level of income, capital gains and dividends fall into either a 0%, 15%, or 20% bracket.  What this means is by making one adjustment that increases your income, you could trigger more of your Social Security to be taxed and push capital gains into a higher tax bracket, resulting in a triple taxation event.  For example, Roth conversions are popular at the end of the year, especially when taxable income is in the 12% tax bracket, but this doesn’t mean everyone should do it.  You might be making a conversion that is taxed at 12%, but that also results in thousands of additional dollars from Social Security that were tax free to become taxable, and the income from the conversion and Social Security push capital gains that were in the 0% bracket into the 15% bracket. When added up that conversion at 12% ended up being taxed at over 37% because of the chain reaction of taxes, not including any state income taxes.  In this situation it probably makes sense to find ways to reduce income instead.  Year-end tax adjustments can be very helpful, but you want to make the right adjustments based on your situation.

Companies Discussed: Macy's, Inc (M), Xerox Holdings Corporation (XRX), PepsiCo, Inc (PEP) & Mastercard Incorporated (MA)

When everything is going up including stocks, commodities and cryptocurrencies, one has to stop and think is this the top? In November US equity trading increased by 38% compared to November 2023. The last time we saw this type volume was in 2021 when meme stocks were the major craze. The CEO of Robinhood, Vlad Tenev, stated a few weeks ago that they’re looking at expanding into sports betting. In my opinion that is not a far stretch from what they’re doing now. Over the past year, their stock has climbed 235% and it trades under the symbol HOOD. Polling by the US conference board on the bullishness of investors revealed that consumers expectations for equities compared to their own income has never been higher. Funny thing when I was drafting this post and I tried to put in bullishness, the auto spellchecks corrected it with foolishness. I would have to agree with the spellcheck on that. Lastly, I can’t help but comment on the most ridiculous thing in crypto I have seen yet. There is now a cryptocurrency and please excuse my language called Fartcoin that has a market value of over $900 million. Comparing that to something of value, that is greater than nearly 40% of all American publicly traded companies. Remember, if you are speculating, Wall Street will always have some type of crazy investment that they’ll make a lot of money off of, but yet in the end, you the speculator investor will more than likely lose big if not all your investment. It may be exciting for a while, but eventually the emotional roller coaster will wear on you.

Are pharmacy benefit managers, known as PBMs, costing consumers?

If you go back to the early 60s, PBMs were the heroes because they helped reduce and control spending on prescription drugs. Back then drug companies were charging high prices and the PBMs came in and negotiated contracts for large purchases of drugs so the drug companies would not have to fill an order of 20 pills. Instead, through a PBM the drug companies could fill an order of say maybe 20,000 pills and charge much less. The consumer received lower prices on drugs, the drug company made a good profit, and the PBM took a slice of the pie. The reason we receive such great prices at Costco on all items is because they buy large quantities of products and pass the savings on to the consumer. Obviously, Costco doesn’t pass all the benefit to the consumer and they keep part of the cost savings as a profit. Not to mention they also charge a subscription fee to gain access to these savings. This is the same way PBMs operate, they keep part of the discount or the spread for themselves so they can make profits. What all the hoopla is about is that the PBMs don’t show the discount or the spread that they are receiving. The FTC, also known as the Federal Trade Commission, already regulates PBMs to ensure compliance with antitrust and consumer protection laws. There’s also concern that six PBMs control roughly 90% of the market. I personally think that is OK especially when you compare it to how many options you have for your cell phone or cell phone service. There are many other services or products where you ultimately have limited options.

Stock market falls after disappointing Fed comments

It was widely anticipated the Federal Reserve would cut the Fed Funds Rate by a quarter of a point to a target range of 4.25%-4.5%. While the Fed followed through on those expectations and lowered the rate back to the level where it was in December 2022, it was the projection for 2025 that moved stocks lower. The Fed indicated it would probably only lower rates twice in 2025. This projection is based on the dot plot which is a matrix of individual members’ future rate expectations. Personally, I’m not a fan of the dot plot as Fed expectations have been wildly off in the last few years and the latest dot plot cuts in half the committee’s intention when the plot was last updated in September. I believe it is just too hard to predict out what inflation will be for the longer term, which then makes it difficult to get a gauge on where interest rates will be over the next few years. Given the current data I can see why the Fed wants to be patient, but the problem as we all know is data can change. If inflation does start to decelerate further next year it is absolutely possible the Fed cuts maybe four times instead of the current estimate of two cuts. The main takeaway I have from this meeting is the Fed is not on an aggressive rate cut cycle and they are going to be data dependent. Ultimately, the market did not like what Powell said and stocks fell greatly during his press conference. This led to another down day for the Dow Jones, which marked the 10th straight losing day. This is the longest losing streak since 1974 when the Dow fell 11 days straight. I do believe with the excessive valuations there will be continued volatility in the markets, but I do see this as an overreaction to the Fed comments and we still see great upside for several companies in next years market.

Should you Fund a Health Savings Account?

A Health Savings Account (HSA) is an investment account that is primary used for medical expenses but also doubles as a retirement account.  Contributions to an HSA are tax deductible and can be invested.  Investment earnings in an HSA grow tax deferred and may be withdrawn tax free to cover medical expenses at any age, you do not need to wait until retirement.  You may also reimburse yourself for out-of-pocket medical expenses at any point for expenses that occurred while you had an HSA.  For example, if you paid for some medical expense in 2024 but chose not to withdraw from your HSA to cover it, you could keep those funds growing tax free and withdraw them in 2030 or any other future year.  Unlike Flexible Spending Accounts where funds must be used every year, balances in Health Savings Accounts rollover each year indefinitely, which is why they can be great retirement accounts. If you make a withdrawal that is not for medical expenses, it is taxable and comes with at 20% penalty.  At age 65 you may withdraw funds for any reason without penalty, but it is still taxable if not used for medical expenses, so you really just want to use these for medical expenses to avoid taxes and penalties.  In retirement there are typically plenty of medical expenses like Medicare premiums and elder care, so it is usually not a problem to withdraw all the funds tax free.   An HSA account must be paired with a high deductible health plan (HDHP) and in 2024 the annual maximum contribution is $4,150 for a self-only plan and $8,300 for family plans. If you are over 55 you can make an extra $1,000 catch-up contribution.  HSA accounts can be funded through payroll if your employer offers them or you can open your own account as long as you have a qualifying plan.  It is more tax advantageous to fund through payroll though because not only are contributions pre income tax, they are also pre–Social Security and Medicare tax which is an extra 7.65% savings.  Unfortunately, California does not recognize HSA accounts which means contributions are not deductible at the state level and earnings are taxable.  However, these are still extremely tax efficient and useful accounts and are not utilized enough.

Companies Discussed: Netflix, Inc. (NFLX), RH (RH), Broadcom Inc. (AVGO) & Occidental Petroleum Corporation (OXY)

Technology has changed and improved oil drilling

Thanks to advancements in technology and artificial intelligence, the United States now out produces any other country in the world when it comes to oil. Much of the success has come from the Permian Basin which is 75,000 square miles located in Texas and New Mexico. The area produces almost 50% of US oil. There have been huge efficiency advantages in US oil production which have increased 60% or more a day while using 40% less workers. It used to take 18 months to find oil when drilling in the ocean with seismic imaging. Thanks to advances in technology, it now takes only 18 days. Companies like Chevron also claim they can drill 80% more feet in a day than they did five years ago. When you think of oil drilling, you may think of the new show Landman on Paramount+ and all the dirty oil. While that is still part of it, it is to a much smaller degree because now there are workstations with computers and 20 to 30 workers controlling thousands of pieces of equipment from many miles away. All this new efficiency will benefit the consumer as this will stabilize oil prices to some degree. I believe this will occur because the breakeven for oil in the Permian has dropped over 50% to $40 a barrel and could fall even further. What this means is more and stable profits for the oil companies. The consumer will benefit as well as oil companies cost decline and the price of gasoline at the pump could decline further.

Should we start to question the progress on inflation?

The November Consumer Price Index (CPI) came in at 2.7%, which was in line with expectations but higher than October’s reading of 2.6%. Core CPI, which excludes food and energy came in at 3.3%, which also matched expectations. The concern here is that this was the sixth month in a row that we have been at 3.3 or 3.2%. I have spent a lot of time talking about shelter costs, but those are finally starting to decelerate. The shelter index showed a gain of 4.7% compared to last year and while it still accounted for 40% of the monthly CPI increase, it was the smallest 12-month increase since February 2022. I continue to believe this index will continue to decelerate moving forward. The big question here is should we be concerned with this report? It looks like since it came in right along expectations the market is now with near certainty pricing in a cut at the Fed’s meeting next week. I do have to say though it is somewhat concerning we are still a decent ways off from the Fed’s target and it appears we have stalled out. We have come a long way from when the CPI was 9% in June 2022, but I believe if the Fed sticks to being “data dependent” they will want to see further progress before cutting rates much further next year. There are still some positives with areas like shelter and auto insurance that should be less burdensome next year, but other areas like energy will have a tough comparison considering the lower prices this year. Overall, I continue to believe the economy is in a good spot, but this report confirms my thoughts that those hoping for a lot of rate cuts next year may be getting too far ahead of themselves.

Make your Charitable Gifts Count this Season

If you currently receive required minimum distributions (RMDs) from a retirement account and you make charitable donations, you should be using your required distributions to make those charitable gifts.  This is called a qualified charitable distribution (QCD) and it is a tax advantaged way to make the donations to charity that you were already doing.  After the tax changes in 2017, the number of tax filers who itemize dropped substantially.  Charitable donations are typically an itemized deduction, so for the majority of tax filers, charitable gifts do not provide any tax benefit.  When taking a required distribution from a retirement account, the distribution is reportable as income.  However, any required distribution that is instead sent to a charity does not need to be recognized as income, meaning the giver is guaranteed to receive both the federal and state income tax benefit, even if they don’t itemize.  Not only that, but since the charitable distribution is not included in income, it results in a lower adjusted gross income which is the income level that determines the cost of Medicare premiums (IRMAA).  A normal itemized charitable donation only reduces taxable income, not adjusted gross income, so even people who itemize are still better off making qualified charitable distributions rather than itemized charitable donations. These QCDs are a great way to help a cause you believe in while getting the most tax benefits possible.

Companies Discussed: The Cigna Group (CI), The Kroger Co. (KR), The PNC Financial Services Group, Inc. (PNC) & The Hershey Company (HSY)

The Job Openings and Labor Turnover Survey, also known as the JOLTs Report, showed job openings of 7.74 million in the month of October topped expectations of 7.5 million and increased from September’s reading of 7.4 million. While it was nice to see the increase, I wouldn’t be surprised to see job openings decline further from here. Openings peaked in March 2022 at over 12 million and have been on the decline since then. While that may sound problematic, these numbers were greatly distorted by the Covid shutdown and then the reopening that followed. We had never seen more than 8 million job openings pre Covid and at the peak there were more than two job openings for every available worker. We still have a very healthy labor market considering there are still 1.1 available positions for every unemployed worker. I would actually say the labor market is in an even healthier place at this point in time. With the excessive amount of openings, we saw a lot of employee turnover and quits which I believe led to elevated wage inflation. The labor market is much more balanced at this point in time, which should lead to less concerns over wage inflation. This should then be positive for the overall inflation rate which the Fed has been battling the last couple of years now.

The labor market continues to produce strong results!

November payrolls showed a very nice increase of 227,000, which topped the estimate of 214,000. The two prior months also saw positive revisions with October now showing gains of 36,000 versus 12,000 and September showing an impressive growth of 255,000 versus 223,000. While the November gain may look quite strong, it’s important to put this in perspective and pair it with the weak October report. October was challenged as it was held back by impacts from Hurricane Milton and the Boeing strike. This essentially reduced the jobs in the October report and added them to the November report. If we instead look at an average of October and November, we would then see growth of 131,500, which is still strong but not nearly as impressive as the November headline number. Areas of strength in the report included health care and social assistance which was up 72,300, leisure and hospitality which was up 53,000, and government which was up 33,000. While the government number includes state, local, and federal, I am curious to see what these numbers look like next year with Elon Musk and DOGE taking a closer look at government spending. Instead of consistent gains from this sector, we could potentially see a decline in payrolls. Utilities which saw a decline of 100 and retail trade which saw a decline of 28,000 were the only areas that produced a negative result in the month. I was surprised to see retail trade on the list considering the busy holiday season, but it is believed the later Thanksgiving holiday had a big impact. With the report largely in line, expectations for a Fed rate cut jumped to nearly 90% when they meet on December 17th and 18th. At this point, I would be very surprised if they didn’t do a quarter point cut at that meeting. I do believe after that cut though, there could be a pause until we see further data.

Holiday spending is looking positive

We have now been seeing predictions for what spending will look like for the holiday season. It’s no surprise to me those numbers are looking pretty good with estimates for spending to increase somewhere between 3.8 and 4%. These estimates should be confirmed or may even be a little light with the success of the post-Thanksgiving deals. Data from Mastercard showed Black Friday retail sales, excluding automotive, increased 3.4% compared to last year. This came with a huge increase of 14.69% for online shopping compared to an increase of just 0.7% for in-store sales. According to Adobe Analytics, Cyber Monday then set a record with $13.3 billion of sales. This was an increase of 7.3% compared to last year. Overall, Adobe Analytics showed online spending for the Cyber Five rose 8.2% year over year to $41.1 billion. The spending looks good for a few different reasons. First, the election is finally over. Based on what I was reading, I believe people really stopped spending because of their uncertainty of what direction they thought our country would be heading. Now that the election is over, consumers are benefiting from and feeling good about a strong stock market that has done well this year and we still seem to be getting some price appreciation on our homes. According to the conference board, their recent report showed the strongest monthly gain in consumer confidence in over three years. We will continue to keep you informed and updated on holiday spending, but based on what I’m seeing I do expect consumer spending for the holiday season to have a strong increase from last year and perhaps when we see the real numbers in January, they could come in higher than those estimates! 

Trading stocks 24 hours a day is coming soon!

With technology today I believe it will definitely happen, but the question is when? I think a more important question is do we really want it? Currently the market trades from 9:30 in the morning until 4 o’clock in the afternoon Eastern standard time. There is also currently low volume in after-hours trading. Companies like Robinhood and even Charles Schwab allow for trading of some equities after hours in a lite market. I have been managing money now for over 40 years and I’ve seen the good and the bad. What worries me is this could become too much stress for some people to handle. I can see people waking up at 2 o’clock in the morning to check to see whether their stock is trading up or down and this could become a regular habit which could happen anytime at night. It would also allow people to make impulsive decisions since you have your phone with you 24 hours a day. Once that trade is made it’s done in terms of its financial impact but will you then worry about it and not be able to sleep? Investing can cause a toll on your emotions and I think having that break from 4 PM until the next morning at 9:30 gives your body and mind an emotional break. If you’re a trader and you’re gambling you probably don’t care much about reading the news or digesting the most recent earnings release before making any financial decisions, but if you are a true investor and you invest for the longer term you don’t need 24 hours a day to trade. You will use the break to read and analyze your decisions because you want to do your research before buying or selling. Be careful what you wish for!

Tax Problems with Overconcentrated Portfolios

We’ve seen many cases where someone has a lot of unrealized capital gains in a taxable investment account and they are afraid to sell anything because they don’t want to pay taxes.  This is more common with older people because they might have bought something decades ago that has appreciated substantially.  Because of this appreciation, one position or a small number of positions may make up the majority of their entire portfolio resulting in a lack of diversification and a much higher level of risk. In turn they feel backed into a corner because selling results in taxes but holding continues the investment risk. There are many ways to deal with this such as charitable remainder trusts or collar strategies, but before any of that it is important to understand what that tax impact actually is, because in many cases it is not as bad as people think. Selling a long-term investment result in a capital gain which is reportable income, but long-term capital gains are taxed at lower rates than ordinary income like wages or IRA withdrawals.  In many cases, that tax rate can be as low as 0%.  For an elderly married couple who claims the standard deduction, if their total income, including long-term capital gains, is less than $126,350, those gains are taxed at 0%.  If their income exceeds that level, only the capital gains above the threshold are taxed at the higher rate of 15%. This is important to know because we’ve spoken with people who have some social security income, maybe some RMDs, and a little interest income, but their adjusted gross income is only $80,000 and they are worried about selling stock and paying taxes on gains.  What they don’t realize is they can handle over $46,000 of additional capital gains without paying any federal income taxes on them.  They may be perpetually carrying an unnecessary level of risk in their overconcentrated investment portfolio because they are so worried about taxes when they have the ability to liquidate and diversify a portion of their portfolio every year tax free.  By better understanding their tax situation, they can be more informed about making investment decisions.

Companies Discussed: Intel Corporation (INTC), Target Corporation (TGT), The Gap, Inc. (GAP)

There will be many changes under Trump, but for investors the SEC, which is also known as the Securities and Exchange Commission could be a big one. The current head of the SEC, Gary Gensler, is likely gone for sure. He has been tough on Wall Street and even tougher on cryptocurrencies. It is likely Trump will appoint a new SEC chairperson who will want to have less control over Wall Street. One name on that list is Hester Pierce. She was appointed by Trump in his first term and is one of two current Republican commissioners. She also voted against most of Gary Gensler’s initiatives and is much friendlier towards Wall Street. That doesn’t mean everything will run wild and in particular, she still would like to see regulation for the cryptocurrency business. It seems she disagrees with both Gensler and Trump-appointed predecessor, Jay Clayton, who sued crypto startups that didn’t register their products as securities. Instead, she would rather see new regulations for crypto’s technology. Her approach would be different than Gensler, but it seems that she still wants to protect the investor by using stronger regulations. One rule in the works that may not make it into the books that had much controversy was forcing companies to disclose climate related risks. The SEC voluntarily put the rule on hold while it is litigated. Another one in litigation is for rules that hedge funds and brokers must report on short positions and stocks lent for short selling. Unless these two can pass before the new administration takes over in January, I don’t believe they will have any chance of surviving. There are also other rules in litigation that are in limbo that will probably be dropped next year. Be sure to stay tuned to the Smart Investing Show for updates and changes in regulations by the SEC, as I’m quite confident it will look very different next year!

Is Michael Saylor, CEO of MicroStrategy, a genius or a crazy man?

If you’re not familiar with MicroStrategy, their symbol is MSTR. Their CEO is famous for not just buying bitcoin, but leveraging everything he can to invest all the assets into bitcoin. I listened to a podcast that Mr. Saylor did recently and I was shocked at many things he said. If you follow us on a regular basis, you know we’re not advocates of investing in cryptocurrencies or bitcoin, but this CEO takes it to the extremes on the other side. The company’s financial statements look like a disaster, I’m surprised they are still in business. Mr. Saylor stated they just borrowed billions of dollars to purchase $4.6 billion in bitcoin, which brings their bitcoin holdings up to about $40 billion. The company only has $60 million in cash. If you do the math, MicroStrategy currently owns about 1.6% of the market value of all the bitcoin. With all the rumors floating around about the US government being an advocate of bitcoin and perhaps even setting up a bitcoin reserve, the price of bitcoin is now around $100,000. Mr. Saylor was laughing as he spoke about the current value of bitcoin at $1.8 trillion and said he sees it going to $180 trillion in 20 years, at that level the price of one bitcoin would be $13 million. The host of the podcast did a quick analysis and said based on that projection, the market cap of your stock, which is currently $89 billion would be worth roughly $10.5 trillion in 20 years. The response was, yes that’s what the math says. The only reason I could come up with why Mr. Saylor is so optimistic is he feels in 20 years 7% of all the world’s money will be in bitcoin. I have read from many professors and experts on the global economy that have said this will never happen because governments will not be able to control their own economy. He also stated that bitcoin should be the world currency and in 20 years there should be $500 trillion in digital assets. I’ve been in the investment world now for over 40 years and none of this makes any sense to me. I do believe there will be a major storm someday in the future. As far as investing in the stock MSTR, the company has no earnings, no cash flow and nearly a 16% short holding betting on a stock decline. The stock has a 52 week low of about $44 a share vs a high of $505 a share and currently trades around $440 a share. I have to say this is not a company, but more of a management company of a non-diversified asset or a leveraged bet all in bitcoin. 

The housing market has changed

It used to be couples would get married and buy a house in their late 20s, but now because of a different lifestyle and higher prices for homes, first time buyers are now nearly 40 years old. I also found it interesting that there are now more single people buying homes. Single women are generally about six years older than single men when buying homes. However, roughly 20% of single women are first time home buyers, which is more than double their male counterparts. People in their early 60s have become the most active in the current housing market. This is the generation that scratched and saved and sacrificed to buy a home back in the 1980s. Even then houses were not that affordable, not to mention interest rates looked a whole lot different! But now those buyers, some of which have accumulated close to 40 years of equity have benefited handsomely and account for a big portion of the $35 trillion in home equity across the US. For those looking to buy, there are some signs of relief in home prices with some areas in Texas and Florida that were not too long ago very hot markets starting to see price declines. I feel it could take another couple years to get a more normal housing market, especially with about 25% of people having a mortgage on their home of 3% or less. With such a low rate, they would probably be more likely to remodel or do an addition rather than sell their house.

Beware of IRA Income Limits

Saving money is obviously a great thing, but it is important to be aware of the income limits when making both Traditional IRA and Roth IRA contributions.  Contributions to IRAs can be made at any age, but you need W-2 or self-employment income to contribute.  However, if your total income from all sources is too large, this may prevent you from making contributions as well. With Traditional IRAs, you can make contributions at any income level, but your ability to deduct those contributions is phased out if your income is too high, assuming you have access to an employer retirement plan like a 401(k).  Since getting a tax deduction is one of the main benefits of a traditional contribution, high-income earners would likely want to fund a different account instead. For a single filer this phase out begins at $77,000, and for married filers this begins at $123,000. If your spouse has access to a workplace retirement plan but you do not, your phase out for traditional IRA contributions begins at $230,000. Roth IRAs are subject to different limits.  For single filers the ability to contribute begins to be phased out when income reaches $146,000 and for married filers at $230,000.  So with traditional IRAs, your income determines if the contribution is deductible, with Roth IRAs your income determines if you can make the contribution at all.  Unfortunately, I see people making Roth IRA contributions when they aren’t eligible to all the time.  This can happen if you are used to making a Roth contribution every year and eventually through raises or bonuses or whatever your income exceeds the limit without you knowing. Now with Roth IRAs, there is a workaround called a Backdoor Roth contribution that can be used to make Roth contributions when income is over the limit.  To do this effectively, the contributor cannot have any Traditional IRA money.  If they do, they would need to roll it into a workplace plan like a 401(k) before implementing the Backdoor Roth contribution.  The Backdoor Roth involves making a non-deductible contribution to a Traditional IRA, which again can be done at any income level, followed by a conversion into a Roth IRA.  Conversions do not have income limits and because the initial contribution to the Traditional IRA was not deductible, it is not taxable when converted to the Roth IRA. 

Companies Discussed: Comcast Corporation (CMCSA), Delta Air Lines, Inc. (DAL) & Alphabet Inc. (GOOG).

Presidential elections, especially this one, make people become very emotional, but don’t let that sway you away from investing. Looking back to 1950, the S&P 500 index gained 12.1% per year under Democrats and 7.1% under Republicans. So based on that tad bit of information, you would think that Democrats are better for the stock market than Republicans. If we dig deeper, we will see that Nixon had a major negative impact as he left office in August 1974. This was at the end of the 73-74 market crash when the S&P 500 was down 48%. The other Republican who had bad timing was George W. Bush, who was in office from 2001 to 2009. The S&P 500 dropped 38% in 2008 during the Great Recession and wiped out all the previous gains in the stock market while George W. Bush was in office. Looking more recently, there were investors who hated Trump as President and when he got into office, they sold their stocks missing an average annual return of 13.8% per year while he was President. The same thing happened in 2020 when Joe Biden became president, many Republicans thought the world was coming to an end and sold their stocks. The gain in the stock market under Joe Biden so far has been an 11.9% average annual return. The best advice I can give you is do not look at the President for any type of analysis on stocks, there are so many other factors at play rather than just who is in the White House. Instead, I recommend you look at the equities you are investing in and ask yourself how will they do going forward. Ultimately, businesses will find ways to succeed regardless who the President of the United States is.

Job openings continue to decline, is that a problem?

In the September Job Openings and Labor Turnover Survey (JOLTs), job openings declined to 7.44 million. This was below both the expectation of 8.0 million and the prior month’s reading of 7.9 million, which was revised lower by 179,000. This also marked the lowest level of job openings since January 2021. While this all sounds negative, there are still around 1.1 job openings per available worker. Also, this should be positive for inflationary concerns as the labor market is now more balanced when looking at the relationship between employers and employees. When employees have way more power like we saw over the last few years, it can have a big impact on wage inflation, which generally feeds through to overall inflation. While this isn’t an overly exciting report, I believe it still shows the labor market is in a good place. I think we could see job openings even fall a little further before it would become a concern.

Based on Friday’s job report, it looks like the economy is in trouble, but it’s not!

We have not seen numbers like these in the jobs report since 2020 with nonfarm payrolls only increasing by 12,000 for the month. The expectation was job creation of 100,000 jobs. Why the big miss? Right off the bat the strike of Boeing was a loss of an estimated 44,000 jobs and who can forget the two hurricanes we had in the south. It’s currently unclear how many jobs were lost during that timeframe due to those natural disasters. On the positive side, average hourly earnings did increase 0.4% for the month, which was above the estimate and the 12 month gain of 4% held steady. Revisions to August and September took out 112,000 jobs bringing the August number to only 78,000 and September’s gain declined down to 223,000 jobs. Temporary jobs are sometimes seen as underlying strength of a job market, but they have declined by 577,000 jobs since March 2022. We don’t feel this is the indicator that it used to be and we expect to see some reversal of temporary jobs for the holiday hiring season. This should start being reflected in the next month or two. The hurricanes in the south were a hit to leisure and hospitality as I’m sure many bars and restaurants were closed and the category saw drop of 4000 jobs in the month. Only two sectors in the job market saw increases which was healthcare as it added 52,000 jobs and government experienced an increase of 40,000 jobs. On the surface, the job report looks frightening, but we are out of hurricane season and heading into the holiday season. I think you’ll see a reversal in the job market in the next 2 to 3 jobs reports, which should be rather positive. Not as positive as it was during the expansion when we were recovering from Covid, but definitely better than a 12,000 job increase! There are two meetings left for the Federal Reserve and I think this job’s report would allow them to cut rates by a quarter point at the next meeting. For the last meeting of the year, we will wait for more economic data before predicting another rate.

Is the US economy still growing? The GDP shows it is.

While Q3 GDP, which stands for Gross Domestic Product, growth of 2.8% came in below the expectation of 3.1% and Q2’s reading of 3.0%, it is nowhere near signs of a recession. It also points to a US economy that remains in a good spot, even though it may be slowing. Remember slowing and declining are very different! The consumer continued to remain a bright spot in the economy as personal consumption expenditures added 2.46% to the headline number. This was thanks to growth of 3.7% as service spending growth was 2.6% and goods spending growth was 6.0%. Durable goods in particular were quite strong as they grew 8.1% in the quarter. Gross private investment had little impact on the headline number as it added just 0.07% to the headline number. The change in private inventories subtracted 0.17% and residential investment continued to be a problem as it fell 5.1% and subtracted 0.21% from the headline number. This was largely offset by growth in equipment spending of 11.1%. Government spending also was a large factor in the quarter as it added 0.85% to the headline number in large part due to growth of 14.9% for national defense spending. The only major category that subtracted from the headline number was trade as it had a negative impact of 0.56%. While exports were up 8.9% in the quarter, imports were up even more at 11.2%. Overall, I’d say this was a good report. I would warn people that I would not be surprised to see growth slow in the quarters ahead, but I’m still not looking for a recession in the near term.

Retirement Plan Allocations

The majority of working people have some type of retirement plan through their employer like a 401(k) or 403(b), but many of those people don’t pay enough attention to how those funds are invested.  Employer retirement plans are great because they automate your savings so every paycheck you have a portion that gets invested.  Over time this can build to a lot of money.  There are also no income limits you have to worry about like with IRA accounts and you get the tax benefit from making tax-deferred or Roth contributions.  However, in order to get the most out of the plan, you need to make sure you’re choosing the best investment options within that plan.  Every plan has a list of options called a fund lineup.  These may include stock funds, bonds funds, balanced funds, asset allocation funds, real estate funds, and cash funds, all of which will have different expected growth rates.  In many cases we see people choosing a random fund that they don’t understand or the default option which is usually a target date fund or stable value fund.  Target date funds generally have higher fees and an overconcentration of bonds which results in lower performance over time and a stable value fund is essentially cash which doesn’t grow.  It only takes a few minutes to update the investment options but taking the time to do it can result in thousands of extra dollars per month in retirement without actually contributing any more.  Once you choose your investments, you typically don’t need to adjust them too often, and in many cases, you can set up automatic rebalancing if you would like.  Making sure your retirement plan is set up correctly is a simple thing everyone can do which will have a huge impact on your financial future. 

Companies Discussed: Chewy, Inc. (CHWY), Genuine Parts Company (CPG) & ASML Holding (ASML)

Right off the bat you’re thinking what how could they say such a thing? Warren Buffett has hundreds of billions of dollars in T-bills! Why do we think it’s the worst investment? First off, Warren Buffett spends all day long reading, researching, analyzing and when he sees a good value investment, he will likely sell what he needs from T-bills to buy those good long-term investments. If you are someone that needs the money in 2 to 3 years, then this belief does not apply to you as T-bills are a great place to have your short-term money. But if you’re a longer-term investor, and you want your money to grow for you, I worry that T-bills are not a great place for you. What will likely happen is that you will feel safe for a while, especially when the correction comes. You’ll be glad you have money in T-bills, but you probably won’t pull the trigger when lower equity prices arrive because you will feel comfortable with the safety and no volatility of your T-bills. Unfortunately, what will then happen down the road is you will eventually get tired of getting a lower return as interest rates drop and your T-bill is only earning you 2 to 3%. You will then likely want to move to something else and maybe do something silly like look at the past performance of equities and buy after stocks go back up after the correction. When it comes to investing, be sure to use the right tool for the right job. A T-bill is not the right tool for long term investors unless you really are a skilled investor and know how to navigate the volatility in equities.

One forgotten component of Tesla’s business has a huge impact on profits!

Tesla reported numbers that were ahead of analyst expectations, but I wouldn’t say I was overly impressed. Sales increased 8% compared to last year and earnings per share of 72 cents did top expectations of 58 cents. This was a growth of 9.1% for EPS when compared to Q3 2023 EPS of 66 cents. The interesting component that people forget about is revenue from automotive regulatory tax credits. To comply with emissions regulations that are set by authorities including the United States and European Union, other automakers purchase credits from Tesla. In the most recent quarter, this added $739 million worth of revenue. While this is just under 3% of total revenue, this is essentially pure profit for the company, which means it likely accounted for close to 34% of the company’s $2.17 B worth of net income. As other companies continue to ramp up their own EV and hybrid plans, a big question I would have is will they need as many credits from Tesla? Also, if there is a change in leadership after this election, will there be a reduction in regulatory requirements that could decrease the need for other automakers to purchase these credits? This could cause problems for Tesla as it would lose a very high margin component of its business. It is hard to bet against Elon considering his successes, but I have a hard time recommending this stock since it still trades at around 70x 2025 expected earnings. With that type of multiple we need to see much higher growth for sales and earnings than what we saw this quarter. Elon did mention his “best guess” for vehicle growth next year is 20% to 30%, which is one reason the stock shot higher. This seems quite ambitious and I’d be curious where that growth is expected to come from. I would say Tesla bulls continue to point towards autonomy as a potential reason to buy the stock, but at this point I would say that is a huge gamble given the elevated level of uncertainty in that space. Elon did say on the earnings call that Tesla has developed a ride-hailing app that some employees in California have been able to use this year and he expects the service to roll out for public use next year in California and Texas. The company intends to use it for a robotaxi network in the future. With that said, according to a list of permits issued on the California Public Utilities Commission’s website, Tesla isn’t currently licensed to operate a commercial, transportation network company or ride-hailing service in California. From a regulatory standpoint, I would say Tesla is behind both Waymo and Cruise. 

Luxury brands lose excitement as thriftiness takes over in this slowing economy

Luxury brands like Gucci, Louis Vuitton and Chanel have seen a big decline in their sales growth. These luxury brands have increased their prices so much to try and keep their products exclusive. The push back towards exclusivity came after the Covid giveaway years where many consumers became short term purchasers. Unfortunately, this has turned off their normal elite customers who saw how ridiculous it was to see prices climb from 2019 to 2024 by 50 to 100 percent. They may be rich, but they are not stupid. As things have slowed, on social media and YouTube frugality has become cool once again. This includes talking about the deals you got or even buying knockoffs, which have a new name called dupes. On many of the posts on social media and other places it is now cool to show off your dupe that you purchased and how much you saved. I remember a couple years ago I talked about how the hype for expensive purses and brand names would not continue to rise. I think we have now hit the turning point where many people who pay those higher prices for purses or shoes will not be able to sell them for anything close to what they paid for them. The reason for that is you’re no longer competing on price with the brand names but now many consumers buying secondhand will compare that price to the dupe and want to get a discount compared to the dupe price. I would not recommend investing any money into these ultra-luxury stocks, even though some are down between 40 and 50%. Many of them still trade at lofty valuations and sales growth has been cut from 20 to 30% down to 2%.

Inheritance Issues with Annuities

Annuities can be purchased with qualified (tax-deferred) funds or non-qualified (after-tax) funds. Because qualified money is tax-deferred all withdrawals or income taken is taxable at ordinary income rates to the owner or the beneficiaries. With non-qualified annuities, any gain in addition to the purchase amount will be taxable at ordinary income rates to the owner or beneficiaries.  There is no step-up in basis at death and they do not receive the preferential lower tax rate treatment that capital gains and dividends do. The growth is tax-deferred, but it is deferred to a higher tax rate than other investment income.  When a spouse inherits either a qualified or a non-qualified annuity, they may treat it as their own and retain all the options that their deceased spouse had.  When someone other than a spouse inherits a qualified annuity, they have the ability to rollover those funds into an inherited IRA and will be subject to the 10-year rule like any other IRA.  The most complicated situation is when you leave a non-qualified annuity to a non-spouse beneficiary.  In this case the beneficiary is typically children of the owner and they have 2 options. They can either stretch the withdrawals from the annuity over their life expectancy, which is typically better for their tax situation as they can spread out the income over many years, or they can deplete the annuity in any way they want within 5 years.  With the stretch option, they must take their first distribution within 12 months of the date of death of the owner or they will default to the 5-year option.  This requirement often causes a problem for beneficiaries because if they forget to take that first withdrawal, they are forced to realize a potentially large amount of ordinary income in a short period of time.  Owners of annuities need to understand their options so they can not only plan their own retirement income, but also have a plan for their estate.

Companies Discussed: Capri Holdings Limited (CPRI), Expedia Group, Inc. (EXPE) & Highwood Properties, Inc. (HIW)

Private equity invests money in many different areas, but the problem that they are having is that both them and venture-capital are sitting on $2.6 trillion, which is a record high. Ultimately, they are having a hard time finding where to invest. A private equity firm generally has to earn between 12 and 14% on their investments to cover their management fee and pay investors a worthwhile return. One area they have been attracted to is HVAC, also known as heating, ventilation, and air conditioning. Other areas of interest have included plumbing and electrical companies. Over the last two years, private equity has purchased nearly 800 big HVAC, plumbing and electrical companies. It is also estimated there are plenty of smaller deals that just don’t show on the radar. I do believe somewhere down the road someone whether it’s the consumer, the employee, the business owner or the investors is going to lose. Basically, private equity is trying to streamline these smaller businesses into bigger businesses to cut costs. Many times, this changes the way they do business and it could place a larger emphasis on making more new sales rather than doing repairs, which leads to bigger profits. I do worry about the business owners who are told they can still run their business the way they want and keep a 20 to 25% stake. If things get difficult, the private equity firm with a 75% ownership will override the small business owners’ decisions.

Are gas prices going up or down in the future?

A big factor in the price of gas is the price of oil. If you live in a state like California, then you can add other factors like taxes and regulations. Oil has remained somewhat reasonable falling under $70 a barrel in the last few weeks, it then recently crossed $80 a barrel on concerns in the Middle East. We know there is potential for a major disruption with tensions between Israel and Iran showing signs of escalation. The war in Ukraine continues to linger on, but so far it has not deterred Russia from selling their oil to countries like China and India. We also have a change in our president quickly approaching and everyone has to ask themselves, who would be more likely to tame the violence in the Middle East? If the next president cannot reduce or stop the fighting, we could see Israel start sending missiles towards Iran’s energy infrastructure. This could then lead Iran to try and restrict or block oil tankers flowing through the Strait of Hormuz. These actions would likely cause oil to skyrocket to over $100 per barrel, which could mean a 20 to 25% increase in the price of gas at the pump. What has kept oil and gasoline prices low so far has been slowing demand from a weak economy in China and talks of OPEC exporting more oil come December. It’s also important to know that there is less oil in storage than the historical average, which could mean there is pent up demand to refill that storage. If you’re an investor, I think it makes sense to have at least 5% of your portfolio in oil and natural gas companies because I believe the upside in the price of oil unfortunately is much greater than the downside.

Are you still spending money in this economy?

Retail sales have continued to prove resilient as in the month of September we saw growth of 1.7% when compared to last year. With the decline in the price of gasoline, gas stations saw a decline of 10.7% compared to last year and if this component was excluded from the headline number, retail sales would have grown at a stronger rate of 2.8% in the month. Areas of weakness included furniture and home furnishing stores (-2.3%) and electronics and appliance stores (-4.6%). One area that showed positive growth for the first time in a while was building material & garden equipment & supplies dealers. It was a very small annual gain of 0.5%, but could this finally be the turning point for a group that has struggled tremendously over the last couple years? Areas of strength in the report included nonstore retailers (+7.1%), health and personal care stores (+4.6%), and food services and drinking places (+3.7%). While the growth in retail sales isn’t setting the world on fire, I believe this report provides further evidence that this economy is in alright shape.  

Income Tax vs Property Tax on Inherited Property

There are many factors to consider when inheriting real estate, especially in California, and the tax impact is one of the largest.  When receiving an inheritance of property there is an income tax consideration and a property tax consideration.  When capital assets, such as real estate, are sold for more than they were purchased for, the increase in value is considered a capital gain which is a type of income.  When property is inherited, it generally receives a step-up in basis which means the original purchase price is no longer relevant and the new income tax basis is the value of the property as of the date of death of the owner.  This means a parent who purchased a property for $200k and passes away when it is worth $1 million can leave it to their children who will not be responsible for the tax on the $800k gain. If they do sell, they will only need to report income on the appreciation after the date of death, or the amount over $1 million.  This is obviously a benefit and applies to other assets as well such as stocks and bonds.  However due to Prop 19, there may be a counteracting property tax implication when inheriting real estate.  In California the property tax assessed value can only increase by a maximum of 2% per year, even if the fair market value of the property increases much more than that.  Because of this people who have owned properties for many years are paying relatively little in property taxes compared to the actual value of their real estate.  However, when the property is inherited, the property tax assessed value increases to match its fair market value, resulting in a much higher property tax bill every year going forward.  As a result, vacation homes and rental properties that were great investments become unaffordable when the heirs receive them.  This often causes the sale of the property, which fortunately can be done income tax free due to the step-up received at death. There is an exception to this property tax increase where if children inherit the primary residence of their parents and begin treating that property as their own primary residence, they may add up to $1 million to the property tax assessed value before being required to pay additional property taxes.  Understanding these tax issues can help you determine when property should be held or sold before or after an inheritance. 

Companies Discussed: Sirius XM Holdings, Inc. (SIRI), Vistra Corp. (VST) & Etsy, Inc. (ETSY)

The Consumer Price Index (CPI) showed September headline inflation was up 2.4% compared to last year, which was a little higher than the estimate of 2.3%. Core CPI, which excludes food and energy was up 3.3% compared to last year and it also came in a little higher than the expectation of 3.2%. While the numbers were a little hotter than expected, headline CPI was down from last month’s reading of 2.5% and it registered the smallest increase since February 2021. It’s come a long way from the high that was reached in June 2022 when headline inflation grew 9%. The major discrepancy between the headline and core number was energy. The energy index was down 6.8% compared to last year and gasoline prices had a major impact as they were down 15.3% over the same time frame. Shelter costs continued to have an outsized impact on the report as the index was up 4.9% over last year and accounted for over 65% of the 12-month increase in core CPI. The decline in inflation has continued to moderate, but overall, it has continued to trend in the right direction. While this report was somewhat disappointing, I don’t think there is anything of major concern in this report. With the Fed’s next meeting coming in November, it will be interesting to see how they interpret all the data as there are several factors that will have hopefully just a short-term impact on inflation and the labor market. These factors include both Hurricane Helene and Hurricane Milton as well as a Boeing strike that has had roughly 33,000 union workers on strike since September 13th. Given all this my estimate at this point in time would be that the Fed will do a quarter point cut at that November meeting.

What is PPI and how it can affect you as a consumer

PPI stands for Producer price index. It’s important to understand these monthly numbers because it will eventually have an effect on consumers. If the cost of producing something increases, that cost will generally be passed to the retail level where consumers purchase.

While September headline PPI of 1.8% was higher than the expectation of a 1.6% increase, it is still a low level that shows no major concern on the inflation front. When excluding food and energy, PPI increased 2.8%. This was higher than the estimate of 2.7% and last month’s reading of 2.6%. It was somewhat disappointing to see a small increase over last month’s reading, but overall, it has continued to head in the right direction and at 2.8% I believe inflation at that rate is still manageable. It is worth keeping an eye on this data as the months progress, but it seems to have less impact on the markets now that inflation has become more manageable.

Gold is up about 28% year to date, here are a few important points to help you decide to buy, sell, or hold.

I hear the thoughts out there that as interest rates decline, gold should rise and so far, that has held true. But if you go back in history, in the early 80s as interest rates fell so did gold. Let’s say that correlation does hold true though, I’m not overly optimistic that we will see a large decline in the 10-year treasury as historically it yields about one and a half percent more than inflation. I believe inflation should be around 2-3% going forward. My other major concern for why I don’t see long term rates falling much further is the United States continues to struggle with a huge debt load. Looking at gold purchasing, central banks from around the world including countries like China, India, and Poland bought more than 1,000 metric tons of gold in both 2022 and 2023, but in 2024 we have seen those purchases slow down. The countries have become a little bit more concerned given the large gain this year. Some of these countries could even consider locking in some profits and sell some of the gold they own. If you still insist on buying gold, you can buy the gold bars at Costco, which has been a huge hit for them, but if you notice they don’t have a program to buy back gold. So when you want to sell those one ounce bars from Costco, you will have to go to a dealer who will charge a markup somewhere between five and 10%, which can eat into your gain more than you think. If you paid $2000 for gold and sold at $2700 you have a paper profit of 35%, but if you pay a 10% commission on that $2700, your gain drops to $430 which gives you an after commission gain of only 21.5%. Another option if you are looking to benefit from the price of gold is mutual funds and gold mining stocks, but because of the trading the returns don’t track the performance of gold very well. If you really insist on adding gold to your portfolio, then I would suggest the best way to do it is an ETF like GLD, which has low fees and tracks closely the price of gold. Full disclosure, we do not hold any gold in our portfolio now nor do we plan on buying it in the near future!

US consumers love their chicken!

In 2023 the average American consumed more than 100 pounds of chicken wings, legs, breasts and thighs, which was an all-time high. American farmers are cranking out about 10 million chickens per year. This includes various forms from organic, free range, antibiotic free, and the list goes on. Compared to beef and pork, chicken is a better value. Unfortunately, the price of chicken has increased dramatically over the last five years. Back in 2019, the average chicken was going for $3.11 per pound and today that average cost comes in at $4.08 per pound, which is $.97 more or a 31.1% increase. I personally consume a fair amount of chicken as I think it tastes good and it’s also easy on your digestive system. I know the cost of chicken is up, but are you consuming the same amount of chicken you were five years ago?

Prioritize the Right Retirement Goals

The most common goal when planning for retirement is to not run out of money. This is obviously important, but it should not be the only goal and in many cases, it should not even be the priority.  If you get to the point where your assets and income greatly exceed what is needed for your lifestyle, the chances of outliving your money decline and the priority should shift to income tax minimization.   For example, if you have a $2 million portfolio but only need $3,000 per month to supplement your social security or pension income, you probably won’t ever run out of money.  However, if you don’t implement the right tax strategies, you will end up paying way more than you need to and the longer you wait the worse it gets.  If your portfolio is $5 million to $10 million or more, you likely aren’t too concerned with running out of money and you hopefully are implementing income tax reduction strategies.  However, at this point you should also be thinking about estate taxes.  This has been largely disregarded because the currently exemption amount for a married couple is so large at about $27 million.  In 2026 though this number is expected to be cut in half to around $14 million, and the tax rate on estates that exceed that will potentially increase from 40% to 45%. An estate worth $14 million is still quite large, but compounding interest is a powerful thing.  A portfolio of $5 million can easily exceed $20 million after 20 years of growth, and waiting to address this until your estate reaches the exemption limit makes tax planning more difficult and more expensive because the value of assets will only grow faster over time.  It is too common for people to fixate on not running out of money and end up neglecting their income and estate tax planning which ultimately just results in more taxes.

Companies Discussed: Roblox Corporation (RBLX), Tesla Inc. (TSLA) & Pinterest, Inc. (PINS)

Employment report surprises to the upside      I was surprised to see the continued strength in the labor market as the growth of headline nonfarm payrolls of 254k in the month of September easily topped the estimate of 150k. Strength came from leisure and hospitality, which saw payrolls grow 78k thanks to a nice spike of 69k jobs from food services and drinking places. Other positive sectors included health care and social assistance (+71.7k), government (+31k), and construction (+25k). Only two sectors saw declines in the month with manufacturing losing 7k jobs and transportation and warehousing down 8.6k jobs. Both July and August saw upward revisions to their reports for a combined total increase of 72k. Wage inflation was also stronger in the month as average hourly earnings grew 4% compared to last year. This is up from last month’s reading of 3.8%, but still remains substantially below last year’s high of 5.92%. Precovid, wage growth was in the low to mid 3% range. Overall, this report didn’t have many problems. The only concern is, did the Fed move to soon and could inflation still be the larger concern rather than a weakening labor market? This report did increase expectations for a November rate cut to be 0.25% rather than 0.5%. I would have been shocked if the Fed would have opted for another 0.5% cut even if the jobs report wasn’t this strong. 

ILA Dockworkers strike Good news for those that were concerned about the International Longshoremen’s Association’s (ILA) strike as the union and the United States Maritime Alliance reached a tentative agreement on wages and agreed to extend the Master Contract until January 15th, 2025. Wages will increase 61.5% over six years under the tentative deal, but the major point of conflict that still needs to be negotiated is port automation. With the increase in wages, it will be interesting to see how much the Maritime Alliance is willing to budge on automation as they will likely need to look for ways to improve efficiency to offset the higher wages. Efficiency is already a concern for US ports as a study from just a couple of years ago ranked the LA and Long Beach ports as the least efficient trade hubs for handling containers in the world. Other US ports including Savannah, Georgia, New York, and New Jersey also ranked in the bottom half of the list. Of the 370-member Container Port Performance Index, we did not have a single port in the top 10. While this resolution is positive, the problems could be delayed until early next year if the two sides still cannot come to an agreement. During my research on this strike, I learned some surprising things about the union leader, Harold Daggett. You may be shocked to learn that his combined income as president of two unions is around $900,000 per year with $728,000 coming from the ILA. He currently drives a Bentley, which is a high-end luxury vehicle with a price of $210,000 for a new one. He also recently sold his 76-foot yacht and based on the US boat group market index, the average price of a yacht in that range is $1.5 million and costs around 10 to 15% of the value to operate yearly. I was also surprised to see this is a “family business” as his son is employed by the same two unions as his dad and was paid a total of more than $700,000 last year. As for the workers, on the East Coast the union workers have an average pay around $81,000 per year. However, the waterfront commission of New York estimates 1/3 of the longshoreman made $200,000 or more last year with overtime. 

Investors are still adding money to money market funds Even with the recent rate cut by the Federal Reserve, investors still put nearly $130 billion into money market funds. This brought total assets in money markets to $6.8 trillion. I don’t believe this money will stay there very long as probably within 3 to 6 months investors will start seeing the interest rates decline and once, they fall below 4%, we could see a large drop in the assets held in money market funds. The big question for investors is where to go. If you need liquidity, you’re probably best off staying in the money market funds, but if you won’t need the money for the next 3 to 5 years, you should be looking at building a strong investment portfolio using patience and a lot of research to make sure you have the right investments. 

A Lesser-Known Spousal Social Security Strategy After 2015 many of the spousal strategies such as the file and suspend or restricted application options are no longer possible. This is because a “deemed filing” rule applies which means when someone files for Social Security benefits, they are deemed to be filing for all benefits they are eligible for such as spousal and their own benefits.  When they apply, they will receive whichever benefit is larger, but not both.  However, there is still a way to switch between benefits. In order to receive a spousal benefit, the spouse you are collecting from must also be collecting. If they are not, you would only be eligible for your own benefit until they begin collecting.  Consider a wife who is no longer working and whose full retirement age 67 amount is $1,000 and who has a working husband with a full retirement age amount of $3,500.  Because of the husband’s larger benefit, the wife is also eligible for a spousal benefit of half that amount, $1,750, if she collects it at her full retirement age.  In this situation the wife may collect from her own record as early as age 62.  Since she would be collecting 5 years early, her own benefit would be reduced from $1,000 to $700.  Later on though, when her husband retires and starts his own social security, she could begin her spousal benefit at age 67 and boost her benefit by $750 up from $700 to $1,450. This $750 boost is because her spousal benefit of $1,750 is $750 larger than her own full retirement age amount of $1,000, even though she began collecting at 62.  If she had waited to apply for anything until age 67, she would receive the full spousal benefit of $1,750, but she would have waited 5 years of collecting nothing just for an extra $300.  From a Net Present Value perspective, it is better for the wife to collect her own benefit at 62 and later receive the spousal boost rather than wait completely until 67.  Also, there are many spouses who collect early without knowing they are also eligible for a larger spousal benefit when their spouse retires.  If they do not alert the Social Security Administration, they may not ever receive their increased benefit.

Companies Discussed: Costco Wholesale Corporation (COST), Humana Inc. (HUM) & LyondellBasell Industries (LYB)

The price of homes has continued to rise and it has left some people out of the housing market, but that may not be a bad thing. I say that because people are doing anything they can to buy a home at these high prices. This includes risky endeavors like cashing in their retirement savings or borrowing from friends and family. The Atlanta Fed’s affordability index was recently at 68.5, which would mark its lowest levels since 2006. I worry people are getting in over their heads as ownership costs, which include mortgage, taxes, and insurance are now occupying nearly 44% of median household income. Generally the 30% level is considered a threshold for affordability and that was last seen in 2021. I worry when the economy slows down, you could see people selling their houses because they can’t afford them. I think it’s rather silly that some campaign promises have talked about giving $25,000 for down payments or expanded tax credits for developers to build affordable rental housing. These sound good as soundbites, but I think they’re terrible ideas because all they will do is pushup demand and that will continue to put more pressure on prices. People don’t realize that builders say roughly 25% of the cost of new homes is from regulatory costs like building codes and zoning issues. If we could get the local government to back off, you could see a nice reduction in prices. The problem is we have the federal government trying to give you money to buy a higher priced home and local governments are raking in the dough collecting fees on those higher priced homes. Throughout history, it has never been great to invest or buy into any type of asset when there is a buying frenzy going on. Look at the history books if you don’t believe me and then think ahead what will happen in the next 5 to 10 years. I know my opinion goes against many experts, but in our over 40 years in asset management, we have seen how things can change unexpectedly.

Is the new iPhone 16 going to move the stock price up?

Last weekend an article in Barron’s written by Alex Eule tried to convince people that Apple stock will increase based on looking back to the original iPhone and every iPhone release after that. Based on the research, Apple stock has returned an average of 11.7% six months after iPhone releases. But before you run out and buy the stock, one thing I noticed was there was no discussion around price/earnings ratios during those launces. I believe it is very important to not over pay for any company and I am curious what the PE ratios were during those last 24 iPhone launches. Holding Apple several years ago I know the multiple was not where it is now in many of those cases. Don’t get me wrong, I think Apple is a great company and has great products, but I worry with the stock trading at 31 times next year ‘s earnings it is more than fully valued. I also believe some of that data was skewed considering the first iPhone launch led to 63.7% return six months after the release and there are several instances where the stock did nothing or actually fell like the iPhone 12 (-3.4%), the iPhone 13 (-1.3%), or the iPhone 15 (-1.0%). I was surprised to see that analysts are more negative than I expected on the stock as currently nearly 1/3 of them have either a hold or a sell rating. Mr. Eule does correctly point out that if Apple beats expectations, the price earnings ratio will come down. However, that assumption would also mean that the stock price did not climb to offset the earnings beat. We have avoided investing in Apple for quite some time now, but I will still not break my discipline and I will not overpay for any company because history has proven eventually everything comes back to the norm. 

ETFs have proven not to be as effective as mutual funds

When Jack Bogle, the founder of Vanguard, was CEO back in the 90s, he refused to add indexed ETFs (exchange traded funds) to their lineup. His concern was it was too easy for people to jump in out of the products and not be long-term investors. There are now long-term studies proving that he was right. A report from Morningstar shows there is a 0.9% per year gap over the study’s 10-year period favoring investors who used indexed mutual funds over investors who used indexed ETFs. While it might not sound like a lot, the compounding takes hold in the long-term and I believe it further illustrates why people should not trade. Unfortunately, even financial advisors who control about 2/3 of the ETF assets appear to be just as jumpy and emotional as their clients. Maybe they’re just trying to prove their worth due to the management fees that they charge on top of the ETF fees.

Is our tax code too complicated?

I know many people hate paying taxes, but have you ever thought about how much time you spend compiling all those documents? According to the Tax Foundation, it is estimated that the time and money individuals and businesses are spending on complying with the federal tax code this year could reach 7.9 billion hours and $133 billion in out-of-pocket expenses—or $546 billion when also accounting for lost productivity. I believe a major problem is that we keep adding more and more complications to the tax code and between 1994 and 2021 it grew in length by 40% to about four million words and has expanded steadily since. Regulations keep climbing and according to the National Taxpayers Union Foundation, from 2000 to 2022 the Department of Treasury’s annual volume of regulations grew 35% to 17,631 pages from 13,070. With all the complications, it’s no wonder most people don’t understand how taxes work and what they actually pay in taxes!

The Third Type of Retirement Account

When it comes to retirement accounts, most people are familiar with 401(k)s, Rollover IRAs, and Roth IRAs.  These accounts have tax benefits when contributing and withdrawing money and allow either tax-deferred or tax-free growth.  However, there are also restrictions such as annual contribution limits and age requirements to make qualified withdrawals.  In addition to these pre-tax or Roth accounts, it can also be helpful to supplement retirement income with a third type of retirement account, which isn’t a retirement account at all – the taxable brokerage account. There are no limits when making contributions or withdrawals and technically withdrawals from this account are not taxable.  This account produces income in the form of capital gains, dividends, and interest which must be reported every year whether withdrawals are taken or not, which is why the withdrawals are not a taxable event.  However capital gains and dividends are taxed at a lower rate than other types of income and in retirement it is more common to be in lower tax brackets which means the tax rate on those gains and dividends can be as low as 0%.   Retirees may have gross income of $125k or higher in some cases while still falling in that 0% tax rate.  It is great and typically preferred to fund retirement accounts but if those are being maxed out, it can make sense to put addition savings into a taxable account.  These types of accounts aren’t utilized as often as they should and they are more commonly used when receiving a large sum of money such as an inheritance or proceeds from selling a property; but combining them with other “retirement” accounts adds flexibility and tax diversification when structuring withdrawals in retirement.

Companies Discussed: Uber Technologies (UBER), Lennar Corporation (LEN) & Alibaba Group Holding Limited (BABA)

The Job Openings and Labor Turnover Survey (JOLTs) showed job openings continued to fall across the country in the month of July. It was reported that available positions fell to 7.67 million in the month, which 237,000 lower than June’s downwardly revised number and well below the estimate of 8.1 million. While this marked the lowest level since January 2021, there were still close to 1.1 job openings per available worker. I do believe we still have some room left for normalization before these declines in job openings becomes problematic. This news also caused the relationship between the 10- and 2-year Treasury yield to uninvert for the first time since June 2022. Generally long-term rates are higher than short term rates and I believe we will see the yield curve continue to steepen as the Fed cuts rates. While the curve usually reverts before a recession hits, I still believe we aren’t heading towards a problematic recession in the coming months.

The labor market is definitely slowing

Nonfarm payrolls increased by 142,000 in the month of August, which was up from 89,000 in July, but below the estimate of 161,000. Both June and July also saw downward revisions, which totaled a substantial 86,000. Leisure and hospitality (+46K), healthcare and social assistance (+44.1K), construction (+34K), and government (+24K) led the way for job gains in the month. Manufacturing (-24K), retail trade (-11.1K), information (-7K), and utilities (-200) all subtracted jobs from the headline number. I was also surprised to see professional and business services only create 8K jobs in the month and I believe that is a good indicator that the economy is definitely in a slowdown. While the numbers don’t look great, I still believe there is no cause for major concern at this point. With an unemployment rate of 4.2% and the major gains we saw coming out of Covid, it was unlikely we’d see that type of labor market continue. I still believe it’s possible we see a soft landing, but in that scenario, you wouldn’t see major payroll gains every month and the prints would likely be more muted and even softer than the readings we have seen the last few months. My expectation is for the Fed to cut rates by 0.25% at the September meeting followed by cuts of 0.25% at both the November and December meetings.

The economy is getting back to normal

It may feel like the economy is weak, but I believe that is because we are comparing it to an excessive economy that had too much money floating around and people spending it pretty much on anything they wanted while not caring about how much they paid. Now that extra cash is gone and we’re back to normal. That might feel uncomfortable for some people as they now can’t spend so easily on things like luxury items. Proof of this can be seen in the used luxury watch market which was very hot, but has now seen prices fall over the last 9 quarters because the demand is gone. I don’t care if you’re buying stocks, homes, or luxury items, if you overpay during the hype, you’ll probably end up losing money down the road. I believe it’s always best to buy things on sale, even if that means being patient for a few years.

There’s a lot of talk about company’s price gouging, but the numbers tell a different story!

There is no doubt that with inflation, prices for many items have increased over the last five years. But are businesses taking advantage of these higher prices to increase their profit margins? Looking at just the companies in the S&P 500, the average price markup between the selling price and the cost is 54%. That compares to 51% five years ago. According to research from financial company Bloomberg, they say the grocery business markup is actually down from five years ago and when looking at the average profit margins for grocery stores, it is now 0.3% lower than five years ago. You may not like the information because we want to blame somebody for paying higher prices, but based on these numbers companies are not price gouging. We do believe every business has a right to make a decent profit for being in business, but the free market and competition should eliminate price gauging and keep the market balanced.

How the Time Value of Money Impacts Roth Conversions

When you do a Roth conversion, the amount you convert into a Roth account is taxable when you do it. First, this means you are paying taxes now that you didn’t need to.  Second, the question people have is, “If I don’t pay that tax now and instead got to keep those dollars invested, what would that grow to and does that offset the benefit of doing the conversion?”  In other words, is having extra tax-free money in the future worth paying taxes now when considering the time value of money? Time value of money is the concept that dollars today are more valuable than dollars in the future because dollars today may be invested and grow over time while dollars in the future are worth less due to inflation.  This is an extremely important concept and needs to be considered when making almost all financial decisions from Social Security to paying debt to investing in general. However, when it comes to Roth conversions this should not be considered.  For example, let’s consider someone making a $50,000 Roth conversion who is in the 20% bracket and will be for the rest of their life.  On that conversion they will owe $10,000 in taxes (20%) meaning the remaining $40,000 makes it into the Roth account.  Money in a pre-tax account and a Roth may be invested exactly the same so we’ll assume an 8% compounded return.  After 10 years, the $40,000 in the Roth grows to $86,357, which is all tax free.  The question though is what would that $10,000 have grown to if it didn’t have to be paid 10 years prior?  Well, if no conversion was done, all $50,000 would have remained in a pre-tax account growing at the same 8%, so after 10 years it would be worth $107,946.25, obviously more than the $86,357 in a Roth.  However, that $107k has not yet been taxed so if accessing it still costs the same 20% tax that would be $21,589.25, meaning the after-tax amount is… $86,357 or the exact same as we would have in the Roth.  What this means from a time value of money perspective is, since pre-tax and Roth accounts may have identical investments and returns, the present value of the tax on the conversion is the same as the future value of the tax if there is no conversion, assuming the tax rate is the same. In our example the future value of $10,000 is $21,589.25 assuming an 8% return over 10 years, which is true. Therefore, when considering a Roth conversion, it is not the time value of money that is relevant, but the tax rate during the conversion compared to the tax rate in the future.  In our example we assumed a consistent 20% tax rate which is not realistic.  Over time income levels and sources change as well as the tax rates themselves.  If Roth conversions are performed when the individual tax rate is lower than it will be when pre-tax retirement withdrawals are being taken, the conversion is helpful. For instance, if we think our retirement tax rate will be more than 20%, a conversion should be done now if it is 20%.

Companies Discussed: DraftKings Inc. (DKNG), Dollar General Corporation (DG) & Dell Technologies (DELL)

Inflation concerns are falling as the July Consumer Price Index (CPI) showed an increase of 2.9% compared to last year, this would mark the lowest reading since March 2021. Core CPI, which excludes food and energy was also positive as it came in at 3.2% which would mark the lowest reading since April 2021. Areas that continued to put upward pressure on inflation included food away from home (+4.1%), electricity (+4.9%), and motor vehicle insurance (+18.6%). Other areas that used to be problematic have now reversed course and are benefitting the inflation report. This includes used cars and trucks (-10.9%) and new vehicles (-1.0%). Shelter continues to be the heavyweight in the report as the category increased 5.1% compared to last year and accounted for over 70% of the increase in core CPI. If shelter was stripped out, CPI would have increased just 1.7% compared to last year. I believe we’ll continue to see further progress on inflation as we end the year.

Retail sales data shows people are still spending money

Data points continued to come in favorably for the Fed this week as retail sales increased 1.0% compared to last month. This easily topped the estimate of 0.3%. Looking compared to last year, retail sales were up a healthy 2.7%. Nonstore retailers continued to see strong growth with a 6.7% gain compared to last year and while growth has slowed, food services and drinking places still showed good growth of 3.4%. It appears both electronics and appliance stores and building material & garden equipment & supplies dealers have bottomed with gains of 5.2% and 0.4% respectively. This is the first time I remember seeing a positive gain in building material & garden equipment & supplies dealers in a long time. Furniture & home furnishing stores did remain a drag on the report as sales declined 2.4% compared to last year. Overall, I believe this was a great report considering we are seeing inflation slow and the consumer is still willing to spend. The soft landing many have wondered about is looking more and more possible with reports like this.

Are separately managed funds best for you?

At Wilsey Asset Management, we manage all our accounts separately and have done that now for over 30 years. What that means is our clients actually hold the securities in their portfolio versus buying shares in a mutual fund or ETF. This trend seems to be taking hold with other brokers as asset growth for separately managed accounts (SMAs) has been 30% over the past two years. SMA’s are now at $2.4 trillion in assets in professionally managed accounts. This compares to $4.3 trillion in mutual funds and $1.9 trillion in ETF’s. These managed accounts will generally use an outside money manager and it will not be quite as individualized as people would prefer. One thing to understand is the fees considering you are likely paying you’re an advisor/broker a fee and then an additional fee to the SMA manager. Often times this strategy can cause confusion for the investor as well, sometimes we have seen this strategy produce 50 to 100 positions which can also be a nightmare to get out of. Lastly if you have questions on why certain positions are in the portfolio you will not be able to call and talk to the person making those investment decisions and you’ll be stuck with a pre-scripted response from the broker. Be sure to ask your broker/advisor many questions if they are advising SMAs as it may sound better than it really is.

Financial Planning:

When to get Umbrella Insurance

Both home and auto policies contain liability coverage, which pays in case you are sued for damaging property or if you are responsible for hurting someone.  An example could be someone slipping on your driveway, but more commonly it is due to a bad car accident.  An umbrella policy adds extra liability coverage that kicks in after the home and auto liability is exhausted.  In recent years, litigation across the board has been rising, but also inflation has increased the cost of medical bills and auto repairs.  This in turn has resulted in more umbrella claims as costs are more likely to exceed the coverage on home and auto polices alone.  As a result, insurance carriers have increased premiums on umbrella policies (as well as home and auto policies) and have been more likely to deny umbrella coverage increases or coverage all together.  Even with these cost increases, it is still relatively affordable at a few hundred dollars per year, so if you are underinsured you should consider purchasing a policy.  Umbrella coverage comes in increments of $1 million, and the rule of thumb is to carry insurance equal to your net worth.  However, this can be excessive in some circumstances as assets like qualified retirement accounts and home equity have some protection against lawsuits. Generally speaking, if your net worth is over a million, you should have an umbrella policy, and depending on your net worth, the types of assets you own, and your exposure to liability, you may need to carry higher amounts of coverage.  The last thing you need after building a nest egg is for an unexpected lawsuit to take all your assets and put you back to square one.

Companies Discussed: JB Hunt Transport Services (JBHT), Mobileye (MBLY), Ulta Beauty (ULTA)

May retail sales showed the economy is continuing to decelerate, which is exactly what I think we need to see. The release showed retail sales were up 0.1% compared to last month, which missed the estimate of 0.2%. When looking at May 2023, retail sales were up 2.3%. While this doesn’t show a booming economy, I still believe it is a healthy level. Nonstore retailers continued see strong growth as sales were up 6.8%. It appears as the comparisons have gotten more challenging sales growth at food services and drinking places is slowing as sales were up 3.8%. It appears we have seen a turn in electronics and appliance stores as sales were up 1.8%, but furniture and home furnishing stores (-6.8%) and building material and garden equipment and supplies dealers (-4.3%) remained the two weakest groups in the report. Overall, I think this report should provide further evidence that a rate cut by the Fed should be warranted as we exit the year. 

Annuities

I have always cautioned people when it comes to annuities. Over my 40 years of financial experience, I have seen annuities sold to people by companies that later went through bankruptcy and insolvency. Two companies come to mind, Baldwin United and Executive Life Insurance Company. After these bankruptcies some policy holders only received 2/3 or so of their investment and no interest at all. I was curious how some annuities were paying high yields over the last few years with interest rates so low. Thanks to an investigative team from Barron’s, they discovered a report from the Federal Reserve Bank of Chicago dated June 3rd that life insurers are relying more heavily on private placements and generally higher yielding securities that are exempt from federal reporting requirements and are lacking an active secondary market. According to the report, private placements now are about 20% of all life insurance bond holdings, which is up from 15% just five years ago. I believe holders of these annuities have no idea that their annuity is backed by private loans from soccer teams, film financing, and even sports broadcast rights. They are definitely far riskier than the old insurance companies that would invest in good quality equities along with highly rated bonds. Consumers need to be aware because in the brochures that are given by the sales people who have no idea what’s in the portfolio, they’re still saying these are as safe as CDs, savings bonds, money markets, and treasury bills. Unfortunately, that is not the case and I believe down the road we could be reading about seniors who were depending on these annuities for their retirement and they have stopped receiving income from the annuity and/or have lost some of their principal. My recommendation is to understand what you’re investing in and make sure the investment advisor you’re dealing with is knowledgeable about the investments and not just selling you a product for a big commission or a trip to Australia or Morocco as some annuity companies have given as an incentive to their brokers with the best sales. It’s always best to deal with an investment advisor who is 100% a fiduciary. 

New Car Sales

Maybe you’re driving around in a car that is six- or seven-years old thinking gosh my car is old, perhaps I should replace it with a new one. Well don’t be in too much of a hurry. The age of your car is well below the average vehicle on the road which is currently 12.6 years as reported by S&P Global Mobility. That Is up from the average age of 11.2 years just 10 years ago. This is caused by many factors, not just the average cost of a new vehicle which is around $47,000. You also have higher interest rates, your registration will be higher, and insurance premiums could increase by double digits with a new car. There are some people who just don’t want the hassle of going to buy a new car and having to deal with the car sales person that could put a lot of pressure on them. Some people flat out just don’t like the new cars and they miss the old buttons and easy access to turn things on and off as opposed to the new touchscreens and technology that can take hours and hours to learn. New car sales have done well over the last few years and probably will continue to stay strong for years to come, but there are a few people out there that are just resisting the technology and will stay with their current vehicle for many more years to come.

Navigating the Social Security Earnings Limit

Social Security can be collected between the ages of 62 and 70, but if you apply before your “full retirement age”, which is usually 67, you will be subject to an earnings limit. This rule states that for every $2 of earned income, such as wages, you have above the annual limit of $22,320, $1 of your Social Security will be withheld from you. This limit does not include retirement income like pensions, interest, capital gains, dividends, or IRA withdrawals. Also, once you reach your full retirement age, this rule no longer applies meaning you can continue to work without any benefit reduction. If you do have Social Security benefits reduced due to this earnings limit, once you reach age 67, you will receive a credit for the benefits you did not receive and your monthly payments will be permanently increased to compensate for it. In other words, the benefits are not totally lost, just deferred until your full retirement age. This might happen if you retire and return to work, or simply apply for Social Security before you retire. Most people retire partway through the year, so it is common for wages in the first half of the year to exceed the $22,320 limit. However, there is a second component to this earnings rule which states if you apply for Social Security in the same year you retire, as long as your monthly earnings are less than $1,860 once you begin Social Security, there will be no reduction. It is also important to note that this earnings rule is the main reason your “full retirement age” is significant. It is a misconception that it is better to wait until full retirement age to collect when in reality every month you wait beyond age 62 up until 70 your benefit amount increases. If you are retired, your full retirement age is irrelevant as the earnings limit will no longer apply.  

Stocks Discussed: Dave and Busters (PLAY), Airbnb (ABNB) and Rivian (RIVN)

I would say I was very optimistic after the May Consumer Price Index (CPI) was released. Headline CPI increased 3.3% compared to last year, which was below the estimate and last month’s reading which both stood at 3.4%. Core CPI which excludes food and energy was up 3.4%, which was below the estimate of 3.5% and last month’s reading of 3.6%. This also marked the lowest reading since April 2021 when inflation concerns really began and the core CPI was at 3.0%. In March 2021 core CPI was at 1.6%. The shelter index continues to be the heavyweight moving core CPI as it was up 5.4% over last year and accounted for over two thirds of the annual increase. Many areas of the report have come back down to more normal inflation rates with areas like food at home increasing just 1% compared to last year. Food away from home was a little more challenged as that was up 4% compared to last year. I believe much of this can be attributed to the continued demand for bars and restaurants and the increased wage pressures. Although energy saw a 2% decline compared to the previous month, it was 3.7% higher than last year. This stems from the major fall in energy prices last year that I believe will make for difficult comparisons over the next few months. Two major areas that have remained problematic include admission to sporting events, which saw an increase of 21.7% compared to last year and motor vehicle insurance, which saw an increase of 20.3% compared to last year. It was positive to see a monthly decline in motor vehicle insurance of 0.1%. I believe this category will not be a problem in 2025 as much of the rate increases have now taken place. Overall, I believe this report should be supportive of a rate cut, but we will need to see more reports like this with further progress in the coming months for a cut to actually occur. 

May PPI

After a positive Consumer Price Index (CPI), the Producer Price Index (PPI) delivered more welcome news on the inflation front. May headline PPI rose 2.2% compared to last year and when comparing against the month of April there was a decline of 0.2%. Estimates were looking for a 2.5% increase in the annual number and a 0.1% increase in the monthly figure. When looking at core PPI, which excludes food and energy, the report showed and increase of just 2.3% on annual basis which was below the expectation for a 2.5% increase. These numbers are right around the Fed’s 2% target and should be a positive indicator for CPI and PCE as we continue to move forward. 

Private Investment Deals

Investors be aware that your local broker could start hitting you up for private investment deals to fund apartment complexes somewhere around the country. The problem is the banks are starting to clamp down on just loaning money for projects on apartments that may be losers. In 2023 almost 500,000 new apartments were opened which is the most since the 80s. That growth is expected to continue and it’s estimated to be around the same number in 2024. We have said before this will help bring down housing costs probably by 2025 as there are so many apartments on the market that the owners will give so many free incentives and reduce the rents just to get people in and provide the owners some cash flow. This will affect the housing market along with the CPI since shelter costs are a big part of that index and lower rents would help reduce the inflation numbers. 

Apple Stock

I was surprised to see Apple move more than 7% higher a day after the developer conference on Monday and close at a record high. There was a lot of hype leading up to the event as the company was anticipated to detail more about its AI strategy. I’m not sure if I saw the same conference, but I was not overly impressed by the details. Apple launched Apple Intelligence which can proofread your writing, or even rewrite it in a friendly or professional tone. It can create custom emojis called “genmoji,” search through your iPhone for specific messages from someone, summarize and transcribe phone calls or show you priority notifications. It can even tap into OpenAI’s ChatGPT to provide you more detailed answers from Siri. ChatGPT is also built into systemwide writing tools. So, for example, Apple said you can create a bedtime story for a child and add images created by ChatGPT. Since the updates will only take place on the iPhone 15 Pro, Pro Max, and newly built phones, the hope is there will be a major upgrade cycle. Personally, I just don’t see how these updates will get many people to move and buy a phone that will cost at least $1,000. I know new emojis is definitely not enough for me to upgrade. I also do worry about how this will impact the relationship with Google. Alphabet currently pays Apple around $20 B per year to be the default search engine on Apple devices. If more people begin to use the AI function and do less search, why would Alphabet continue to pay such a hefty fee? For a stock trading at close to 30x this year’s projected earnings, there is now a lot riding on this next iPhone cycle. 

What should you do with your Annuity?

It is very rare that I come across someone who fully understands their annuity. Annuities can be either qualified or non-qualified and their status will determine how they are taxed. A qualified annuity means it was purchased with retirement funds while a non-qualified annuity was purchased with non-retirement funds. Generally qualified annuities are more flexible because they can be surrendered and rolled into another IRA without tax. However, if non-qualified annuities are surrendered, the entire gain becomes taxable at ordinary income rates. Because of this sometimes (but not always) it can make more sense to annuitize non-qualified annuities which is the process of converting the funds into a pension-like stream of income. This is still taxable, but the gain is spread out over time rather than realized in one year. I recently spoke with someone who is close to 80 years old and owns a non-qualified annuity. It turns out their annuity has two annuitization options. They can either withdraw 5% of the account value for the rest of their life, or they can withdraw 7% of the account value until the account value has been reached, but would also stop upon death. The issue here is in both of these cases, there is a decent chance they will not live long enough to get all their money back, let alone any growth. Another option would be to surrender the annuity to guarantee they receive all their funds back, but then they would pay a decent chunk of it in taxes. This is one example of many that illustrate if you have an annuity, make sure you also know when and how to use it because waiting will limit your options.

Stocks Discussed: Docusign (DOCU), Ferrari (RACE) and Southwest (LUV)

The Jobs Report showed the labor market continues to remain on good footing considering nonfarm payrolls rose by 272,000, which easily topped the estimate of 190,000. Strength occurred in health care and social assistance (+83.5K), leisure and hospitality (+42k), professional and business services (+33k), and construction (+21k). Government was also strong as it added 43k jobs in the month. I generally don’t like to see government adding this many jobs as it is essentially an expense to taxpayers and it can detract from showing an accurate picture of the private labor market, which should ultimately drive our economy. The strangest part of the report was the divergence between the establishment survey and the household survey. While the establishment survey showed strength, the household survey showed the unemployment rose to 4% for the first time since January 2022 as the level of people who reported holding jobs fell by 408,000. Wage inflation was also a slight concern as average hourly earnings rose 4.1% compared to last year. This was above the estimate of 3.9% and last month’s reading of 4.0%. Overall, I’d say this report was somewhat complicated with a mix of positives and negatives. I don’t think it provides any evidence for the fed to cut rates, but I also wouldn’t view it as problematic.

JOLTs

The Job Openings and Labor Turnover Survey (JOLTs) showed there were 8.06 million job openings in the month of April. This missed the expectation of 8.4 million and was also below the prior month’s reading of 8.4 million. The number marked the lowest reading since February 2021 and it was well below the peak above 12 million in March 2022. While this all sounds like bad news, I believe this puts us back in line with a more normal labor market. Even with this decline, the labor market is still historically strong and I believe there is further room for it to soften without causing problems. There are still about 1.2 job openings for every available worker, which puts us back in line with where we were before Covid. 

NVIDIA and the S&P 500

There is no doubt that AI has pushed Nvidia to records that are nothing short of astounding. It should be noted that when you include Microsoft, Meta, Amazon, Apple and Alphabet into the equation, these six companies now account for nearly 30% of the value of the S&P 500. Nvidia alone has accounted for close to 35% of the index’s gain this year. Even a powerful freight train eventually gets derailed when it gets going too fast. What could cause Nvidia to fall off the tracks? I see more articles about how the demand and future sales of AI could be overhyped. If that comes to be true, then the earnings estimate for Nvidia will fall, which would cause a deep decline in the stock price. It is currently the king of the mountain and no one can knock it from the top, for now. But no company stays on top forever and competition can come out of nowhere causing the price of chips to be cut dramatically, which also could cause a problem for earnings. Keep in mind Nvidia does not make the chips, they rely on Taiwan Semiconductor to manufacture the chips for them. The contracts that they have are rather secret, but what if Taiwan Semiconductor says they want a bigger piece of the pie? This could really hurt Nvidia’s profits and there’s no other company that can produce the chips at this time. I think it could be a very rocky summer for equities, especially stocks that are trading at valuations that are well above the norm. 

Natural Gas Prices

It was a hot May across the country, except for here in San Diego. We seemed to have some nice weather with temperatures still in the 70s. But with hot weather across the country, it increased electricity demand as people cranked up their air conditioners to stay cool. Before the increase in demand, there was a large inventory of natural gas that brought natural gas prices down to levels not seen in a long time. The reduction in natural gas inventories to more normal levels has allowed natural gas prices to rise and they now trade around $2.60 per million British thermal units which was about 65% higher than the low reached in late March. It is forecasted that this could be a hot summer, which means a higher use of natural gas for electricity to run those air conditioners. One area that is helping is solar, which is reducing some of the need for natural gas. Currently, estimates are that natural gas should not be too much higher as recent prices are perhaps just enough to bring back the drillers. This should make consumers happy with lower natural gas prices and the drillers happy since they can drill more and get a reasonable price for natural gas. It’s a nice situation, but keep in mind it will not last forever and something will cause the market to move one way or the other and spoil the party. 

Game Stop

Roaring Kitty is back and I must say I still don’t get why people follow this guy. He seems nice and all, but he has profited tremendously from this GameStop (GME) craziness. Keith Gill who goes by Roaring Kitty now holds 5,000,000 shares of GME and has 120,000 call options with a strike price of $20 that expire June 21st. It is unlikely he will be able to take full possession of that stock after the options expire as he would need $240 million to take custody of it after exercising the calls. Just looking at the value of his GME shares he has a net worth of at least $140,000,000. Considering he started this crusade sharing his positions with a $53,000 stake in September 2019 he must have sold during the craziness in 2021. I cannot think of any other way that he was able to amass such a fortune considering the major fall in GME’s stock price that occurred over the last few years. The initial premise for buying the stock in 2021 was to stick it to hedge fund managers who were shorting the stock. At that time short interest was over 100% and a short squeeze was rather easy to achieve. Recently the short interest was around just 20%. While the intention was to essentially take money from these big hedge funds, I believe there were many small investors that Gill profited off and this time around if he sells with a big gain, I believe it will come at the expense of even more small investors. The company has terrible fundamentals considering the business model is dying with sales that declined 29% compared to last year and a loss of $32.3 m in the recent quarter. GME also said it would sell an additional 75 million shares on top of the 45 million share sale it had announced in May that raised more than $900 million.

Stocks Discussed: Salesforce (CRM), Foot Locker (FL) and eBay (EBAY)

The core personal consumption expenditures index (PCE), which is the Fed’s preferred measure for inflation did not show much progress in the month of April. Year over year core PCE was up 2.8% which matched the previous month’s reading. If you want to get really mathy with the numbers and move over one more decimal place there was actual a positive move in the number considering it came in at 2.75% vs slightly over 2.8% in the month of March. This would result in the smallest gain since March 2021. Headline PCE which includes food and energy was up 2.7% compared to last year, which also matched last month’s reading and the estimate. While I can’t say the numbers were overly impressive and point to enough evidence for a cut, I also don’t see any reason for the Federal Reserve to discuss rate hikes. My estimate at this point in time is for the Fed to cut once, maybe twice this year. 

Quality Investments 

At our firm, Wilsey Asset Management, we are currently getting out of our second largest holding, which we began investing in back around 2010. I want to explain the long-term history of this not to brag about how some of our clients got a very large return over that timeframe, but to help you understand, what happened over the years to get that type of return. The numbers I’m using while very close are not the real numbers and are for educational purposes only. In 2010 we began investing in this company at around $20 per share. Eight years later it traded as high as $120 per share, along with our clients we were very happy with the gains. Then in 2020 when Covid hit, we saw this equity drop more than 50% to around $50 per share. Fast forward to today and we are currently selling this position around $160 per share. The real lesson here is to explain why we continued to hold even when we were down over 50% in 2020. We always talk about the fundamentals and how in the short term they mean very little, but in the long term they can make a big difference. Each quarter we review the financials and listen to or read the conference calls to see what is going on with that company over the last quarter and find out what management sees going forward. Every Monday we go over all the ratios, growth rates, forward earnings and roughly a total of 25 other numbers to keep asking, is this a business we want to continue to hold? This discipline and strategy is what keeps us on course with good quality companies over the long term. I have said for many years we are not traders; we are long-term investors. I want to emphasize that does not mean we or you should ever hold any equity or any investment blindly long-term without following what that business is doing on a regular basis. 

Short-Term Investing 

If you’re like our firm, Wilsey Asset Management, you may be sitting on a lot of cash as we have made a couple sales this year and aren’t finding anything worthwhile to buy. The advantage this time is short term rates are high so we can invest that money in short-term instruments and receive a roughly 5% rate. Many other people are catching on. Back in 2022 retail investors only owned about $1 billion of treasury bills, at the last count that is now over $16 billion. Investors need to be cautious because there is what is known as reinvestment risk. Today you may be receiving 5%, but then 6 to 12 months from now that could be 3 to 4%. Keep in mind these should not be long-term investments, but rather a holding place until you can find a good long-term investment. Besides the short-term maturity of T-bills and their safety, they are also come with the benefit of being free from state income taxes. There are also short-term ETF’s and money markets that can invest in short term US government securities, but be aware they may not be investing 100% in tbills. Sometimes they invest in short term loans backed by US government securities or repurchase agreements, which are not free from state income taxes. So, enjoy the high yield on short investments, just realize we are currently dealing with an inverted yield curve and short-term rates should come down in the near future. 

Reducing Auto Insurance Premiums

It’s no secret that auto insurance rates have noticeably gone up the past few years. To counteract these rate hikes, here are a few tips that may help keep premiums low. It is common for auto insurance to include collision and comprehensive coverage. Collision coverage pays when there is damage to your vehicle due to a collision that you cause. Comprehensive coverage pays when there is damage to your vehicle caused by something other than an accident such as theft, vandalism, or acts of nature. Both collision and comprehensive coverage come with deductibles that must be paid before the coverage kicks in, and increasing these deductibles is one way to reduce the amount of premium you pay. In some cases, if you have a vehicle with a low market value and that you don’t drive often, it may not be necessary to carry these coverages at all which would further reduce premiums. Additionally, auto insurance premiums are based on your assumed annual miles driven, which in many cases is more than you actually drive. If you provide your insurance carrier with a more accurate lower number, they will reduce your premium. In many cases it is not necessary to change insurance carriers, but rather just adjust the coverage on your existing policy.

Stocks Discussed: Treehouse Foods (THS), Target (TGT) and Live Nation (LYV)

You may have missed the AI boom in NVIDIA, but for patient longer-term investors there could be a good investment opportunity in energy going forward. As more companies begin to use AI, the demand for energy will increase. Keep in mind that this is on top of expected growth in the electric vehicle market and if it continues on in future years, cryptocurrency is also a drain on electricity to mine all those silly tokens. To give you an example on the power needed for AI, a ChatGPT request takes roughly 10 times as much power compared to if one did a Google search. Based on some research from Bank of America, they estimate that the current demand for electricity from datacenters is currently one to two percent, but in the next seven years that could increase to eight percent. There will be some great opportunities for the investor who is looking out 3 to 5 years, if they invest in good fundamentally strong companies. The nice thing about many energy companies is they also pay a decent dividend while you wait for the investment to grow. 

Bond Allocation

When we see potential clients come to our firm for a consultation and we see they have a 10% to maybe 30% allocation of bonds, I just scratch my head and wonder what the broker was thinking. Maybe they weren’t. Even the Bond King, Bill Gross, who managed the PIMCO Total Return Fund and who was largely responsible for bringing the investment firm PIMCO from assets under management of $12 million to around $2 trillion has said he now dislikes bonds and is investing money in other areas. He had some of the best returns of bond fund managers, but it came at time of declining interest rates from 1981 to 2020 that is now over. With long term interest rates at current levels, I believe the best return that investors could hope for is probably the coupon rate which on a 10-year treasury will be somewhere around 4.5%. This will not only hurt bonds; I believe it will also lead to disappointing returns in the old asset allocation model of 60% in equities and 40% in bonds over the next five to ten years. So, if your broker or advisor has part of your money in bonds, you may want to ask why. I would say be prepared for the weak answer of something to do with asset allocation or that it has worked in the past. In other words, they are taking the easy way out rather than doing some hard research for your portfolio going forward. 

Tariffs on Chinese Goods

I was happy to see the Biden administration boost tariffs on Chinese goods from electric vehicles to steel and aluminum. Unfortunately, I’m worried about Newton’s law that for every action there’s an equal and opposite reaction. The Chinese government will probably counteract against these measures by targeting the imports that they receive from us and US businesses. Two that come to mind are Apple’s iPhones and Tesla’s cars. That would hurt these companies and I believe that’s what the Chinese want to do in response. The Chinese economy is suffering and they are producing far more than they can absorb domestically. As an example, they are now producing seven times the number of electrical vehicles they did in 2019 and consumers don’t have the money to buy them. They have also been a big producer of solar cells and they too are up 500% between 2018 and 2023. China has seen their global exports increase by 14%, but exports to the G7 countries now only count for 29% of those exports. This is far below the 48% it was in the year 2000. My guess would be that they are selling more to other third world countries. This means the prices will not be as high as they could get selling to the G7 countries. One area of concern with these tariffs is higher prices in the US and as we are fighting inflation these tariffs will increase the price of products not just from China, but here in the US we may produce some of those products at a higher cost, which makes reducing inflation more difficult.

2 Monthly Mortgage Payments

Making a payment every two weeks only makes a difference because at the end of the year you will have made 26 half payments (13 full payments) instead of the normal 12. This basically means you are paying extra toward the principal which will reduce the loan faster. If you were to actually pay twice a month for a total of 24 payments over the year, you will see no difference than if you had made 12 full payments. This is because with mortgage loans, the interest is based on the balance of the loan at the end of each month, so whether you pay 1 full payment or 2 half payments, the balance at the end of the month is still the same meaning the monthly interest is the same. This is different than other loans like credit cards or HELOCs where interest is calculated based on the average daily balance. With these loans making multiple smaller payments will reduce the amount of interest due and will pay it down faster. With a normal mortgage, the best way to make payments is once per month two weeks after the payment is due. For example, your May payment is due June 1st but you will not have any extra interest or penalties if you pay by June 15th. If you make your payment sooner, those funds are essentially set aside by the lender and not applied to your loan until June 15th, so there is no benefit by making your normal payment early. If you want to make extra principal payments in addition to your normal payment, it is best to make that extra payment at the end of the month. However, this should only be done if you have a high interest rate.

Stocks Discussed: Home Depot (HD), Zoetis (ZTS) and Altria (MO)

Initially the Producer Price Index (PPI) looked problematic as it increased 0.5%, which easily topped the estimate of 0.3%. Looking further into the report though, the March reading was revised from an initially reported 0.2% gain to a decline of 0.1%, which more than accounted for this month’s beat. Looking on a year-over-year basis, PPI rose 2.2% and core PPI was 2.4%. While the core PPI increase was the biggest annual move since August 2023, I still don’t believe it’s at a problematic level considering the Fed’s 2% target. 

CPI

The Consumer Price Index (CPI) brought some positive news as the index grew 3.4% in April which was in line with expectations and better than the previous month’s reading of 3.5%. Core CPI which excludes food and energy was up 3.6% and was below last month’s reading of 3.8%. This was the lowest reading for core CPI since April 2021. Shelter continues to be the major weight keeping prices elevated as it was up 5.5% over last year and accounted for over two thirds of the growth in core CPI. Energy which was a major positive for the CPI numbers for much of last year has now brought some pressure to the headline CPI number as it was up 2.6% compared to last year. The easy comparisons from last year have disappeared and now I believe we will continue to see year over year gains in the energy component moving forward. Other areas that remained problematic included motor vehicle insurance (+22.6%), admission to sporting events (+15.4%), and motor vehicle repair (+9.8%). While there are some remaining negatives in the inflation fight, overall, I believe this report shows we are continuing to head in the right direction.

Private Credit

I have seen investors become more interested in the private credit space, but personally I have not invested any money in it, nor would I recommend my clients do so. Private credit is where nonbank financial institutions, like private-equity firms, make loans to businesses. It was essentially created to serve companies that were too big or risky for banks or too small for the bond market. The funds are generally illiquid, which means you could be stuck in an investment and if it goes south, you may have no other choice than to ride it out and hope it comes back. Also, since they rarely trade you don’t really know what the loans are worth and have to rely on pricing from quarterly accounting estimates. The fees are quite high as they are in the range of 1.25%, which I would consider high for essentially a fixed income alternative. Unknown risks could also be developing in the space due to less regulations and limited oversight. The International Monetary Fund (IMF) recently released a report that stated with the recent increase in yields, more than a third of borrowers have interest costs that exceed their earnings. Pull all the info together and I’m comfortable not being in this investment. 

Meme Stocks

Meme stocks are back in the news with companies like GameStop (GME) and AMC Entertainment (AMC) surging! AMC was actually quite smart and took advantage of the move to do a $250 million stock sale to raise capital. Like I said back in 2021, these moves are occurring for no fundamental reason. The fact that these are occurring because a guy that goes by the name “Roaring Kitty” posted an image of a man in chair leaning forward is just crazy. If you want to gamble on this stock just know that’s all it is, there is no fundamental reason for the company’s stock to be trading at these levels. It’s also important to remember that last time the hype occurred the stock reached an intra-day split adjusted high of $120.75 per share and has been in free fall before this recent move as it touched a three year low of $9.95 per share. I believe the story will end the same way for many of these traders and for those that think they are sticking it to Wall Street, unfortunately it will not have as big of an impact as they think. 

Financial Planning: Best Withdrawal Rate for Retirement 

The 4% rule has been around for decades and states if retirees withdraw 4% from their portfolio every year, and increase the annual withdrawals by the rate of inflation, they are very unlikely to run out of money. This rule of thumb has been widely used but it is important to understand it has some pitfalls. First off, a 4% withdrawal rate is overly conservative in almost all cases. To be able to withdraw 4% plus inflation over a retirement lasting 30 years, the asset return needs to outpace inflation by just 1%. A 1% real return is extremely low. This is partly caused by the misconception that retirees need to have an overly conservative portfolio. Regardless of age, retirees still should allocate their assets to grow and outpace inflation. That doesn’t mean they need to buy risky or trendy investments, but there should always be growth. Retirees are living longer and longer which means traditional “conservative” portfolios are actually riskier because they increase the chance of outliving money. Secondly, retirement spending typically doesn’t maintain pace with inflation. In the first few years of retirement, people are more active and spending more, but as they age, they tend to slow down which results in lower levels of spending. This means it can be appropriate to start with a larger withdrawal rate followed by smaller inflationary increases over time. Because of this, a 5% or even 6% withdrawal rate can be used in retirement when paired with wise investment management. A withdrawal rate of 6% may not seem like much more than 4%, but mathematically it is 50% more which means substantially more retirement income, or being able to retire several years sooner.  

Stocks Discussed: Netflix (NFLX), Wayfair (W) and CVS Health (CVS)

With many companies in the stock market more expensive than we’d like to see, we have been sitting on more cash in a money market than we normally would. While the 5% or so in interest is nice for the time being, we are using this as a temporary parking place until we find a good long-term investment. It could take one week or it could be three months, but the important factor is we are not considering this as a long-term investment. I know many people right now are happy with their money market rates and would totally miss a great opportunity if it presents itself to continue investing in the money market. I believe this will be extremely damaging for their long-term returns, especially as short-term rates are likely to fall. Looking long term cash will likely not beat stocks and in a recent Vanguard paper, they showed global stocks earned about 6% more a year than cash from 1901 to 2022. Don’t become complacent with the short-term yields, as you could miss a great investment that could help you over the next three to five years. 

AI and Jobs

Some people are worried about artificial intelligence taking away many jobs. I remember hearing about the same concern when computers first came out, but in reality, they created new jobs. Investment firm Goldman Sachs projects that by the end of 2034, artificial intelligence could boost the GDP to 2.3%. According to the Census Bureau’s November 2023 Business Trends and Outlook Survey, only 3.9% of businesses nationwide have used artificial intelligence, which includes machine learning, natural language processing, virtual agents and voice recognition. Another survey by Deloitte discovered that 87% of private businesses who were surveyed, expect artificial intelligence to increase their labor productivity within the next three years. It is true that change is always scary and it is true that AI will replace some jobs, but it will also create jobs that haven’t even been thought of yet. It will also make our economy more productive, which then should increase the overall wealth of consumers. 

Apple in China

Relations between the US and China are rather strained currently and Apple could be paying the price for that. In the Wall Street Journal, they released information that the company has discounted phones in China by $70, which normally sell for around $600 on average. On a side note, wouldn’t be great to get an iPhone for $600? Consumers in China have been switching to Huawei phones as the government in China and consumers begin to feel more comfortable with the company’s technological progress. If you remember a while back, we did post that the Chinese government had banned the use of iPhones in government agencies. So, Apple is now fighting with the government of China, despite what Tim Cook says and they are also fighting with the Federal Trade Commission in United States as well. They are definitely in the middle of some major storms, which could go on for years hampering sales growth for their products. This could cost the company their premium valuation on earnings, which means no stock growth going forward at best. There could also be a pull back in the stock on the horizon if they are not able to return to sound growth. 

Financial Planning: Tax Rate on Gold

Investing in gold has been popular recently, but it is important for investors to understand how gold is taxed. Federally there are 7 tax brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%) which ordinary income is subject to. Ordinary income includes most sources like wages, interest, and IRA distributions. There are also separate brackets for certain types of investment income like long-term capital gains and qualified dividends. Depending on the amount of taxable income, the tax rate is either 0%, 15%, or 20%, plus there can be an extra 3.8% tax if AGI is above $200k or $250k depending on filing status. Basically, this type of investment income will always be taxed at a lower rate than if it had been received as ordinary income. There is also a third set of brackets that is applied to income earned from collectibles, which includes gold. If gold is bought and sold more than a year later for more, it is considered a collectible long-term capital gain which is taxed at ordinary income rates for those in the 10%, 12%, 22%, or 24% brackets. For those in the 32%, 35%, or 37% brackets, gold is taxed at a maximum rate of 28%, but it can also be subject to the additional 3.8% net investment income tax for those with higher AGI levels. This tax rate includes investments backed by physical gold such as a gold ETF. If you are considering buying gold, be prepared to pay more taxes than you would on other types of investment income.

Stocks Discussed: Starbucks (SBUX), Chegg (CHGG) and Apple (AAPL)

Nonfarm payrolls increased by 175,000 in the month of April. While this was well below the estimate of 240,000, this may actually be a big positive. Having that type of growth still shows the labor market is on good footing, but to combat the Fed’s inflation concerns it’s nice to see a labor market that is not too hot. Previous revisions also weren’t major considering March was revised up by 12,000 to a gain of 315,000 and February was revised lower by 34,000 to a gain of 236,000. Areas of strength included health care and social assistance (+87K), transportation and warehousing (+20.1K), and retail trade (+20.1K). Some areas actually saw minor losses including mining and logging (-3K), professional and business services (-4K), and information (-8K). With wage inflation being a major concern, I’d say the biggest data point was average hourly earnings growth of 3.9% missed the expectation of 4.0%. This was a decline from March’s reading of 4.1% and actually marked the lowest reading since the Fed starting hiking interest rates in 2022. Overall, I was quite pleased with the job numbers as I believe it shows a cooling labor market that remains healthy.

Job Openings

At the end of March job openings totaled 8.5 million. This missed the estimate of 8.7 million and was lower compared to the previous month’s reading of 8.8 million. Compared to last year, job openings were down 1.1 million. While this all sounds like bad news, I believe this is a positive. To start, pre-covid we had never seen a reading of over 8 million job openings, which means there is still plenty of available work for those that are looking. Also, when there were too many available jobs it created more competition for workers, which many times leads to wage pressures and in theory puts pressure on inflation. The labor market has remained resilient, but I believe we need to continue to see some softening to assist with inflationary concerns. This report came after the employment cost index spooked markets as it rose 1.2% in the first three months of the year versus an expectation of 1%. Compared to last year’s first quarter, wages and benefits rose 4.2%, which matched Q4’s reading and is off the multidecade high of 5.1% in 2022. Wages make up about 70% of employment costs and they increased 4.3% compared to last year, while benefit costs increased 3.7%. One other note to consider is that union workers saw a larger increase than non-union employees in the quarter. As we lap the impact from the union negotiations that concluded late last year, we will likely see a smaller increase from union jobs in the report.

Microsoft and OpenAI

I’m very curious to see how lawsuits against Microsoft and OpenAI over copyright infringement play out. Late last year the New York Times announced a lawsuit and now eight newspaper publishers in California, Colorado, Illinois, Florida, Minnesota, and New York have claimed Microsoft and OpenAI used millions of their articles without payment or permission. All eight publishers fall under the ownership of hedge fund Alden Global Capital and include names like the Denver Post, Chicago Tribune, and the New York Daily News. “The current GPT-4 LLM will output near-verbatim copies of significant portions of the publishers’ works when prompted to do so,” the complaint said. It also showed several examples of ChatGPT and the Copilot allegedly doing so. If these companies are able to win, I worry it could open the floodgates and other content providers could then claim the same infractions. ChatGPT also received more bad news with competitor Anthropic announcing its first enterprise offering and a free iPhone app. Anthropic was founded by ex-OpenAI research executives and has backers that include Amazon, Google, and Salesforce. Its Claude 3 model can reportedly summarize up to about 150,000 words and convert the large data sets into summaries in the form of a memo, letter or story. For comparison, ChatGPT can handle about 3,000 words. Overall, the AI space remains very early on to try and pick winners and I believe many investors will be disappointed a few years down the road as they unfortunately picked the wrong horse to bet on.

Starbucks

Have you not been drinking as much Starbucks as you used to? The 52 week high for the stock is $109.72, but after reporting earnings the stock fell to $74.44. This was a 32.2% drop from the high. The company is struggling with their competitor in China, Luckin Coffee, and Starbucks saw a 11% decline in same store sales year over year. Starbucks has ambitious plans to roll out new beverages and increase their efficiency to bring back lost customers. Investors should note that there are union negotiations going on for 410 stores in the US, which could increase their labor cost and perhaps slow down their efficiency. In my opinion, even with this pull back it's still not a bargain as it still trades at almost 20 times earnings. We will do an analysis of Starbucks during our radio show and podcast on Saturday, May 11th after the numbers settle down and we can better view the company going forward.

Stocks Discussed: Tesla (TSLA), Albemarle (ALB), Manpower (MAN) and Ford (F)

First quarter GDP was a large disappointment as it grew at an annualized pace of 1.6%, substantially below the estimate of 2.4%. I will say, considering there is a lot of data to collect the first reading can be subject to major revisions. As a recent example, in 2023 Q1 GDP had an initial reading which showed an increase of 1.1%, but it was later revised to 2.2%. It is possible we could see a similar situation with this report. Given the current numbers, there were still some positives. Although it was below the estimate of 3% and down from the Q4 reading of 3.3%, consumer spending in the quarter still grew nicely with a gain of 2.4%. There was quite a large discrepancy between goods and services spending as goods actually fell 0.4% and services climbed 4%, which marked the best quarter since Q3 2021. Goods spending was largely dragged down by a 1.2% decline in durable goods. Private investment was also very strong in the quarter as it grew 3.2%, residential investment was a large contributor to that number as it increased 13.9%. Government spending was also positive in the quarter with a gain of 1.2%. With all these positives, you might be wondering how GDP missed expectations. Areas that were negative weights on the report included the change in private inventories, which subtracted 0.35% from the headline number and net exports of goods and services, which subtracted 0.86% from the headline number. Private inventories can be a volatile metric that will depend on businesses restocking inventory. I would not be surprised to see this number turn positive in Q2 considering Q4 of 2023 was also negative and subtracted 0.47% from the headline number. This followed a nice benefit of 1.27% in Q3 of 2023. If consumer spending remains strong, businesses will likely need to restock inventory which should be a benefit moving forward. As for the trade imbalance, this came as exports grew 0.9% in the quarter, but imports rose 7.2%. Overall, I wouldn’t say this report was super strong, but I’m also not worried about the current standing of the economy as I am still anticipating a slowdown over a major recession.

Personal Consumption Expenditures (PCE)

The release of the March core personal consumption expenditures price index (PCE) was I’d say lackluster. It wasn’t as positive as I was hoping for, but I still don’t think it was that bad. The core PCE of 2.8% came in slightly hotter than the estimate of 2.7%, but it matched February’s number. Including food and energy, PCE increased 2.7%, which was also slightly higher than the estimate of 2.6%. Services continues to elevate prices as they were up 4% on a 12-month basis versus goods which increased just 0.1%. Overall, it is somewhat disappointing to see the deceleration in inflation slow, but numbers don’t always follow a straight-line trajectory. It will be interesting to see this report over the next couple months, but as of now the estimate for three rate cuts is looking a little more questionable.

S&P 500

The S&P 500 remains expensive based on several valuation metrics, but that doesn't mean you can't find buys out there. Although the index trades around 20x forward earnings, about 20% of companies are bringing up that multiple as they trade at double the index's valuation. The positive is there is about 20% of the index that trades at half the index's multiple. Much of the dislocation comes from the excitement over growth stocks and the index now has more than two times the allocation towards growth (46%) over value (21%). Historically the allocation has been more balanced and on average over the last 30 years the split has been an allocation of about 31% for growth and 32% for value. I continue to believe that numbers like these will be a reason for value's outperformance going forward.

Technology & S&P 500 

I have talked many times about my concern with the over-concentration of the S&P 500 index in technology. The sector controls about 30% of the entire index, but what is crazy is Amazon, Tesla, Meta, and Alphabet are actually classified as consumer and communication stocks which would then understate the tech weighting of the S&P 500 (If you count Tesla as a tech company). If these were included, the weighting would be over 40%. The last time the index was so concentrated in tech occurred before the dot-com bubble burst in 2000. If you’ve held the Magnificent Seven over the last couple years, congrats, but for those that enjoyed the movie, you may remember four of the seven end up dead. Could we see a similar fate with these stocks?

Nasdaq

If you didn't do as well as the market in 2023, don't beat yourself up. The top 10 stocks greatly carried both the S&P 500 and the Nasdaq. In fact the average return for the top 10 stocks was 85.6% versus 16% for the other 490 companies. This meant that these top 10 stocks accounted for 63% of the index's return for the year. Over the past 30 years, the top 10 stocks have on average represented 24% of the index's growth. I do continue to worry many of these top 10 stocks could be a drag on the index and people's portfolios considering their lofty valuations.

Financial Planning:

Do you Hold too Much Cash?

Everyone needs some level of cash, and that number varies from person to person. For those with higher levels of assets, it can be possible to have too much cash which would be better off invested. We’ve seen people with $100k, $250k, $500k, or even over $1 million in cash which is likely way too much, even if it’s in a high-yield account or CD. Over time, cash will not perform as well as invested dollars. Right now, there are places where cash can earn over 5%, but this is still lower than market returns of 8% to 10% or more. Also, those 5% yields will be coming down as interest rates decline. We know there’s people out there who wait to time the market and invest their cash right at the bottom, but that generally doesn’t work out. From a tax perspective, cash produces interest which is taxed at a higher rate than investment income like dividends or capital gains. When interest is taxed at 10% or 12%, investment income would be taxed at 0%, and when interest is taxed at 22%, 24%, or 32%, investment income would be taxed at 15%. Not only is cash taxed at a higher rate, but its entire return is reportable as income every year, there’s no appreciation with cash. For example, if you have $500,000 of cash earning 5% for a total of $25,000, that entire $25,000 is reportable as interest income that year. If instead that $500,000 was invested in equities earning on average 8% made up of 2% dividends and 6% appreciation, you would only need to report the 2% dividend income of $10,000 as long as nothing is sold. This flexibility keeps your tax bill down but also reduces the chance of triggering AGI related issues like the net investment income tax or additional Medicare premiums. If you’re in the 4th tax bracket with an 8% investment return of $40,000, you’re only paying $1,500 in federal taxes from the dividends, plus $930 in state taxes if you’re in California. Comparing that with your 5% cash return of $25,000, you’d pay $6,000 in ordinary income taxes, $2,325 in state taxes, plus potentially an extra $570 net investment income tax, and/or another $3,000 in extra Medicare premiums. Now that 5% yield becomes 2.6% after tax while the invested dollars return 7.5% after tax. Investing can be volatile in the short-term, but over time it is a much better option than hoarding cash.

Stocks discussed: Nordstrom (JWN), Netflix (NFLX), Goldman Sachs (GS), and Palentir (PLTR)

People may be complaining about higher interest rates, but it does not appear to be slowing down the consumer. Retail sales climbed 0.7% in the month of March, which is easily topped the estimate of 0.3%. Compared to last year, sales were up an impressive 4.0%. Areas of strength continued to be nonstore retailers, which were up 11.3% compared to last year and food services and drinking places, which were up 6.5% over the same time period. Areas that continued to weigh on the report were furniture & home furnishing stores (-6.1%), electronics and appliance stores (-0.6%), and building material & garden equipment & supplies dealers (-0.6%). While energy prices have increased lately and gasoline stations saw an increase of 2.1% compared to February, compared to last year sales were actually down 0.7%. This makes the retail sales number even more impressive considering the fact that if gas stations were excluded from the headline number, it would have been up 4.4% compared to last year. Overall, this report provides further proof that the consumer remains resilient. This could bring into question the number of rates cuts this year. If the consumer remains strong, we may only see one or two cuts this year. 

Value Companies

With the market’s recent highs, we have had a few companies that reached their target sell price. We sold those companies and now we’re sitting on a large amount of cash. We were considering investing into an oil and/or natural gas company because based on the valuations they are still not that expensive. One thing that has concerned me is that we are probably near the peak for gasoline consumption, but oil is also used in chemicals with a big demand coming from plastics. Approximately 102 million barrels of oil are produced every day and roughly 60 million barrels go to diesel, gasoline and jet fuel. Only 12 million of that ends up in chemicals. What concerned me even more is how all the oil companies like Chevron, Shell and Saudi Aramco have a big push to produce more for chemicals. For instance, Shell opened a chemical complex with capacity to produce about 1.6 million tons of plastic pellets per year. Saudi Aramco is working on turning 4 million barrels of crude oil per day into chemicals by the year 2030, today just 1 million barrels go into chemicals. For many years China has been a major consumer of plastic and they accounted for 70% of plastic demand. Now they are producing their own plastic capacity, which is exceeding demand. On top of all this, you have the push for recycling plastics and statistics show that only 10% or less of plastic gets recycled. Even a doubling of that over the next few years would mean less oil needed for plastics. Recycled plastics are roughly 50% more expensive than virgin plastic, but I believe that will come down in future years. In summary, at this point it does not make any sense that I can see to invest in an oil company or the chemical companies. It may look like they could be on sale, but with the large supply going forward sales and earnings could decline, which would mean they are currently fully priced. The abundance of plastics is estimated to go on until the year 2030. So…. the search for that great value company to add our portfolio continues! 

Home Owners Insurance

You hear and read that insurance companies are dropping homeowners for no reason. Well, it turns out that insurance companies are becoming wiser on how to verify that policy owners are following the rules. To keep costs and risks down, insurance companies are now using drones, satellites, and airplanes to take aerial photos of your house. If you neglected to tell the insurance company that you have a pool, trampoline, a roof in bad shape or yard debris and hanging tree branches that are fire hazards, these will show up in the aerial views. You may think this is unfair, but when you sign your policy, you agree to home visits to verify that you’re telling the truth. Another question for consumers, is it fair for you to pay the same insurance premium with a brand-new roof then your next-door neighbor whose roof is 25 years old? At first thought it seems unfair that insurance companies can take pictures of your home from the sky, but if you neglected to tell them the truth about that pool or trampoline, maybe they have the right to drop you. In the long run, this could help insurance companies keep premiums lower for those who follow the rules and disclosed to the insurance company all the insurable risks that they have. 

Avoiding Social Security Reductions Caused by Pensions

If you receive a pension from work that was not covered by Social Security, you may see a reduction in any Social Security benefits you are entitled to which includes benefits from your own earnings or any spousal benefits you are claiming. This is caused by the Windfall Elimination Provision and the Government Pension Offset. Keep in mind, if you earned a pension from a job where you also paid into Social Security, you will not see any reduction. One of the common pension systems we see in California is CalSTRS for teachers. Teachers do not pay into Social Security so their pension will reduce their Social Security amount. One way to get around this is by taking a “refund” from the pension. This allows you to withdraw all your contributions plus interest and roll them into your own retirement account so you can invest how you would like, and you will no longer have any reduction to your social security benefits, including any spousal benefits. The reason this works is because the refund only includes your own contributions, not the contributions made by the employer. This doesn’t work with all pensions as some lump sum options include employer contributions, so the same Social Security reduction would apply. Taking a refund from CalSTRS is not appropriate for everyone. If you are close to retirement or have been part of the CalSTRS system for many years, it likely makes sense to stay with it to receive your pension and any Social Security reduction that comes along with it. However, if you are younger, have a limited earnings history with CalSTRS, or are entitled to sizable Social Security Spousal or Survivor benefits, rolling over your CalSTRS pension to a retirement account may make sense so you get the benefit of both your pension dollars and Social Security.

Stocks Discussed: KBhomes (KBH), Northrop Grumman Corporation (NOC) and Boeing (BA)

The March Consumer Price Index (CPI) report spooked investors and sent the likelihood of a Fed rate cut in June to around 20%, which was a sharp drop from the greater than 50% chance that was priced in before the data was released. The concern came as headline CPI was 3.5% over the last 12 months, which topped the estimate of 3.4% and core CPI rose 3.8% from a year ago, compared with the estimate of 3.7%. Last month the annual rate for headline CPI was 3.2% and for core CPI it was 3.8%. Energy prices were a benefit to headline CPI over the last year or so, but with the recent increase in energy we are beginning to see them not benefit the headline number as much and I soon worry they will cause the headline number to top the core CPI reading. In the March report, energy was up 2.1%, but as we lap the easy comparisons from last year the annual increase could climb substantially which would cause the headline CPI to increase. Shelter continues to be a major weight on the numbers as the index climbed 5.7% compared to last year and accounted for over 60% of the climb in core CPI. Transportation services were also a major negative as they climbed 10.7% compared to last year. I believe this can largely be attributed to rising energy prices. Also, motor vehicle insurance continues to be a major negative as it saw an increase of 22.2% over the last year. While this report wasn’t overly positive, I would like to wait and see the PCE release on April 26th before abandoning the idea for a potential of three rate cuts this year. 

March PPI

The March Producer Price Index (PPI) report looked much more favorable than the CPI. Headline PPI rose 0.2% for the month, less than the 0.3% estimate and core PPI matched the estimate as it also rose 0.2% in the month. On a 12-month basis, PPI rose 2.1% which was the biggest gain since April 2023. While that may sound concerning, the inflation rate is near the Fed’s target so I would not say that is problematic. Core PPI rose 2.4% over the last year, which was the highest since September. Like the headline number, I don’t believe this is problematic considering the rate is still very reasonable in relation to the Fed’s 2% target. 

Investing Highs and Lows

I love to read information from smart people like Daniel Kahneman, who unfortunately passed away at age 90 on March 27. He was a pioneer in behavioral economics, although he felt he was really a psychologist. If investors would listen to his advice, their returns would probably be much higher and their psychological well-being would be far better when it came to investing. He mentions that people who lost on an investment feel at least twice as much pain as the gains feel pleasant. He also discusses how people do not incorporate all available information and people believe that short streaks in a random process enables them to predict what will come next. Interestingly, he also points out that based on research of asking people if they want to take a risk with an 80% chance of success, most people say yes. However, if you flip-flop that around and ask if they incurred the same risk with a 20% chance of failure, they say no. Obviously the risk is the same, but the psychology is different. I believe this is why many people get into bad investments. Sales people just focus on the positive side and leave the unsuspecting investor to do their own risk analysis. 

Semiconductor Industry

While the semiconductor industry is likely to continue growing, I do worry about China hurting the growth of US semiconductor companies. Shares of chip companies like Intel and Advanced Micro Devices fell after the Wall Street Journal reported that China is ordering the country’s largest telecommunications carriers to cease use of foreign chips. According to the Journal, Chinese officials issued the directive earlier this year for the telecom systems to replace non-Chinese core processors by 2027. China also recently set new guidelines to remove U.S. chips from government computers and servers. The problem here is China still remains a major market for US chip companies as the country accounted for 27% of Intel’s revenue in 2023 and AMD generated 15% of sales from China. Data from S&P Global showed that U.S. chip giants Intel, Broadcom, Qualcomm and Marvell Technology all generate more revenue from China compared with the U.S. The relationship with China is definitely worth keeping an eye on if you are investing in semiconductor companies, especially since most of them now trade at lofty valuations.

To Reinvest or Not Reinvest Dividends

From a retirement planning standpoint, it can be helpful to not reinvest dividends, especially in non-retirement accounts. In a non-retirement account, or a taxable account as they are called, dividends are taxed exactly the same way whether they are reinvested or not. In retirement, the focus shifts from accumulation to building tax-advantaged cashflow. When a dividend is automatically reinvested, it repurchases the same holding it came from. On the other hand if it is paid in cash, it will remain in the account where it can be invested or withdrawn. Therefore, when a dividend is paid in cash and incurs its normal tax, that cash can be accessed without any additional tax consequences. Alternatively, when dividends are automatically reinvested which is still taxable, if cashflow is needed, sells will also need to be made to generate that cash which can result in additional capital gain taxes. In a way, you’re getting taxed twice to create the same amount of cashflow. From a tax perspective, if a dividend is produced from a holding that is held for more than 60 days within the 121-day period surrounding the ex-dividend date, it will be considered a qualified dividend and taxed at the lower long-term capital gain rate. That criterion is a little technical but basically it means dividends from long-term holdings are taxed at the lower rate. It is popular to have dividends reinvested but this can force unnecessary taxation in retirement and can limit other planning opportunities like Roth Conversions.

Stocks Discussed: BP (BP), Redfin (RDFN) and Highwood Properties (HIW)

I must say, I was very surprised by the strength in the March Jobs Report. Nonfarm payrolls increased 303,000 in the month, which easily topped the estimate of 200,000. Unlike prior reports, there wasn’t a major change to the previous months as February saw a negative revision of just 5,000 and January’s revision brought the total up by 27,000. There were many positives in the report considering the unemployment rate ticked lower to 3.8%, the labor force participation rate actually increased 0.2 percentage points to 62.7%, and average hourly earnings increased 4.1% which was lower than last month’s reading of 4.3%. Areas of strength in the economy included health care and social assistance (+81,300), government (+71,000), leisure and hospitality (+49,000), and construction (+39,000). According the BLS, the leisure and hospitality sector is finally now back to its pre-pandemic level. If the economy and labor market continue to remain resilient, I do worry we may not see those three interest rate cuts we have been expecting during the remainder of the year.  

JOLTs

In the Job Openings and Labor Turnover Survey (JOLTs) it showed there were 8.8 million job openings in February, which pretty much matched expectations and last month’s reading. The job market has continued to remain resilient and I do believe that it will need to enter a Goldilocks period where it is not too hot or too cold. Too many job openings may deter the Fed from considering rate cuts and obviously we do not want a weak labor market as that would be bad for the economy. 

Stock Market

The stock market has gotten off to a strong start and in the first quarter the S&P 500 was up 10.2%, which marked the best first quarter performance since 2019. The Dow and Nasdaq also had good quarters as they were respectively up 5.6% and 9.1% in Q1. In a recent study, it was pointed that of the 16 times the S&P 500 rose 8% or more in the first quarter from 1950 through 2023, only once (1987) did the index lose ground the rest of the year. In the remaining years, the index gained an average of 9.7% over the next three quarters. In 10 of the 15 years the first quarter’s gains were higher than those seen over the remainder of the year. While this is bullish for the remainder of the year, I do worry about the concentration of the market. With Nvidia’s strong start and large market cap it accounted for close to half of the entire gain for the index. I don’t believe this will be able to continue, but I am optimistic that the rally could continue to broaden which would be beneficial to other stocks. 

Office Rents

Across the country office rents are holding firm and they are higher now than they were back in the fourth quarter of 2019. The average US office rent has an asking price of $35.24 per square foot. This is an increase from $34.92 per square foot in 2019. It is not a high increase, but compared to a lot of the negativity that the media is spreading, it shows office rents as a whole are still doing OK. I would recommend for investors looking into office real estate to really do their due diligence to make sure they are not buying or investing in a declining property.

Stocks Discussed: Visa (V), Tesla (TSLA), Disney (DIS) and McCormack (MKC)

Electric vehicle sales have really not kept up with expectations and I’m concerned for the smaller companies such as Lucid, Fisker and Rivian, which besides Tesla may be the only other exclusive electric vehicle company that may survive. Digging deeper into the numbers for Lucid, since 2021 they’ve only built 10,495 cars and the most recent quarterly loss per vehicle was $145,824. When the company first went public back in 2021, they had $4.8 billion in cash, but as of the end of 2023 the company is down to cash of $1.4 billion. In 2023 the company burned through $3.4 billion in cash. The only thing that could save this company would be another billion-dollar investment from the Saudi Arabia Public Investment Fund as they did back in 2018 when they invested $1 billion. I really like the look of the Lucid Air, but do not see how this company will survive. I would speculate that by 2025 this company will be in bankruptcy. The sad part is for people buying the cars today because of the great deals they may be receiving, think ahead a few years about who will be around to service these cars and they may be stuck in your garage with no way to get them serviced. I would encourage people if you’re going to buy an electric vehicle, buy it from a well-known brand like Ford or General Motors who will be around for years to come to service that vehicle.

History of Hype Investing

Are people so smart that they really don’t need to look at what happened in history? We have said many times we stay away from the hype investments like Nvidia and cryptocurrencies and back this up with reality. Let’s go back and learn from the late 90s about a company called CMGI, which helped fund internet startups. It was claimed to be one of the hottest investments in history and the CEO, David Wetherell, was deemed to be a hero and a genius. Keep in mind this was 24 years ago and when the company hit a $34 billion market cap, it was larger than Alcoa or Texaco. All the financial talk shows could not talk enough about CMGI and why the stock would continue to go up and what a great investment it was. Anyone on the other side who warned about this was considered a fool, or an idiot. They were told they didn’t understand enough about the company. In 1999, the stock rose 940% and everybody wanted a piece of it. Starting to sound familiar yet? However, the next year when the curtain came down, the stock fell 96%. That was the end of the story for many investors!  

PCE

No real exciting news from the personal consumption expenditures price index (PCE) as it was right in line with expectations. The headline number showed an annual increase of 2.5%, which matched the forecast. This was however above the January reading of 2.4%. This increase was likely a result of energy prices as they climbed 2.3% in the month. Core PCE, which excludes food and energy also matched expectations with a 2.8% rise compared to last year. This was slightly lower than last month’s reading of 2.9% and marked the smallest gain since March 2021. 

Roth IRA 5-Year Rules

There is often confusion around the nuances of the 5-year Roth IRA rules. There are two separate 5-year rules that apply depending on whether a contribution or a conversion is made. In a nutshell, the rule for contributions dictates how long you must wait to access the earnings without taxes or penalties, while the rule for conversions dictates how long you must wait to access the conversion principal. When making a contribution to a Roth IRA, you can always withdraw the contribution principal no matter your age. This is because contributions are made with after-tax funds. To access the earnings, the account must have been funded at least 5 tax years ago, and you must be at least age 59.5. Being age 59.5 alone is not enough to access those earnings. A contribution of any size will start this 5-year clock and after those 5 years it will no longer be relevant. After making a Roth Conversion, there is a separate 5-year rule which states that 5 tax years must pass for each individual conversion or the account holder must reach age 59.5 in order to access the conversion principal. Upon reaching age 59.5 this rule no longer applies. Therefore, if a conversion is made by someone who is 60, they can immediately access the conversion principal, or if someone who is 58 makes a conversion, they can access conversion principal upon reaching age 59.5 without waiting the 5 years. In these cases, the accounts must still be funded for at least 5 years to access any earnings. Since the conversion rule is triggered by the sooner of reaching age 59.5 or 5 years, a 30-year-old could make a conversion and withdraw that conversion principal after 5 years without tax or penalty even though they are not age 59.5. It is common for people to question making a contribution or conversion in fear that money will be locked up for 5 years, but if done correctly there can be ways to access funds without waiting.

On Thursday, March 21st, the Department of Justice (DOJ) filed an anti-trust lawsuit along with 16 states against Apple. The DOJ claims Apple’s iPhone ecosystem is a monopoly that drove its “astronomical valuation” at the expense of consumers, developers and rival phone makers. The lawsuit claims that Apple’s anti-competitive practices extend beyond the iPhone and Apple Watch businesses, citing Apple’s advertising, browser, FaceTime and news offerings. The DOJ also said in a release that to keep consumers buying iPhones, Apple moved to block cross-platform messaging apps, limited third-party wallet and smartwatch compatibility and disrupted non-App Store programs and cloud-streaming services. With pressure also surrounding the App store in the EU, I worry the expected growth from the services business could be under pressure. We have often said Apple is a great company, but trading at such lofty levels has left many investors open to declines in the value of their investment. The stock trading around $170 per share is down from the high of over $200 per share, and while this lawsuit will take a couple years to go through the court system, it could have a major impact on the growth of Apple’s earnings. At Wilsey Asset Management, we do continue to believe that Apple is overpriced and has no potential for growth going forward. Looking out a couple years from now the stock could still be trading around these levels due to the high valuation and limited prospect for business growth. We do believe it’s very possible for the stock to drop at least another 10% to 20%. 

Retirement Assets and Target Date Funds

I was so disappointed to read recently that Vanguard has 63% of their US retirement assets allocated to Target Date Funds. I cannot stress what a poor investment these are. They make nice fees for Wall Street and people think it’s an easy way to retire but the allocation and numbers are just so wrong. A good example is as recent as 2022 when the bond index went down about 14% that year. Based on the theory of Target Date Funds and how they are invested, most of a 65-year-old retiree’s money would be invested in bonds. On a million dollar account a 14% decline would have led to an account value of $860,000 and now a couple years later, bonds are still lower. I do believe in buying and holding, but you must understand what you’re holding and why you’re holding it. It does make sense to just implement a blind strategy. If you have a target date fund, I would highly recommend that you sit down with a knowledgeable financial advisor that really understands and can explain how they work…. Yes, I’m available! 

Mind Games of Investing

I learned a new word this weekend, counterfactual. In my 40+ years of investing I believed what this word meant, but I just didn’t know there was a word that described what I knew. What I’m talking about as it stares in your face where you would have been if you would’ve bought Microsoft, Nvidia or Tesla a few years ago. The emotional psyche is great at tracking the big misses and convincing you why you should’ve invested, but it never seems to remember the investment losses that you missed because you didn’t take that risk. Over the years we’ve talked about these types of companies many times. Just to remind you, take a look at the cannabis companies or during the pandemic had you invested in Zoom or Peloton. More recently, we just discussed in our newsletter about had you invested in electric vehicle companies you would’ve lost about 90% of your investment had you purchased at the top. Investing is hard, throughout your lifetime there will always be some companies that you “knew” were going to go up after the fact. Comeback to reality and realize if you can average about 10% on your investments, in 21 years a $100,000 investment would be worth close to $800,000. But if you lost principal along the way by taking on risk, you may not even have your $100,000. And if one of your friends tells you they bought one of these high flyers and they brag about it, ask them percentage wise how much does it make up of their entire portfolio? More than likely it’ll be less than one percent, but even at one percent be sure to inform them that the investment, even if it doubles in price would only add a one percent increase to their entire portfolio. And if you would like to use the new word counterfactual, the definition is what might have been an imaginary alternative to the actual past. 

Mortgage Points and Lender Credits

When you apply for a mortgage, there’s a lot more to consider than just the interest rate. When you get a mortgage, there are closing costs that include things like title and escrow fees that are not part of the loan itself. Then there is prepaid interest which is the interest that accrues from the closing date through the remainder of the month. Since mortgage payments are paid in arrears, your first payment will be two months after the month you close. For example, if you close your mortgage in the beginning of April, you’ll have more prepaid interest at closing since you’ll have to pay interest for the bulk of April, but you won’t have to make the next payment until the middle of June. Also, at closing you might have points or credits. A mortgage point is an extra fee you pay in exchange for a lower interest rate. A lender credit is the opposite where you receive a higher interest rate, but the lender will provide you funds that can be applied to closing costs and prepaid interest. You can also choose to pay no points and receive no credits for an interest rate in the middle which is called the par rate. For example, if you were to get a mortgage right now your par rate might be 7%, or you could pay a few thousand dollars in points to receive a 6.75% rate, or you could receive a few thousand dollars in credits in exchange for a 7.25% rate. With where interest rates are at now, pretty much everyone agrees that mortgage rates will be coming down in the coming months and years. This means if you are considering buying or refinancing, even if you are using a 30-year mortgage, it is best to think of it as a 6, 7, or 8 month loan as there should be an opportunity to refinance in a few months at a lower rate. Therefore, if you are getting a loan now, you want to structure that loan so you have the lowest overall cost during the next 6 to 8 months. During a decreasing interest rate environment, this typically means accepting a higher interest rate and using the accompanying lender credits to cover as much closing costs and interest as possible. You might pay a few hundred dollars more in interest over the next several months, but that is worth it if you receive a few thousand dollars in credits upfront.

The Consumer Price Index (CPI) came in a little bit hotter than expected as the headline number for February showed an annual increase of 3.2% versus on expectation of 3.1% and the core CPI showed an annual increase of 3.8% versus an expectation of 3.7%. While it was not much progress, there was still a decline from last month’s core CPI reading of 3.9%. This marked the lowest reading since May 2021 when core CPI was 3.8%. Food was a bright spot in the report as the annual increase was just 2.2%. Food at home came in at an annual increase of 1.0%, while food away from home increased 4.5%. With wage pressures continuing, I believe this discrepancy will continue. Energy was also an interesting sector as the annual reading showed a decline of 1.9%, but the monthly reading was up 2.3%. Energy has been a big positive for the headline number, but as we lap easier levels it will likely not be as big of a benefit. One of the areas that remains very hot is motor vehicle insurance as it was up 20.6% compared to last year. I believe this item will remain hot for the next several months, but as we lap higher prices it should subdue. Shelter also remained a large weight on the report as it increased 5.7% over the last year and accounted for about two-thirds of the annual increase in core CPI. I feel like I sound like a broken record, but I continue to believe that this is heavily distorting the numbers and is it declines over the remainder of the year it should be a benefit to both headline and core CPI. I don’t believe this report does anything to change the expectation for three cuts in the back half of the year.

PPI

I was somewhat surprised to see the negative reaction to the February Producer Price Index (PPI). It seems as if people were fixated on the monthly jump of 0.6%, which doubled both the estimate and January’s reading of 0.3%. Looking year-over-year though the numbers still look quite manageable. The headline number increased just 1.6% and core PPI, which excludes food and energy was up 2%. I don’t think this report should have a major impact on the Fed’s expected interest rate direction.  

401k

It's no secret that I'm a big advocate of saving in your 401k, but I was surprised to see that according to a recent survey 77% workers believe that the unavailability of pensions is making it harder to achieve the American dream and 83% say all workers should have a pension to be independent and self-reliant in retirement. I was also surprised to see some UAW members are still unsatisfied with the automaker’s retirement plans as some are continuing to push for pensions. A Ford spokesperson recently shared the current retirement structure at their company, "The company contributes 10% of employee base wages, plus $1 per hour worked (capped at 2,080 hours a year), with zero employee contribution required.” I would take that over a defined benefit plan any day. 401ks give participants the power to grow their wealth more effectively, they are much better estate planning tools, and they are much more portable if changing employers. The key is you have to take accountability and actually participate in your 401k to reap the benefits. 

Bitcoin Peaking Point

I admit it myself that I have no idea where bitcoin will peak. But the truth is, no one does. I do know that demand is high right now because Wall Street continues to build their ETF’s to collect their fees, which I have talked about before. But can we please get off some of the comparisons of Bitcoin to make one feel better, especially the one with gold and saying it is a digital gold. The value of all mined gold is around $15 trillion. A good portion of that is in gold jewelry. I know when I buy a gift for my wife like a gold bracelet or necklace, she’s going to be pretty happy, but I can’t even write the words how to compare if I gave her a gift somehow of a Bitcoin that she can open and do something with it. I think if I would try, I could be sleeping on the sofa that night. Also, let’s stop saying this will be the replacement currency if the dollar falls. Just think of the calamity the country would go through with a fall of the dollar in the United States. Do you think you will still be able to plug into the Internet and access your Bitcoin? You may not even have electricity to plug-in your electronic devices like phones, computers and laptops? Let’s really understand what Bitcoin is, it is a speculative game that is being played right now, and it really cannot be used for anything that is really of any value. There are smart economists like David Kelly from JPMorgan who have similar feelings. He recently told Barron’s, “I worry about the silly decisions investors make. People get misled by all sorts of fads and fantasies as to how they should invest. I worry about the money that’s been poured into things like Bitcoin, which is absolute nonsense. It is simply a focus of speculation. I worry that someday that’ll all go poof and people will lose money.” I’ve said it before, but congratulations if you have made money on Bitcoin, if you want to continue to hold it you should really think through what it is. If you don’t have a sound answer, you should sell it. 

Tax Brackets vs Your Tax Rate

Most people believe tax rates are going up, which may be true. With the level of government spending and debt, it is logical to conclude taxes will need to increase to keep up. Starting in 2026, the federal tax brackets are set to increase due to the sunset of the current tax rates implemented in 2018. We may also see further tax increases to address issues like the deficit or Social Security. However, there is a difference between the tax brackets and the tax rate you will experience as an individual. Just because tax rates increase, doesn’t necessarily mean the rate you will be subject to will be higher or that your tax bill will be higher. Currently the federal tax rates are 10%, 12%, 22%, 24%, 32%, 35%, 37%, and they are expected to change to 10%, 15%, 25%, 28%, 33%, 35%, 39.6%, which is technically an increase. These are brackets which means the more income you have, the higher you get pushed into the brackets. What most people don’t understand is that your individual level of income will also fluctuate up and down over time, not just the tax brackets. In retirement you have much more flexibility in choosing where your income comes from, so while you’re working you might find yourself in the 4th tax bracket which is 24%, but in retirement with the right planning you may get to the 2nd tax bracket which could be 15% at that time. Even though tax rates increased, your tax rate could go down because you will be in a lower bracket due to your income level. I’m not saying taxes aren’t a problem in retirement, because they absolutely can be, but the way to address them is to understand how your individual income will change over time so you can take advantage of the tax system all along the way.

While the headline number of 275k jobs created easily topped the estimate of 198k and sparked concerns the labor market remained too hot, the details of the report showed a much softer labor market. To begin, the prior two months saw a downward revision of 167k jobs, which more than offsets the beat we saw in the month of February. Also, while I generally am a little more skeptical of the household survey, it did show a decline of 184k in those that were counted as employed, which led to an uptick in the unemployment rate to 3.9%. This was above the estimate of 3.7%. I was also disappointed to see that government remained a large contributor in the establishment survey as the sector added 52k jobs. Outside of government, other areas that were strong included health care & social assistance (+90.7k), leisure & hospitality (+58k), and construction (+23k). Wage gains were also a bright spot in the report as average hourly earnings increased 4.3% compared to last year. This was below the estimate of 4.4% and below last month’s reading of 4.5%. I believe this report continues to put us on track for 3-4 rate cuts in the back part of the year.

JOLTs Report

The January Job Openings and Labor Turnover Survey (JOLTs) was right in line with expectations and the previous month as job openings totaled about 8.9 million. This remains well below the high of 12.2 million in March 2022, but is still well above historical norms as prepandemic we had not seen a reading above 8 million. I continue to believe job openings will continue to trend lower to come back in line with historic levels. This does not mean we believe we are seeing a weak labor market, but I would call it a normalizing labor market. We have also seen a normalization in quits which should be a positive for wage pressure. Quits in the month were 3.4 million. This compares to annual quits of 44.4 million or 3.7 million per month in 2023. Total quits in 2023 fell by 6.1 million when compared to 2022. Looking at prepandemic levels, quits totaled 42.1 million in 2019 which would have been an average of 3.5 million. Layoffs were also strong in the month as they totaled just 1.6 million. This is right in line with 2023 levels as for the full year they totaled 19.8 million and averaged 1.65 million per month. In 2019, layoffs totaled 21.7 million and averaged 1.8 million per month. I wanted to provide all this data to show the labor market may be softening from strong levels, but I believe there is still some room to have numbers normalize without tilting us into a weak labor market.

China

What happened to China? The country had such a robust economy just a few short years ago, but the writing was on the wall. Here are the problems that caused the economic downfall. A real estate boom which accounted for 25% of China’s annual economic output. The debt and inventory continued to rise in houses and condos but many remained empty with no one able to buy them. The government cutoff the debt to developers, which ended the real estate boom. Consumers who did buy into the expensive housing market in China leveraged beyond their means with the expectation that the growth would continue and they could sell out with a profit. Unfortunately, they are now sitting under water in much of their real estate, but still have to pay the debt and don’t have much discretionary income to spend in other parts of the economy. China is now experiencing deflation, which will give them negative growth in parts of their economy for perhaps years to come. China’s overall debts have now surpassed 300% of GDP with very little chance of the economy growing to pay down that debt. Many years ago, they put a cap on how many babies people could have and now that is hurting them with an aging workforce and a shrinking workforce. It will take years to reverse this. In the meantime, the economy remains underwater. Since 1998 foreign investment in China has always been on the upswing, but that run came to an end in the third quarter of 2023 as foreign companies sold out and left or just stopped investing in China. There is nothing left to build in China when looking at their infrastructure. They have built many roads, railroads and airports so there’ll be no future investment in infrastructure. China has always been a communist country and I don’t think they really understood capitalism very well. An economy will always go through the ups and downs, but the United States has been around for 200 years and we have learned some valuable lessons like 1929 and 2008. While we can’t avoid the down turns, we have learned how to minimize the depths of the down turns.

Personal Consumption Expenditures

The Personal Consumption Expenditures Price Index, known as the PCE and is the main inflation gauge that the Federal Reserve looks at came in with a good inflation number. Excluding food and energy the change from one year ago for January was 2.8%, which shows a nice downward trend from December 2023 of 2.9%, November 2023 at 3.2%, and then October 2023 at 3.4%. The numbers are going in the right direction, but they are now falling a little more slowly than the big jumps we had. I still believe by the end of the year we should be at 2%, which is the Fed’s target and they should start reducing rates by midyear. Even though they won’t be at their target of 2% by June or July they need to start reducing rates a little bit to prevent a recession in 2025. At Wilsey Asset Management, we do believe the Federal Reserve came to the rescue to reduce inflation a little bit late but have now done a good job on managing the economy. We continue to believe that the Federal Reserve will do a good job in 2024, but stay tuned as we will be on top of it each month as the data is released.

Social Security Changes Coming?

The State of the Union was this week and one of President Biden’s talking points was Social Security. He stated, “Working people who built this country pay more into Social Security than millionaires and billionaires do” so he vowed to “make the wealthy pay their fair share”. It is true that millionaires and billionaires whose incomes do not come in the form of wages or self-employment do not pay into Social Security, but they are also not entitled to Social Security benefits in retirement. Working class people do in fact pay more into Social Security, but they are also the only ones who receive it. However, for people who do pay into Social Security, benefits are subsidized by high-wage earners and business owners for the benefit of low-income earners. As an employee, 6.2% of wages are withheld for Social Security up to a cap of $168,600. The Social Security benefit amount is based on 35 years of earnings which is used to determine the average monthly earnings. The full retirement amount will be the sum of 90% of the first $1,174 of average monthly earnings, 32% of the next $5,904, and 15% of any monthly earnings above that. For example someone who made $50,000 per year would receive $2,014 per month at their full retirement age which is 48% of their earnings. For someone who made $150,000 per year, their Social Security would be $3,759 per month which is 30% of their earnings. Even though both paid the same 6.2% of their income into Social Security, the lower-earner received a much larger percentage of their income in the form of benefits. In the case of business owners, they have to pay double the tax for a total of 12.4% because they are considered both an employee and employer, and they have to pay 6.2% for all their employees. So a business owner is really paying more into Social Security than all their employees combined. In regards to making the wealthy pay their fair share, there have been proposed bills that would tax earnings over $250,000, over $400,000, or possibly tax investment income. However, it is unclear if these additional taxes would change the potential benefit amount of those paying them, or if they would just benefit lower wage earners. There is no doubt that the Social Security system needs some adjustments, but we must understand the facts before implementing change.

It was nice to see that retirement assets saw a nice increase in 2023. According to Fidelity, the average 401k was up 14% from a year earlier to $118,600 and the average IRA was up 12% to $116,600. While it is good to see this progress, balances are still short of the year end 2021 levels when the average 401k reached $136k and the average IRA stood at $131k. I was somewhat surprised but happy to see the average 401k contribution rate, including employer and employee now stands at 13.9%. With the decline in companies offering pensions, employees really need to make sure they are saving at least 10% of their pay to achieve an enjoyable retirement. On the other side of the equation, I was disappointed to see the percentage of workers who took a loan from their 401k, including for hardship reasons, increased to 8.9% from 7.8% at the end of 2022. Many times, people believe 401k loans are great option, but it costs you greatly when you consider the loss of compounding and the tax inefficiency. They are better than mounting high interest credit card debt, but they should only be used as a last resort rather than a tool to fund a vacation or buy a new toy.

Hype Investing

At Wilsey Asset Management we avoid hype investing. From time to time, we attempt to give evidence of how long-term, hype investing can destroy your portfolio. Here’s another example, in 2021, you may recall the hype around electric vehicles, people made it sound as if an internal combustion engine vehicles would never be sold again and we would all be driving electric vehicles. Well, the hype of the stock price matched that excitement, two examples are Lucid and Rivian automotive. The all-time high a couple years ago for Lucid was $35, recently it has fallen to under three dollars a share, a 91% decline. The other example is Rivian, in late 2021, it hit an all-time high of $146 per share and has recently fallen under $11 a share, a 92.5% decline. It is possible for these companies to turnaround and may do well in years to come, the massive decline in stock price is the reason we will not invest in a company which does not have earnings, and we will not pay more than 10 to maybe 12 times for those earnings going forward. We may miss out on some highfliers. but I’d rather take it slow and steady than try and hit the home run and lose 80 to 90% on an investment. For Lucid to get back to $35 a share that would be over a 1000% return.

US Farmland

Farmland in the United States has been on quite the ride for the past 26 years. Back in 1997, the average price per acre for farmland in the US was $1,270. It has now increased by over 430% to $5,500 per acre. Now before you people in San Diego think that is not that good because of the appreciation you’ve seen on your house, remember this is nationwide and a 400% plus return is very good on real estate. The question is, will it continue? Over the last 20 years, farm acreage has declined by about 50,000,000 acres to just under 900,000,000 acres nationwide. Development has been taking away some of the agricultural land which could drive prices higher. That could encourage farmers to take advantage of their high value real estate and retire. That would not be a good thing for our agricultural needs going forward.

Is Long-Term Care Insurance Worth it?

Most people know that elder care can be expensive later in life which begs the question, “Is long-term care insurance a viable solution?”. The long-term care insurance industry has evolved a lot over the last four decades. In the 80’s, 90’s and early 2000’s there were policies available that were affordable and provided more coverage, such as lifetime benefits. However, over time the insurance companies came to realize they weren’t making money because more people were filing claims than expected. As a result, most insurance companies have stopped selling this type of insurance all together, and the ones that remain have substantially reduced benefits and increased premiums on new and existing policyholders. Therefore, the cost/benefit ratio for long-term care insurance is not nearly as attractive as it once was and retirees are typically better off exploring other ways to pay for elder care.

We hear that commercial real estate properties are having problems, but how bad are those problems? After the 2008/2009 financial crisis, by the second quarter of 2010 commercial property had a record $194.8 billion properties in distress. Compare that to the end of 2023, when commercial properties in distress totaled $86 billion. Also, think about how much commercial real estate has appreciated since 2010. Another point to consider, after the financial crisis there were not many funds on the sidelines and today real estate private equity firms are sitting on $544 billion in cash, which is a record level up from $457 billion in cash at the end of 2022. With that much cash, they will be interested in doing some deals and give a floor to many commercial properties across the country.

Should You Buy Nvidia Now?

We all know that Nvidia has done very well, and after the most recent report the stock is at a new high. I heard the dumbest thing from a money manager on CNBC, who didn’t own Nvidia and said you need to buy one percent of the stock in your portfolio. The reason I say it is dumb is because even if the stock doubles from here that would only increase your investment return by one percent. In other words, if your return was 10% over the next year, with the addition of Nvidia your return would be 11% if the stock doubles from here. This also assumes that had you invested one percent somewhere else it would’ve made no return at all. When it comes to investing, discipline is very important and yes, we all want to invest in investments that will increase in value, but an investor must understand their objective and their discipline, stay the course, and realize that one will not always own all the hot stocks and should not chase returns.

Chinese Car Makers

A Chinese electric auto maker, BYD, is sending chills across the auto makers in the US. Elon Musk said “If there are not trade barriers established, they will pretty much demolish most other car companies in the world. “In a memo from executives at Toyota, they stated Chinese companies have a 25 to 30% advantage over global competitors when manufacturing EVs. If not protected against, Chinese EV companies could storm the US market. In 2018, the Trump administration applied an additional 25% tariff on Chinese cars on top of the regular 2.5% tariff on all cars coming to the US. To get around this, BYD is looking at building a factory right across the border in Mexico. They have not purchased any land yet and this is a few years down the road, but it could be devastating to all car makers 3 to 5 years from now. I looked to see what the BYD cars look like and some of them are not that bad looking. Whoever becomes president in November 2024, I hope they look seriously at this situation to prevent BYD or any other Chinese carmaker from flooding our car market.

Financial Planning: Investment Return of Annuities

An annuity is exchanging your assets for income, you’re essentially buying a pension. It’s funny that pensions have such a positive connotation but annuities aren’t as popular, even though they’re pretty much the same thing. We don’t sell annuities and we don’t ever recommend annuities because when you look at the numbers, they aren’t that appealing for an investor. To illustrate this, I got a quote for a 65-year-old purchasing a $500k immediate annuity. In exchange for the $500k, they will receive monthly income of $3,000 for the rest of their life, which is a 7.2% yield. Keep in mind, the $500k is now gone, so they can’t decide down the road to do something else with their money. Statistically someone who is 65 has a life expectancy of about 83, or more 18 years. With this information we can calculate the expected return of the $500k investment and it comes out to 2.88% per year. In other words, if you were to invest $500k and then withdraw $3,000 per month for the next 18 years, you would need that $500k to return 2.88% per year to last the full 18 years. From an investment standpoint, most people wouldn’t be happy with an annualized return of less than 3% over almost 2 decades, but that’s what people agree to when they purchase an annuity. Don’t get confused by the 7.2% yield, which is misleading since those payments stop when you die. Instead, calculate the actual return to see if it still seems like a good idea. Keep in mind, the insurance company and the agent selling the annuity will not break down the actual return for you.

Microsoft spent about $7 million per 30 second ad for the Super Bowl promoting their Copilot AI service. Some results are not coming in so good for Copilot with some testers after using the software for more than six months said it was useful but doesn’t live up to its price. Another survey adopter said the initial excitement wears off with a 20% drop in use after only a month. Executives at Microsoft expected billions of dollars in new revenue as their search engine Bing would take market share from Google. Unfortunately, nearly a year later Bing has only seen less than a one percent gain in market share. A survey from Boston consulting group said that roughly 90% of business executives said generative AI is a priority for the company this year; however, 66% said it would take a couple years for the technology to move beyond the hype. 70% of those executives said they were only going to do small investments with limited testing. I’ve been concerned about the over hype of the money going into AI and the return on investment taking years to payoff. This would not be the first time on Wall Street that the hype sent stocks into orbit, only to come back down to earth when reality set in.

Investing in Technology

More strange news with the markets. As of the week ending February 9th, the NASDAQ was up 6.5% this year and the S&P 500, which is also heavily weighted in tech companies had increased 5.4% in 2024. This compares to a return of just 0.84% for the broader Russell 2000 index. The S&P 500 has increased 14 of the last 15 weeks something we have not seen since the end of 1972. I’m not saying the market is going to crash tomorrow, but the 73/74 market period had a very long bear market. The difference here is that our market is so concentrated in technology that I think we could see a bear market, but many companies will still gain going forward because of the great value that has been ignored. Another example of exuberance in technology would be that fact that since the 2008 financial crisis, US companies with dividends above 5% gave investors a return of 450%. Over that same timeframe, companies that don’t pay a dividend have returned nearly 1200%. Going back to the 1870s, this flies in the face of normal behavior. The excitement in tech has led to some major gains for the big tech companies and Microsoft is now the most valuable company with a market cap around $3.1 trillion. It is almost twice the $1.6 trillion value of the entire S&P 500 energy sector, yet it’s annual free cash flow of around $67 billion is less than half the $135 billion from these energy companies. I do not know what will cause a drop or when it will happen, I just believe many investors do not realize the risk that they are taking by investing heavily into technology. Unfortunately, all parties do come to an end.

CPI

The Consumer Price Index (CPI) caused a lot of concern and sent stocks lower as the reading came in above expectations. Frankly, looking through the data I don’t think the numbers were that bad. CPI rose 3.1% compared to last year which was above expectations of 2.9%, but was lower than the reading of 3.4% in December. Core CPI, which excludes food and energy rose 3.9% and came in above the expectation of 3.7%. This reading matched December’s 3.9% rise which was the smallest increase since May 2021. It is important to remember that numbers don’t always go in a straight line and I believe this report should not have a major impact on the Fed’s rate decisions. Especially, when looking deeper at the numbers. The shelter index again continued to be a heavyweight on the report as it climbed 6% compared to last year. This increase accounted for over two thirds of the 12-month increase in core CPI. It was also interesting that there was a little bit of a divergence between the rent of a primary residence which was up 0.4% in the month compared to the owners’ equivalent rent of residences which was up 0.6% in the month. I believe this is a silly metric that distorts the CPI level. The Owners’ equivalent rent is obtained through surveys and asks members of a household: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished, and without utilities?" I don’t believe this is a great way for tracking shelter inflation and that these numbers should be taken with a grain of salt. Other areas of the report continued to see positive deceleration or even deflation in some cases. The energy index was down 4.6% compared to last year with gasoline falling 6.4%. Food at home showed a gain of just 1.2%, which compares to a peak of 13.5% in August 2022. Food away from home did have a larger increase of 5.1%, which likely stems from higher wages and the elevated demand we are seeing at restaurants and bars. Overall, as I said I don’t think this was a bad report, but investors need to realize that the Fed will not be cutting rates 6 times this year.

PPI

I was somewhat disappointed by the Producer Price Index (PPI), as I thought we would see better numbers. In January, PPI rose 0.3% compared to the prior month, which was the biggest move since August and it was well above the expected increase of 0.1%. Core PPI was even more troubling considering it saw a 0.5% increase, which easily topped the expectation for an increase of just 0.1%. Looking at the year over year increase, the numbers are less concerning. Headline PPI increased just 0.9%, but core PPI did see an increase of 2.6%. I wouldn’t recommend panicking over one report, but I will definitely be keeping an eye on inflation over the next few months. I still believe the broader trend will show a decline towards the 2% target, but there will likely be bumps in the road.

Financial Planning: Health Insurance Before Medicare

Most become eligible for Medicare at age 65. With Medicare you will have a Part B premium, which is $174.70 per month in 2024, and potentially an additional premium of up to $200 per month depending if you select a Medicare Advantage Plan or a Medicare Supplement Plan. If you retire before age 65, health insurance can be much more expensive and range into the thousands of dollars per month. For many this is a major factor in why they delay retirement. However, with the correct planning ahead of time, it is possible to retire early without being subject to exorbitant insurance premiums. When purchasing health insurance through the Health Insurance Marketplace, the actual premium is based on your income. This means if you can keep your income lower, you will qualify for the same coverage, but at a lower monthly cost. Some ways to keep income low is to keep extra cash, taxable brokerage accounts, and Roth accounts available as withdrawals from these accounts are not considered income. Therefore, these types of assets can cover livings expenses until reaching Medicare at age 65 while also keeping health insurance premiums, federal taxes, and state taxes at a minimum. This also means it may be necessary to defer other types of income such as Social Security, pensions, capital gains, pre-tax retirement account withdrawals, and Roth conversions until reaching age 65. There are many insurance plans available all with their own premium based on income, so it is important to choose the right plan to cover your individual medical needs, but with the right planning, there are affordable options available for early retirement.

One of the main reasons I continue to believe the Consumer Price Index (CPI) will continue to decelerate this year is I don’t believe there will be as much pressure from the shelter index. In December, the median U.S. asking rent price fell 0.8% from the prior year to $1,964. According to Redfin, this marked the third consecutive monthly decline as prices dropped 2.1% in November and 0.3% in October. The rent price reflects new leases which means I believe this will have a larger impact as we progress through 2024. I believe there will be even less concern over rent increases going forward considering the number of new buildings in the U.S. with five units or more. Looking at the chart below you can see that the amount of completed buildings is near the highest level in over 30 years and the number of new buildings under construction is at levels we have not seen before.

China Owning U.S. Debt

I have heard people worry about China owning U.S. treasury debt. Over the last decade or so, it truly has become a very small concern. China now holds just $782 billion of our debt which trails Japan at $1.1 trillion. China still tops the UK, but the gap has been narrowing over the years as the UK now holds $716 billion of US debt. The next largest foreign holders of our debt are Luxembourg at $371 billion and Canada at $321 billion. With our debt now over $34 trillion, China owns just over 2%. Compare this back to 2013 when Beijing’s holdings peaked at just over $1.3 trillion and our debt stood at close to $17 trillion and you will see the concerns over China controlling our debt are currently overblown. Back then they owned over 7% of our debt. The main benefit here is China no longer could threaten dumping our debt and causing a major spike in interest rates. The downside is our debt has continued to grow and with less demand for our debt from China, interest rates are likely higher than they would be if China was actively participating in buying more of our debt. Remember like everything else these markets are based on supply and demand. If there is more demand for our debt, prices would go higher and since there is an inverse correlation, interest rates would go lower.

Growth Companies

I don’t like to invest in the expensive growth companies because of the risk that comes with them. People often forget how much value they can lose and how long the recovery can be. One great example of this is Microsoft during the Tech Boom. In 1999, Microsoft could do no wrong and they were one of the most exciting companies in the world. The stock hit a peak of a split-adjusted value of $59.96 per share in December of 1999. The stock then fell dramatically during the tech bust and financial crisis and bottomed out in March 2009 at a price of $15.15 per share. This resulted in a decline of about 75% over essentially a 10-year period. The shares would not reach the 1999 peak until October 2016, essentially 17 years after it reached the tech boom peak. While the stock has done well as of late, how many people are patient enough to hold through a 17-year period with no growth? Not to mention if you need income from your portfolio, that would have been a complete disaster. While tech is hot again, I still recommend people be careful as they often forget the lessons from the past.

Financial Planning: Understanding Your Tax Phases

Sometimes it feels like taxes only go up, but it doesn’t have to be that way. In fact, most people go through different tax phases during their lives. While you’re working, taxes seem high because you’re subject to 5 different taxes. You are taxed federally, on the state side, and you have Social Security, Medicare, and disability taxes withheld from payroll. Then when you retire, things change. You’re no longer subject payroll taxes, which in California is a flat tax of 8.75%, and some of your retirement income may be partially or fully tax-free. For many this is a period of low taxation which means you don’t need as much total income to produce your after-tax cash flow. Then in your 70’s, you may see your taxes increase again due to required distributions from retirement accounts and extra premiums for Medicare. By understanding these different tax phases over time, you can take advantage of your tax situation and create a plan to save taxes over your lifetime.

The numbers for nonfarm payrolls blew away expectations as they expanded by 353,000 in the month of January. This easily topped the estimate for 185,000. Job growth was widespread as it grew in every major category except for mining and logging which saw a decline of 6k in the month. Two areas that remained extremely strong were health care and social assistance (+100.4k) and professional and business services (+74k). Other areas of strength included retail trade (+45.2k), government (+36k), and manufacturing (+23k). The previous two months also saw upward revisions with an upward revision of 117k in December and 9k in November. There was some concern that maybe this report was too strong and that it could impact the Fed’s rate cut path. The major concern on the inflation front came from average hourly wages which jumped 4.5% and easily exceeded the forecast of 4.1%. While this could have an impact on inflation, it is important to remember that data doesn’t always move in a straight line. Also, the average hours worked fell to 34.1 which was 0.2 hours lower than the previous month and would have an impact on total labor cost. I was also happy to see in a separate report that the Employment Cost Index increase by just 0.9%, which was the smallest quarterly gain since the second quarter of 2021. Looking at year-on-year, labor costs increased 4.2% in Q4 which marked the smallest rise since Q4 of 2021. Overall, I think this report shouldn’t throw a wrench in the idea of the Fed cutting rates in the back half of the year.

Job Openings

It is looking like the economy could navigate a pretty remarkable feat with decelerating inflation rates, growth in the economy (albeit limited), and a resilient labor market. In the month of December, job openings rose to 9.0 million which easily topped the estimate of 8.7 million and marked a three-month high. This is well off the high of around 12 million that was achieved in 2022, but it still is a healthy level considering pre pandemic job openings were around 7 million.  

Investment Grade Debt

I was surprised to learn that the amount of investment grade debt was $168 billion so far in the month of January. One would think that these corporations would do everything they could to hold off until the second half of the year when rates should be lower. Investors would have to go back 34 years to find this much debt issued in January. It makes one wonder do they know something we don’t know and maybe rates won’t be falling? I still remain very confident we will see rates fall in the second half of the year.

Liquid Cash

As of the third quarter of 2023, cash in money markets and CDs has reached an all-time high of $8.8 trillion. The last peak for CDs and money markets was reached in 2008 when it climbed above $6 trillion. At US lenders, total deposits fell to $17.4 trillion from the peak of $18.2 trillion, but when you combine the two you have around $26 trillion of liquid money. The question is, as rates fall where will this money go and how much will be transferred to longer term investments like real estate and equities? I don’t believe we will see much action here until probably the last quarter of 2024 and even more likely happening in 2025. However, as an investor, I would rather be investing early than late because that will hurt your long-term returns. I think investing in the right equities on sale over the next six months will provide good returns when you look at December 31st, 2025.

Financial Planning: Tax Filing Review

With tax season coming up, it is helpful to review your tax return before filing to catch any mistakes. Some of the most common errors include misreporting 1099-Rs, missing rental expenses, incorrectly reporting capital gains, and missing IRA contributions. Any time money leaves a retirement account a 1099-R is generated, even with Roth accounts. However just because a 1099-R is generated, does not mean the distribution is taxable. Roth withdrawals and more commonly rollovers to other retirement accounts are not taxable. We have seen cases where a non-taxable distribution is reported as income due to the receipt of a 1099-R, so if you had retirement account distributions in 2023, make sure you’re only paying for taxable withdrawals. With rental properties it is common to have insurance, property taxes, interest, HOA or management fees, and depreciation all listed as expenses. If any of these are missing or seem low after reviewing the Schedule E, it may be necessary to go back and recount all your rental expenses to confirm you are receiving all possible deductions. When selling assets like a business or property there is no 1099 generated, so it is helpful to double check how a taxable sale is reported on the Schedule D. We’ve seen sales reported as a short-term gain instead of a long-term gain which can result in substantially more taxes. Lastly if you made any contributions to pre-tax retirement accounts like an IRA or SEP, be sure these contributions are reported and deductible. When making a contribution to an IRA, a Form 5498 is generated, but this form isn’t available until after taxes are due. This means you have to remember to report the contribution because there will be no tax form showing it. There’s many possible errors or omissions when filing a tax return, but these are some of the more common ones to keep an eye out for.

I would say the GDP report was an extremely strong indicator that the economy is progressing in the right direction. While the growth number in Q4 of 3.3% was impressive compared to the estimate for a 2% gain, I believe the inflation numbers were even more important. The PCE price index increased just 1.7% in the fourth quarter and when looking at the “core” PCE, which excludes food and energy it increased just 2.0%. I believe this points to the possibility that barring any major shocks, inflation should continue to decline towards the Fed’s 2% target on an annual basis as we progress through this year. When looking at the growth in the GDP, it was interesting to see that all components produced positive benefits for the report. With growth of 3.8% in goods spending and 2.4% in services spending, overall consumer spending grew 2.8% and added 1.91% to the headline number. Private investment also grew 2.1% and added 0.38% to the headline number. Within private investment I was happy to see a mild impact from the change in private inventories as it added just 0.07% after a large impact in Q3 when it added 1.27% to GDP. Trade added 0.43% to the headline number as exports grew an impressive 6.3%. Lastly, government spending rose 3.3% which added 0.56% to the headline GDP number. Overall, I believe this report puts the economy in a great spot as we progress through 2024 as the potential for the soft landing is looking more and more realistic.

PCE

More good news on the inflation front as the Personal Consumption Expenditures Price Index (PCE) showed an annual increase of just 2.6% in the month of December. More importantly, core PCE, which removes food and energy and is the Fed’s primary gauge, showed an annual increase of just 2.9%. This was a decline from 3.2% in the month of November and was the lowest 12-month rate since March 2021. This gives me even more confidence that we could come very close to the Fed’s 2% target by the end of the year and that my estimation for 3-4 rate hikes remains in likely. I believe as we exit the year the talk around inflation and the Fed will no longer be as newsworthy as investors move on from the inflation concerns.

Interest Rates At Wilsey Asset Management, we do expect to see the Federal Reserve to begin reducing interest rates with 3 to 4 cuts starting around the middle of the year. I have heard some estimates as high as six, but I think those are too aggressive. At our firm, we are value investors and we think this will be a positive as the cost of capital could decline for the equities that we hold in the portfolio, which would lead to a nice investment return. If you’re a growth investor, you may not experience the same type of return on your equities. I based this on when the Federal Reserve reduced interest rates in 2001 it did not help growth stocks go up in price and they actually underperformed. So as always be careful on the expensive growth stocks, they don’t always perform as you may hope.

Federal Reserve Balance Sheets

The mainstream media loves to talk about all the negative news they can find, but never seem to want to talk about positive news. I remember the Federal Reserve’s balance sheet assets rising to nearly $9 trillion when they were at their high. They have been quietly reducing the assets on their balance sheet and as of early January they had fallen to $7.74 trillion. When compared to January 2023, that is a decline of nearly $850 billion. I do believe at the current pace and with the current economy by January 2025 perhaps we could see the assets on the Federal Reserve’s balance sheet under $7 trillion. The Fed is currently allowing $60bn of maturing Treasuries and $35bn of agency mortgage-backed securities to run off its balance sheet each month. For reference, before the pandemic the Fed’s balance sheet stood around $4 trillion.

Financial Planning: Rule Changes for Inherited IRAs

The SECURE ACT passed in 2019 but one of the major provisions has not been enforced until now. Beginning in 2020, beneficiaries who inherit a retirement account can no longer stretch distributions out over their life expectancy and instead must deplete the account within 10 years. For accounts with pre-tax funds like traditional IRAs, this can result in a large amount of additional taxable income. This has been the case since 2020, but now in situations where the original account owner was old enough to be taking Required Minimum Distributions, meaning they were in their 70’s or older when they died which will be most people, the inheriting beneficiary now must also take a required distribution each year starting in 2024 in addition to depleting the account in 10 years. This beneficiary RMD has not been enforced in 2020-2023 due to the lack of clarity surrounding this rule, but the grace period is now over. There’s a bunch of people out there who have inherited retirement accounts in the last 4 years and haven’t done anything with them, however if they don’t take their distributions going forward, they will be subject to a 25% penalty. So, people with inherited IRAs need to make sure they take that distribution this year and be prepared for the tax impact of it. Keep in mind this applies to non-spouse beneficiaries who inherited accounts in 2020 or later. For accounts inherited before 2020, beneficiaries will see no change and may continue stretching distributions. Also, spousal beneficiaries may still treat retirement accounts as their own and are not subject to any special distribution rules.

Financial Planning: Taxes When Selling a Home A house is considered a capital asset, and when a capital asset is sold for a profit, a capital gain is produced which can result in a tax bill. For homes that have been the primary residence of the seller for at least two years out of the last 5 years, a home sale exclusion applies which reduces the amount of capital gain by up to $500k for a married couple or $250k for a single person. For example, if a home was purchased for $250k then sold years later for $1,250,000, there would be a capital gain of $1,000,000. This gain may then be reduced by the $500k exclusion, resulting in a taxable capital gain on the remaining $500k. If the home was instead sold for $700k after purchasing for $250k, the gain would only be $450k, which the exclusion would completely cover resulting in no taxes on the sale. If there is a taxable capital gain after the exclusion, it will be taxable at the lower capital gain rate as opposed to ordinary income rates on the federal side. On the state side the gain will be taxed as ordinary income as most states don’t have separate capital gain tax brackets. For married couples with an adjusted gross income of about $125k or less, including any taxable gains from a home sale, the federal capital gain tax rate is 0%. So, if a residence is going to be sold, it would be best to sell during a year with low income such as the first year of retirement so that the 0% tax bracket would absorb some of the gain. Once income goes above $125k, the next capital gain bracket is 15% up to an income level of about $615k at which point the tax rate increases to 20%. It is also important to keep a record of any home improvements or selling costs as these can be deducted against the taxable gain. Due to appreciation in the housing market, it is getting more common for home sales to result in taxes, so be diligent about keeping records and be careful when you sell a home so you don’t pay more taxes than necessary.

Financial Planning: Social Security Spousal Benefits Social Security spousal benefits come into play when one spouse has little to no earnings history. In this case their own social security benefits would be low, so they can claim a spousal benefit from the spouse that did work. There’s a common misconception that it’s ½ of the higher earning spouse’s amount, but the actual calculation is ½ of the working spouse’s full retirement age amount and the non-working spouse would need to apply at their own full retirement age. The working spouse may apply at any point between age 62 and 70 and the spousal benefit is still ½ of their age 67 amount. The non-working spouse may collect as early as age 62, but they will receive a reduced benefit for every month they collect before age 67. Upon reaching age 67, they do not receive a larger benefit by waiting any longer. The only other caveat is the working spouse must be collecting social security for the non-working spouse to collect a spousal benefit. In situations where the higher earning spouse is not collecting social security because they are still working or they are waiting until age 70, this prevents the non-working spouse from collecting. If the non-working spouse has reached age 67, benefits are being permanently lost. This is compounded by the fact that the spousal benefits will only last until the death of either spouse because only the higher social security benefit is retained by a surviving spouse. This is one of several instances where it is better to collect Social Security sooner rather than later.

There was initial concern that the jobs report was too strong and could point to inflationary concerns. After digging into the report, I believe it is still in line with our belief that the economy is in a good enough spot to have a soft landing and avoid further inflationary pressures. The initial concern stemmed from the fact that headline employment grew by 216,000 in the month of December, which easily topped the estimate of 170,000. While this may sound extremely strong, the previous two months were revised lower by a total of 71,000 jobs. Also, Government was a major contributor in the report as the sector added 52,000 jobs in the month of December. With such a large contribution from the public sector, this shows me the private sector is continuing to soften. Areas of the private sector that were strong included health care and social assistance (+58,900), leisure and hospitality (+40,000), and construction (+17,000). Even after many months of positive gains, the leisure and hospitality sector still remains 1% or 163,000 below pre-pandemic levels. Overall, the jobs market softened in 2023 as monthly gains averaged 225,000 for the year compared to 399,000 in 2022. I believe that those monthly gains will soften even further in 2024. The only concern I had about the report was wage inflation as average hourly earnings increased 4.1% compared to December 2022. This was above expectations for 3.9% and last month’s reading of 4%. Ideally, we would like to see this continue to soften as wage inflation generally pressures overall inflation, but data does always move in a straight line. It is something to keep an eye on, but I do believe wage inflation will also soften in 2024.

JOLTs

According to the Job Openings and Labor Turnover Survey (JOLTs), the labor market is continuing to soften. The report showed that job openings fell to 8.79 million in November. This was right in line with the estimate of 8.8 million, but it was lower than October’s upwardly revised report by 62,000 openings. If it stands, the report produced the lowest level of openings since March 2021. While this continues to sound negative, there are still 1.4 openings for every available worker. While this is lower than the 2 to 1 ratio, we saw for much of 2022, it is still well above historical levels and shows we have a good labor market that is softening from historic levels.

Dividends & Buybacks

Dividends and buybacks for 2023 came in with dividends holding strong at $588 billion which was an increase of 4.2% compared to 2022. Buybacks were still higher than dividends at $780 billion, but company executives in 2023 cut back 15.4% on stock buybacks for the year. Don’t think dividends at 2% or 3% are not worth putting your investment dollars into, going back 100 years dividends as a percent of the total return still account for 38%. For the long-term, investors should have equities in their portfolio that not only grow the stock price but also pay a dividend that the company increases overtime.

Federal Debt

In the first part of January, it was announced that the federal debt for the first time surpassed $34 trillion. Yes, a very large number, but it is important to understand the debt to GDP. Debt to GDP is like looking at your own personal situation where your income is rising and you can take on more debt to either buy a home, a car, or some other asset that you want to finance because you can afford the payments. The debt to GDP peaked at the end of 2020 touching 126% and the most recent data shows debt to GDP has now fallen to under 120% of GDP. If the economy can continue to grow faster than the increase in the debt, the percent of debt versus GDP will go down and put the country in a better financial position.

Financial Planning: Structuring Income for 2024

With the new year comes a fresh slate for your taxes, so now is the time to plan out your income for 2024. If you are withdrawing money from investment accounts, you’ll probably want to take another look at it as tax brackets and RMD’s have changed. Withdrawals from pre-tax accounts are considered ordinary income, Roth withdrawals are tax-free, and withdrawals from taxable accounts are tax-free. Taxable accounts contain capital gains and dividends which are taxable even if you don’t withdraw anything, but they are taxed at lower rates. Depending how you structure where your income comes from will determine how much you have to pay to the government. Ordinary income is taxed the highest, and it’s okay to have ordinary income as long as it only fills up the lower tax brackets. Tax-free income is obviously preferred, but you don’t need to only have tax-free income because then you’re missing out on the benefit of the lower tax brackets. Ideally you want to have the right amount coming from each source to satisfy your living expenses while keeping your income on paper at the most efficient thresholds. For those with lower expense needs, a threshold to plan around is an adjusted gross income of $30,000. At this level there would be no tax because the standard deduction would reduce taxable income down to nothing. $30,000 might seem low, but at that level social security is largely tax-free and if there is some Roth income, it is possible to have $5,000, $6,000, or even $7,000 of monthly cash flow while keeping that annual AGI at $30k. The next threshold is an income level of about $125,000. This is the point where ordinary income moves from the 12% tax bracket to the 22% tax bracket and where capital gain and dividend income moves from the 0% bracket to the 15% bracket. You really have to be careful here because a little extra ordinary income might fall in the 12% bracket but that can push some capital gain income up to 15% so your marginal rate temporarily is 27%. Next is an income level of about $210,000 for those 63 and older. This is when Medicare premiums start to increase based on higher income levels and since there is a 2-year gap between income and premiums, you need to be aware of this at 63 and not 65. Lastly for those with higher incomes, the threshold to watch out for is income of about $415,000 which is where the tax rate increases from 24% to 32%. No matter your income needs, it will help to plan it out because ultimately the goal is to be able to retire sooner with more income and pay less tax on that income.

The Consumer Price Index (CPI) did not show us much new news and I believe it will be enough for the Fed to keep rates steady and put an end to their hiking cycle. The headline number showed just a 3.1% increase compared to last year and the core CPI, which excludes food and energy showed an increase of 4%. The headline number saw a nice benefit from falling energy prices as the energy index declined 5.4% compared to last year and gasoline prices were down 8.9% compared to last year. Although the annual increases showed little to no change compared to last month, it’s important to understand the progress that has been made from the peak inflation levels. In June 2022, headline CPI hit a cycle high of 9% and in September 2022, core CPI hit it’s cycle high of 6.6%. Progress continues to be made in many areas including food at home which showed an increase of just 1.7% compared to last year, but remains stubbornly high in areas like motor vehicle insurance which was up 19.2% compared to last year and motor vehicle repair which was up 12.7% compared to last year. Shelter continues to be the big headwind in the report as the index was up 6.5% compared to last year and accounted for nearly 70% of the total annual increase in the core CPI. While this has taken longer than I anticipated, I still believe this shelter index will see subsiding price increases which should continue to bode well for the overall inflation report.

Government Debt Many times I’m asked or hear concerns by people about the government debt and I tell them I don’t like where it is, but it’s not a major problem at this point. Currently the debt to GDP stands at 119.47%. Compare that to another developed nation like Japan, who has a debt to GDP of 263%. I do not wish to see the US get into that situation, but you have to notice that Japan has not fallen and it has continued to move forward. One problem with our government debt being so high is that there is only a certain number of buyers looking for debt and if the government is absorbing more debt to cover their bills, it takes money out of the private sector debt market, which can slow down our economy. In summary, we are not in danger territory, but to improve our growth going forward we need to get a handle on our debt and or grow our GDP much more. I still believe there is no need to panic for years to come.

Apple

In the future, the next iPhone you purchase may not come from China and instead it may come from India. Within two to three years, Apple is expecting to build over 50 million iPhones in India. If Apple reaches this goal, that would mean India would make up about 25% of global iPhone production. Currently global iPhone shipments are around 220 million per year, which means China will still continue to account for over 50% of the iPhone production. It does appear that relationships with Apple and the Chinese government are a little strained since the Chinese government banned some officials from using iPhones at work. Apple responded saying any iPhones sold in China will be produced in China. There are unions in India that do put up some barriers for Apple, but so far, they have been able to work with the unions to get things done like having the ability to do a 12-hour workday if production increases are needed. Even with Apple’s popularity here in the US, Samsung is still the global smartphone leader.

Accident Repair

People who own EV’s may be saving money on gas, but they lose that benefit when it comes to repairs if you get in an accident. This is because of such things as how the cars are built and special storage may be required because of lithium batteries to prevent fires. Last year the average cost for a crash of an electric vehicle was $6,587 which was 55% higher than on all vehicles which was $4,215. You may be thinking that’s ok, I don’t have to pay for accidents as my insurance will cover them. Unfortunately, the insurance companies know they pay more for electric vehicle repairs so you’ll pay 44% more for car insurance on an electric vehicle or about $357 per month compared to $248 per month for normal vehicles. You may still love your electric vehicle, but they’ve only really been around for a few years. As time passes, we are finding out more about some downsides that we did not know before.

Financial Planning: The Season of Giving

Whether it’s to charity, church, or family, people tend to be in a more giving spirit during the holidays. If you happen to be in the giving mood, there are a few stipulations to be aware of. When giving to family or friends, there is an annual gift limit that applies. In 2023 it is $17,000 per person and next year it increases to $18,000. This limit is stackable so a married couple may gift $34,000 to as many people as they want and may repeat this for as many years as they want. This gift is not deductible to the giver and does not count as income to the recipient. For extra generous givers, a 529 account may be used to gift 5 years’ worth of gifts at a single time, meaning a married couple could give $170,000 to as many beneficiaries as they want. This applies to beneficiaries of any age and they do not need to use the funds for education as long as they withdraw the entire gift from the 529 before it has a chance to accumulate earnings. Givers may also gift appreciated shares of stock to avoid paying taxes on the gains. In this case, the recipient inherits the gain and will realize income if the shares are sold, which may be at a lower tax rate than the giver. When making charitable gifts, it is important to verify if the donation will be deductible to you. In order to receive a tax benefit, you must itemize your deductions which means you need the total amount of your deductions to exceed the standard deduction. This applies to both federal and state taxes so even if you do not itemize federally, you may still itemize on the state side and receive a tax benefit. Givers may also donate appreciated shares of stock when donating to charity to receive the tax deduction and avoid the capital gains tax. If you liked the investment, you could repurchase the stock which essentially resets your cost basis while you receive the tax benefit from the donation. Keep in mind, when you give to charity, the dollar amount of the tax benefit does not outweigh the amount of the donation so it is still costing you money. In other words, you are still being charitable! Lastly, for people who are over the age of 70.5, have an IRA, and who would like to make a charitable donation, they should heavily consider using the IRA to make the donation directly to the charity. This is called a Qualified Charitable Distribution (QCD) and will offer the same tax benefit as an outright donation, but with a bunch of extra perks. With a QCD, the giver receives the full tax benefit whether they itemize or claim the standard deduction. Since the donation is coming from an IRA, this will reduce the amount of future required distributions and therefore reduces taxable income. Also, a QCD is not included in either the adjusted gross income or taxable income (regular donations only reduce taxable income) which means the donation may also reduce Medicare premiums in addition to taxes. If you plan to give this season, doing it in the most efficient way will give some tax savings or even allow you to give more.

JOLTs Report While it may not look like good news when reading the headline number, the JOLTs report showed exactly what the Fed is looking for. Job openings of 8.73 million in the month of October were below the estimate of 9.4 million and showed a decline of 617,000 or 6.6% compared to the previous month. This also marked the lowest number since March 2021. While this all sounds troubling, it shows the labor market is softening which is what the Fed has wanted to see. It also shows that the labor market is still doing alright considering there are still 1.3 job openings to every available worker. Pre-pandemic this ratio stood at 1.2.

Drug Companies The Biden administration has opened the door to seize the patents of certain costly medications from drugmakers. The administration has unveiled framework that outlines the factors federal agencies should consider in deciding whether to use march-in rights, which take patents for drugs and shares them with other pharmaceutical companies if the public cannot reasonably access the medications. Officials can now factor in the price of a medication in deciding to break a patent. While this may sound like a nice practice, I do worry about the long-term ramifications. While drug companies often do have nice margins on drugs that succeed, people generally do not discuss the billions of dollars that is spent on research and development for drugs that do not succeed. If drug companies cannot offset those costs with high margins on successful drugs, the industry could have major problems. Also, what would the incentive be to spend billions of dollars on research and development for a new drug, when you could just potentially wait for another company to come up with the solution and then use their patent that has been taken from them by the government? This could ultimately stifle innovation in the industry.

Magnificent Seven Remember a few years ago the FANG stocks? They have now been replaced by what is known as the Magnificent Seven which are Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta. People still believe index investing is a great way to invest and diversify your portfolio, but when you look at the S&P 500 you should realize that the Magnificent Seven have carried the index to a year-to-date return of around 20%. If you look at that equal weight index it is actually only up around 6% this year. Also, in the index 44% of stocks are showing negative results. You may think you had diversification with the S&P 500 but currently the seven stocks account for close to 30% of the index. These companies stock prices have continued to perform, but history has proven time and time again that any equity trading at such high valuations eventually comes back to reality. When that happens investors in these seven stocks, and also the index will have disappointing returns. Unfortunately, I cannot tell you when it will happen, only that history has proven itself to be right 100% of the time.

Financial Planning: Reviewing Income at the End of the Year As we get closer to the end of the year, it is getting more important to review income levels and make any necessary adjustments before December 31st. When analyzing income, it is helpful to identify the expected level of adjusted gross income (AGI), the number of itemized deductions (if any), the amount of total taxable income, and the amount of taxable income subject to ordinary income rates. Adjusted gross income is the sum of all reportable income which could be wages, capital gains, interest, IRA distributions, and Social Security to name a few. After tallying AGI, next is the itemized deductions which include mortgage interest, state income and property taxes, charitable donations, and medical expenses. Taxpayers can claim the larger of the itemized deductions or the standard deduction which is $27,700 for a married couple in 2023. These deductions act as an expense which reduces the adjusted gross income and results in taxable income (AGI – deduction = taxable income). From there the long-term capital gain and qualified dividend portion of income can be separated from the other ordinary taxable income as capital gains and dividends are taxed at a lower rate (taxable income = ordinary + capital gains and dividends). From this point a taxpayer can determine what tax bracket they will be in, the tax rate of their capital gains and dividends, and whether their income will trigger any additional net investment income tax or Medicare premiums. Finally, action can be taken such as Roth conversions, realizing gains or losses, charitable donations, or retirement contributions to push income in a more efficient direction.

Commercial Real Estate I know many people are concerned about commercial real estate, but I believe there are some great opportunities given the extremely negative sentiment. The office sector has been of great concern, but when listening to the conference call for a public REIT we own in the portfolio I remain quite optimistic. The CEO pointed to many major positives including new tenant leasing marking the 11th consecutive quarter at or above pre-COVID levels. Leasing has been extremely strong this year and the company expects to see the highest amount of new tenant leasing since 2016. Retention rates also look good coming in at 70%. Don’t get me wrong there are some definite cracks in the sector, but be careful throwing the baby out with the bathwater. In fact, JLL recently reported that after analyzing its vast data set of office buildings, comprising over 2.7 billion rentable square feet across the top 25 MSAs (Metropolitan statistical area) 50% of the sector's vacancy is concentrated in the bottom 10% of the office stock. I believe the office still has a place in our economy but it is the strong Class A properties that will remain.

Growth Companies People and investors always like the excitement of growth companies with high expectations that they will have great returns. This week the growth company WeWork filed for bankruptcy in New Jersey. This company has never seen a quarterly profit but yet the stock price did reach a high of $130.80, it currently trades for less than a dollar. The big problem with this growth company was excessive expansion which caused excessive losses and rising debt they could not pay. At our firm, Wilsey asset management, I still continue to believe as I have for many, many years we will not invest into or hold a company that has no earnings and high debt. I may have missed some huge gains on a few companies, but I do believe being cautious and not having losses from companies filing bankruptcy is a far better plan for a long-term return and also, I think it is much easier on the emotional side.

Financial Planning: 2024 Tax and Retirement Changes As we get closer to the end of the year, more information is being released about 2024. Each year the IRS adjusts the tax brackets for inflation and in 2024 the increase will be 5.4%. This is a good thing as it allows slightly more of everyone’s taxable income to fall in lower brackets and results in a tax reduction. The standard deduction, which acts as a deductible expense for most taxpayers, is increasing for married couples from $27,700 to $29,200 plus an extra $3,100 if 65 or older. For single filers it is increasing from $13,850 to $14,600 plus $1,950 if over 65. Retirement account contributions are receiving an increase as well as the maximum contribution for employer plans like 401(k)s is increasing from $22,500 to $23,000, plus an extra $7,500 for savers older than 50. IRA contribution limits are increasing from $6,500 to $7,000 plus a $1,000 catch-up contribution for those older than 50. With these upcoming changes everyone should review their income and savings plans for 2024 to make any necessary adjustments.

While the employment numbers missed expectations, it is a big positive for interest rates as the labor market is slowing and should provide evidence for the Fed that their hiking cycle can end. The headline number showed nonfarm payrolls increased by just 150,000 in the month of October vs the expectation for an increase of 170,000. The prior two months were also revised lower by a total of 101,000 jobs. While this may sound like bad news the key takeaway here is the labor market is softening, but it is still doing ok. Areas of strength were health care and social assistance (+77,200), government (+51k), construction (+23,000), and leisure and hospitality (+19,000). While I generally don’t like to see government jobs leading the way in employment reports, hiring has lagged in the sector and has now finally returned to pre-covid levels. Manufacturing was a major loser in the month as 35,000 jobs were lost. While this may sound troubling, 33,000 of those lost jobs came from motor vehicles and parts which can be attributed to the UAW strike. With the resolution now in place with the auto manufacturers, we should see most of these jobs come back next month. Also, another positive on the inflation front was average hourly earnings which increased 0.2% in the month versus expectations for 0.3%. Compared to last year average hourly earnings were up 4.1%, which would mark the smallest year over year increase since June 2021.

Labor Market

Even with a softening labor market, there are still plenty of jobs out there. The Job Openings and Labor Turnover Survey (JOLTs) showed there were 9.55 million available positions in the month of September, which means the ratio of job openings to available workers still stands at an impressive 1.5 to 1. The number of layoffs in the month also headed lower and stood at just 1.5 million compared to 1.7 million in the month of August. As a reminder, before Covid in 2019 layoffs averaged over 1.8 million per month.

Federal Reserve Survey

A recent Federal Reserve survey said the average American is now worth $1 million, which is up 42% from $749,000 back in 2019. Now you may be thinking that includes multi-millionaires and billionaires, this is why the median wealth gives one a better idea of where America stands. From 2019 to 2022 median wealth hit $193,000 which is an increase of 37% adjusted for inflation. 16 million American families or a little over 12% now have wealth exceeding $1 million which is up from 9.8 million in 2019. These millionaires have received over 90% of their wealth from owning stocks, which is above the 87% home ownership rate. It was also discussed that for the most part they became wealthy over time and it did not happen quickly. A lesson for the younger generation, don’t be in a hurry to make big returns and lose your money. Be smart by investing in good quality equities and using taxpayer advantaged programs like IRAs and 401(k)s. Also, it is important to look where you will be in 30 years not 30 days.

Interest Rates

While I believe over the next couple years rates will decline from these levels, I’m not optimistic it will be a major decline. One reason for that is the elevated government deficit. It was announced the treasury will be auctioning off $776 B of debt in the final quarter of 2023 and $816 B in the first quarter of 2024. This comes as the government recently announced the fiscal 2023 budget deficit would be about $1.7 T, which is an increase of $320 B compared to the prior year. It is important to remember that the debt market is based on supply and demand. If there is not enough demand at lower interest rates, to absorb the remaining supply of bonds the interest rate would need to climb.

Financial Planning: Adjustable-Rate Mortgage Demand Spikes

It’s no secret that mortgage rates have climbed to their highest levels in over 2 decades. This has caused many potential home buyers to consider adjustable-rate mortgages as their initial interest rates can be significantly less. While 30-year fixed loan rates reach 8%, the rate for a 5/1 ARM loan hovers around 6.75%. These have a fixed rate for the first 5 years of the loan before becoming variable. Borrowers then have the idea of using an adjustable-rate mortgage to lock in the lower initial rate, simply to refinance before the fixed term ends, hopefully at a lower rate in the future. However, while the rate can look more attractive, these loans generally come high higher point costs. A point is an extra fee attached to a mortgage that is due at closing. Currently mortgage rates are priced based on the assumption that borrowers will look to refinance as soon as mortgage rates fall. Since ARMs have a lower initial rate and therefore less interest, extra point fees are added to make up for the fact they will likely be refinanced. Home buyers must look not only at the interest rate, but also the point cost, and how long they expect to have that loan before moving or refinancing. With mortgage rates at their current highs, it may make sense to accept a higher rate temporarily if the ultimate plan is to refinance in the next few years.

PCE There wasn’t much in the Personal Consumption Expenditures Price Index (PCE), which is the Fed’s preferred measure for inflation. The headline number was up 3.4% which was the same as last month. The core PCE, which excludes food and energy was up 3.7% and was one-tenth lower than the reading in August. Core PCE hit a peak around 5.6% in early 2022. With the aggressive increase in short term rates, the recent increase in the 10-year treasury, and the resumption of student loan payments likely slowing the economy somewhat I still believe the Fed should allow these hikes to sink in and evaluate where we stand in the coming months.

Recession It is interesting how many people believed we were going to see a recession in 2023, but yet the numbers keep proving the doubters wrong. Today’s Q3 GDP report showed annualized growth of 4.9%, which topped the estimate of 4.7%. It’s important to point out that this report does account for inflation. The primary driver of growth here was the consumer as spending increased 4% in the quarter and accounted for 2.7 percentage points of the total GDP increase. Both goods and services saw nice increases as spending grew 4.8% and 3.6%, respectively. Gross private domestic investment also saw a major increase of 8.4% and accounted for 1.5 percentage points of the total GDP increase. Within this category the change in private inventories was the major contributor as it accounted for 1.3 percentage points of the headline number. Government spending and investment also grew 4.6% and accounted for 0.8 percentage points of the headline number. The only detractor in the report was trade as the net exports of goods and services took away 0.08 percentage points from the headline number. While I believe this will likely be the highest GDP report we see for some time, I do believe we can still avoid a recession as the consumer remains in a good spot.

Financial Planning: Annuity Sales Continue to Grow As market volatility continues, annuity sales continue to climb. Last quarter annuity sales hit $89.4 billion which is an 11% increase over the 3rd quarter of 2022, according to LIMRA. Sales reached a record in 2022 and that record may be beat in 2023. This is common during times of uncertainty in the market as investors and retirees look for safer places to put their money and many advisors are happy to sell them. This can feel more comfortable in the short term, but typically leads to underperformance in the long term. Retirees must remember that inflation and longevity risk, in addition to market risk, need to be factored into their retirement income plan. Annuities reduce portfolio volatility and can provide peace of mind at the expense of performance. Even in retirement, assets need to grow to outpace inflation and provide income, and lower performance increases the risk of running out of money too soon.

JOLTs Report The JOLTs report showed Job openings rose by nearly 700,000 in the month of August to 9.61 million. This easily topped the estimate of 8.8 million and means there are still about 1.5 jobs available for each unemployed worker. Layoffs also remained low at just 1.7 million. While this is positive for the labor market, concerns remain that a tight labor market could pressure the Fed to continue tightening policy. I believe there are other factors on the inflation front that should lead to a stabilization from the Fed rather than a continued increase. The positive news continued to push treasuries higher, and the 10-year treasury pushed passed 4.75% to reach its highest level since 2007.

Oil Prices We have seen a dramatic rise in gas at the pump which has been caused by the rising price of oil. Just a couple of months ago at the beginning of July oil was at $71 per barrel, it has increased substantially and ended September at $91 per barrel. Yes, that is a 28.2% increase. At the end of September, we also saw US commercial crude inventories at their lowest level since December 2022. Before you jump to conclusions and think gas prices are going to continue to rise, let me give you some fundamentals behind the scenes. Because of the rising prices gasoline consumption is declining and if prices were to hit $100 per barrel that would cause a further decrease in consumption. It is a world market and China has built up over the last three years a very large inventory of oil which they acquired at low prices. This means they likely will not be coming back into the market, since they have more than adequate supplies. Also, if oil were to hit $100 per barrel that could bring more inventory online increasing the supply and also it is possible that Saudi Arabia would bring back some of their production that they took off line earlier this year. Keep in mind an unexpected supply shock would cause oil prices to continue to rise, barring that scenario I believe we should be close to the top!

Investment Returns Last week in a newsletter we said that we see a very good fourth quarter for investors as it could produce some good fourth quarter investment returns. The personal consumption expenditures price index (PCE) was released and came out at 0.4% last month. Core prices which exclude food and energy only rose 0.1% which is the weakest monthly increase since 2020. If you look at June through August of this year core prices only increased at 2.2% on an annualized basis, which is very close to the Fed’s 2% target. Based on this data, I believe the Federal Reserve once again will pause at the meeting on October 31st. I’m seeing no indication of rising inflation overall, even with the increase in prices at the pump I believe there will be another positive PCE Report released about a month from now and then no increase in interest rates once again in December. If you agree with this data, you should not be sitting on much cash or short-term instruments that pay 4-5%. You should be investing that money in good quality equities or else you’ll be scratching your head in January on what you missed.

Financial Planning: Social Security: A Solution to Insolvency? It is well known that the Social Security trust fund is running out of money. It is projected that the program will be insolvent in about 10 years at which point beneficiaries would only receive 80% of their expected benefits. While we think it unlikely this will come to fruition, there will absolutely be changes to the program over the next decade. Most proposals to fix this problem involve an increase to taxes or a decrease in benefits in some capacity as the Social Security trust fund by law can only invest in US treasuries and cannot borrow. Over the last few years, US Senators Bill Cassidy and Angus King, who sit on opposite sides of the isle, have been working on an alternative solution. The idea is the federal government would borrow $1.5 trillion over 5 years for an “unrelated” third party to invest for the next 75 years. In the meantime, the Social Security insolvency would be financed with additional government borrowing. After 75 years, the accumulated investment principal would repay the $1.5 trillion plus any additional borrowing and accumulated interest and the balance would go to the Social Security trust fund. Over any 75-year period the US stock market has always far outpaced the return of US treasuries so in theory this would solve the issue without tax increases or benefit cuts, but this borrow-to-invest strategy, known as a pension obligation bond, is frowned upon for government agencies. Between the borrowing and investing, not to mention government corruption, there’s a lot that can go wrong here, and failure in a program as large as Social Security would be catastrophic for American taxpayers.

Portfolio There is only one business day left in September and you may be concerned on where your portfolio stands for the month or maybe even year to date. I want to refresh people’s memory that September is historically the worst month of the year for investing and this September looks like it is holding true to the history. But based on what I’m seeing, this is setting the stage for a very strong fourth-quarter gain. We are seeing lower inflation, which means we are closer to stable interest rates and there are some very good values in equities. This is why investors who buy quality and stay the course do receive good long-term returns. If you have good quality equities, do not panic and sell out as I believe you will miss out on some very good future gains.

Automobile Strike You may be thinking that the automobile strike from the UAW against Ford, General Motors, and Stellantis won’t affect you because you’re not in the market for a new car. Well, think again. The UAW President, Shawn Fain, is not just striking against the car manufacturers, but also is causing parts suppliers that don’t have large inventories to have a disruption in the supply chain of parts. What that could mean for you if you own a Ford, General Motors or Stellantis, is you could be turned away when you need repairs on your car like maybe brakes or a water pump. I still believe the union is being rather greedy with workers of the car manufacturers making between $65,000-$95,000 a year and asking for a 40% increase over the next four years along with other benefits, it just seems excessive to me. And who pays? the consumer.

Gold I noticed today that gold is now down to $1848 per ounce and over the last six months has lost 5.7%. It looks like the high was reached this year on May 4 at $2049.73 which if you were unfortunate to buy that day that would be a loss of 9.8%. I bring this up because I know in the last six months or so I’ve received more inquiries about buying gold then I have in quite a while. I am steadfast with my recommendation this year, not to invest in gold I see no reason for it. Even with the government shut down we are looking at I see no reason to invest in gold in 2023.

Financial Planning: Social Security and Medicare changes in 2024 As we get closer to the end of the year, we are getting more information about the benefit and cost changes coming to Social Security and Medicare. Next year the expected increase for Social Security payments is 3.2%, which is quite a bit lower than the 8.7% COLA last year and the 5.9% COLA in 2022. For the average beneficiary receiving $1,792 per month, this increase results in $57. The annual increase is determined by the change in inflation from the third quarter of 2022 to the third quarter of 2023, so we won’t know the official change for a few more weeks. Last year we saw Medicare Part B premiums decrease from $170.10 to $164.90. However, in 2024 these premiums will be increasing again up to $174.80. This 6% increase is largely attributed to the cost of a new Alzheimer’s treatment coming out. Medicare Part D, Medicare Advantage, and Medicare Supplement premiums are expected to be mostly unchanged from their current levels. Overall, even though the benefit increase from Social Security will be relatively small, it will be enough to cover the increase in Medicare costs.

Snacking in the US I can’t remember the last time I had a Twinkie, but apparently, I’m in the minority. The snack business overall in the US is up 8% in the past two years with consumers eating three or more snacks a day. Overall, US snacks increased by 11% last year to a total of $181 billion. The demand has led to 1 million Twinkies being produced each day. This could be why J.M. Smucker recently paid $4.6 billion for Hostess brands which over the last 15 years has filed bankruptcy twice. Twinkies were started back in the 1920s by James Dewar who delivered pound cakes from a horse drawn carriage. If you want to know where the name Twinkie came from, Mr. Dewar came up with the idea after passing a billboard for Twinkie toes shoes. He thought Twinkies would be a great name for a snack. Hostess which owns Twinkies filed for bankruptcy back in 2004 and again in 2012 after the company failed due to a strike over a labor deal with the Baker’s union. It looks like this time being owned by J.M. Smucker; Twinkies will last longer. You may not know this, but they also prolonged the life of a Twinkie from 26 days to now they will last on the shelf for 65 days. I guess I will have to try a Twinkie and bring back the days of my school lunches when I was a kid.

Stock Market You may be worried about investing because of the high levels of the stock market. At Wilsey Asset Management, we have talked about how it’s an overconcentrated market and overall, it is still expensive. Famed investor Warren Buffet also feels the market is expensive, he has what’s known as the Buffet indicator, which he uses to see when the market is expensive. He compares the Wilshire 5000 index to the GDP of the country. The perfect market price is when the market has the same value as the GDP. Buffet points out that the Wilshire 5000 is currently $49 trillion, well above the GDP at $26.9 trillion. To bring the Buffet indicator from a high level of 182% down to 100%, the market would need a decline of 45%. No one, including Buffet, expects to see a 45% decline in the market. What I have said, and agree with Warren Buffett on is that for the next 5 to 10 years we will not have much of a gain in the overall market as the GDP will increase to catch up to the index and normalize the ratio. To make money in your portfolio going forward one must remember it is not a stock market, but a market of stocks and one has to find good stocks that are of good value with good dividends. This will bring the investor better returns over the next 5 to 10 years.

Financial Planning: Premium Financed Life Insurance Cash value life insurance is sometimes sold as a retirement planning vehicle. Premiums are paid with after-tax dollars which covers the fees, cost of insurance, and builds cash value. If enough cash value is accumulated, you can take out loans against it, which is not taxable because it is technically debt. In retirement, the cash value can continue to grow tax deferred while loans can be structured as a “tax-free” income source. The loan balance increases from the withdrawals and compounding interest, but the income/loans may continue as long as the loan balance does not exceed the cash value of the policy. At death, the life insurance death benefit is used to pay off the outstanding loan balance. One challenge for these types of plans is they require substantial amounts of cash value collateral to produce a worthwhile income stream. To build the necessary cash value, extremely large premiums are required which can be difficult to add into someone’s budget. This is where premium-financed life insurance comes in. Instead of the policy owner paying the premiums themselves, they obtain a 3rd party loan to pay the high premiums and then make payments on that loan. The hope is that the cash value will grow faster than the loan balance and at some point in the future, a second loan can be taken against the insurance cash value to repay the loan used to pay the premiums. At that point, additional loans can be taken from the cash value to produce the “tax-free retirement income”. It may go without saying but this type of plan can get complicated and risky pretty quickly. If structured correctly and with some luck, this strategy can produce some retirement income, but there are so many areas where it can fail, and when you invest using debt and fail, the losses are compounded. High net worth and accredited investors can be attracted to these plans from believing they need a more sophisticated and tax-advantaged strategy, and advisors are happy to sell them because of the massive commissions that come along. However, these plans are extremely risky and in pretty much every case there is a more appropriate alternative.

Government Shut Down Here we are in September and the end of the federal government's fiscal year is fast approaching ending on September 30th. The question is will the government shut down in October if the Democrats and Republicans can't agree on funding legislation. At our firm, Wilsey Asset Management, we don’t worry about short term movements in the market caused by political turmoil because we know that they will come up with some type of a settlement sooner or later. Looking back in history in 1978 and 1979 the market did decline when the government shut down. But, in total there have been six shutdowns since 1978 that lasted five days or more and on all other occasions since 1978 the market increased. This included a 10% climb during the December 2018 to January 2019 shutdown. I do believe investors have come to understand government shutdowns are now, sad to say normal and they will come to a resolution at some point. So, with that said, we will not be selling any positions in our portfolio based on a government shutdown. I'd recommend the same for all investors. We all know market timing does not payoff.

Apple in China The news for Apple in China should concern shareholders. China recently announced that they would ban iPhones and other foreign-branded devices at work for officials at central government agencies and they would not be allowed to bring them into the office. It was then reported by Bloomberg that China is planning to extend the ban on iPhone use to state-owned corporations. China does make up a good chunk of revenue for Apple as it is currently accounts for around 19% of total revenue. I do find the timing of these reports somewhat odd as Huawei, which is a big competitor to Apple, recently announced their new smartphone known as the Mate 60 Pro that is capable of ultrafast data connectivity to rival 5G. This will definitely threaten Apple’s market share in the country. Back in 2019, Apple held 56% of smartphone sales over $600 in China while Huawei held 39% of the market share. As Huawei has had to battle limitations on components due to US restrictions their market share sank while Apple’s expanded. In 2022, Apple held 70% of the market share compared to just 11% for Huawei. As the battle between the US and China continues, I do worry this could cause a big sales hit to Apple. Not to mention, who knows what else China could look at banning when it comes to Apple’s service revenue in the country.

Credit Cards Last quarter Visa had $8.1 billion in revenue and earned $4.2 billion. MasterCard had similar results with $6.3 billion of revenue and net income of $2.8 billion. If you have been following me for a while, you know, how opposed I am to merchants now charging a 3% fee if you use a credit card on the purchase. They say if you pay cash, you can save that 3% credit card fee. Whether I like it or not that seems to be sticking and I have to believe this will be a big headwind to the credit card companies. One reason for the growth of these companies has been the increased use of credit cards. In 2016, 31% of purchases were in cash and credit card purchases were just 18%. In 2022 cash purchases dropped to 18% and credit card purchases climbed to 31%. I believe that trend will be changing going forward as consumers save 3% on their purchases by paying cash. Also adding to problems for Visa and MasterCard is what is known as FinTech and other non-bank financial firms which includes companies like PayPal that offer peer to peer payments bypassing the networks. I don’t see how these things cannot reduce the growth of the big credit card companies which trade at around 25 times forward earnings. The credit card companies point out they saw 22% of the revenue in the last quarter come from value added services such as fraud protection and data analytics. But I believe you would still have to use the credit cards to get the services. I’m confident that the financial industry is changing and this will hurt the revenue and earnings of Visa and MasterCard.

Sales Retail sales came in with a good report as sales in July were up 0.7% compared to June. This easily topped the estimate of 0.4% and compared to last year sales were up 3.2%. Gas stations weighed heavily on the report due to lower gas prices as sales decline 20.8% compared to last year. If these were excluded from the headline number, retail sales grew at an even more impressive pace of 5.8% compared to last year. Areas of strength included food services and drinking places (+11.9%), nonstore retailers (+10.3%), and health and personal care stores (+8.1%). Areas that continued to be negative included furniture and home furnishing stores (-6.3%), building material and garden equipment and supplies dealers (-3.3%), and electronics and appliance stores (-3.1%). These categories were all beneficiaries from covid, but with the beginning of the pandemic now more than 3 years ago I do wonder when some of these items that were purchased then will need to be replaced. For example, I do know laptops have an expected life expectancy of around 3-5 years so sales there could start to turnaround in the coming months.

Barbie Movie Move over Batman and hello Barbie! Barbie has now become Warner Bros. Discovery’s (WBD) highest grossing domestic film of all-time. The movie has now topped $537M which comes in above Christopher Nolan's The Dark Knight, which generated $536M in 2008. Barbie does have the benefit of inflation as prices are now higher than 2008, but considering the weak box office post Covid the feat is still quite impressive and it shows the potential reach and advertising power of the recently combined Warner Bros. Discovery. From a global box office perspective, Barbie has collected over $1.2B which would make it the second highest grossing movie worldwide for WBD after Harry Potter and the Deathly Hallows: Part II. I personally have not seen the movie, but apparently many people have!

Gold 26% of Americans believe gold is currently the best long-term investment, which is an increase from 15% one year ago. Unfortunately, people are investing in gold near the all-time high of $2,069/oz hit back in 2020. It is strange to me because gold is supposed to be a very good inflation hedge, but the risks of inflation seem to be subsiding. The Wall Street Journal recently did an article on gold and they mentioned a gentleman who lost thousands of dollars in his retirement plan by betting on biotech shares in early 2021. He has now invested in gold and feels comfortable and says he can now sleep at night. It makes no sense to me why someone would do a risky investment in biotech and then turn around and put all their money into a single commodity such as gold. This is why the average investor only earns on average around 3% per year. During periods like this, people tend to forget when investing in gold you can still lose money. In fact, if we look at GLD which moves with the price of gold, in 2013 shares fell more than 28%. The 10-year average return on GLD is also extremely lackluster at just 3.48%. At the end of the day gold is a just a piece of metal that is only worth what the next person will pay for it. Ultimately, I would not be investing in gold at this time.

CPI The Consumer Price Index (CPI) continued to show positive signs in the month of July as the headline number of 3.2% was below expectations for 3.3%. Core CPI which excludes food and energy was still higher than the headline number at 4.7%, but it was the lowest reading since October 2021. Shelter continued to be a heavy weight on the report as prices were up 7.7% compared to last year. This increase in shelter costs accounted for more than 90% of the increase in the CPI report. Other areas that remained troublesome included motor vehicle insurance (+17.8%), motor vehicle maintenance and repair (+12.7%), and food away from home (+7.1%). Food at home was much less problematic as it was up just 3.6% compared to last year. Energy continued to be a major positive as prices were down 12.5% compared to last year and regular unleaded gasoline in particular was down 20.3%. Overall, I’d say this was a great report, but I will say oil prices have increased as of late and I do worry they could become problematic for inflation as a whole if they do not stabilize.

PPI The Producer Price Index (PPI) showed wholesale prices in July were up just 0.8% compared to last year. Some may point to the month over month gain of 0.3% being higher than expectations of 0.2% as a problem, but considering the year over year number is under 1% I still believe it’s a good report. Looking at core PPI, which excludes food and energy, prices were up 2.4% compared to last year. This was tied for the lowest annual increase since January 2021. Services were a problem in the report rising 0.5% in the month. This was the largest gain since August 2022, but much of the increase came from a 7.6% surge in prices for portfolio management which likely can be attributed to the increase in stocks we have seen this year. There’s nothing in this report that leads me to believe the Fed needs to continue on its rate hiking path.

Job Openings Job openings in the month of June of 9.58 million were below the estimate of 9.7 million and they were at the lowest level since April 2021. Compared to last June they were down 12.6% or by 1.4 million openings. This sounds troubling, but it is important to understand there are still 1.6 job openings out there for every available worker. Also, even with the decline we still have a very strong labor market. Looking back to February 2020, job openings totaled just 7 million and in 2019 they averaged just 7.2 million per month. Layoffs were a positive in June as they came in at just 1.5 million. In February 2020, before Covid, layoffs were close to 2 million and in 2019 they averaged 1.8 million per month. The labor market will likely continue to soften as the economy normalizes from the Covid disruption just a few years ago.

Shopping Malls It’s no surprise that malls that were big 10 to 20 years ago are now struggling. This has caused a problem where malls are now worth 50 to 70% less than the valuation peak back in 2016. Roughly 20% of all malls financed through commercial mortgage-backed securities are underwater because the loans are much higher than the value of the property. What has been hurting the malls is large anchors like Macy’s, JCPenney and Sears have closed nearly 900 department stores between 2018 and 2020. This is a big jump from the 175 they closed from 2016 to 2017. Not all malls will go out of business. What has worked is newer, well located properties that have strong tenants and have generated healthy traffic. A good comparison here in San Diego would be North County Fair in Escondido, which looks like a ghost town compared to Fashion Valley, which is in the middle of a remodel, and still has a good amount of traffic in stores worth going to. I would caution investors to be wary of trying to pick up bargain prices on these properties. I’m sure some will survive, but I would say overall in five years we will see many less malls and in my opinion they are not worth risking capital on as an investment.

Trucking Company The trucking company Yellow was forced into bankruptcy because of three things in my opinion. The first was bad management, which caused the second problem of acquiring companies and piling on debt. This includes acquisitions like in 2003 when they bought Roadway for $1 billion and just two years later USF for nearly $1.4 billion. Number three was labor costs that were pushed to high levels by unions and their 22,000 workers. Approximately 7,000 employees were nonunion. This company filed bankruptcy in 1951 then again in 2010 they wiped out most of the shareholder value to get the union to agree to cuts of benefits and pay. They also had issues with bankruptcy in 2014 and once again during Covid in 2020. The company may still continue to operate in bankruptcy, but the shareholders will likely lose most if not all of their money. Old contracts are worthless and the bond holders may get some type of a deal. Roughly half of the companies $1.5 billion in outstanding debt was owed to the federal government who loaned the company money during Covid to keep them afloat. This is why at my investment firm, Wilsey Asset Management, we pay close attention to the balance sheet and debt levels.

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%).

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.

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?

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.

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.

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. 

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. 

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.

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. 

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.

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.

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.

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.

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!

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. 

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.

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.

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"

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?”

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.”

Apartment Rent As I suspected, the large increase in apartments is putting downward pressure on rents. Nationwide rents have fallen about 3 1/2% since last August. It was also the first time in five years that rent fell every month over the preceding six months. If one drives almost anywhere in San Diego, you see new apartment buildings going up and nationwide, we are seeing the biggest supply of apartments delivered since 1986 with nearly a half million apartments coming online. This is good for two reasons. First is that obviously people will be spending less on rent and the second reason is this will ease some of the inflation pressure since housing is a big part of the CPI.

Capital Gains Taxes One of the major benefits of being a long-term investor is the benefit of capital gains taxes. Rather than ordinary income rates, at the federal level gains are taxed at 0%, 15%, or 20% as long as the position is held for more than 365 days. In 2023, the standard deduction and income thresholds for capital gains increased which is a benefit for investors. In fact, you may qualify for the 0% long-term capital gains rate with taxable income of $44,625 or less for single filers and $89,250 or less for married couples filing jointly. This means you still may be able to make over $100,000 as a married couple and be in the 0% range after the standard deduction.

Crypto Market Another hit to the crypto market! Silvergate Capital (SI), a cryptocurrency focused bank, plunged 58% in a single day of trading this past week. The reason for the massive decline was the company delayed its filing of the annual report as it needed more time to assess additional losses, regulatory scrutiny, and the big one its ability to continue as a going concern. In other words, they may not be able to operate for another 12 months, this is a major hint towards a potential bankruptcy. I've stayed away from crypto, and I'll continue to stay away from crypto. We've seen the fall of FTX and other exchanges and now the major concern from Silvergate leads me to believe there are more issues around the corner with more exchanges. This also continues to fuel my belief that the argument for wider adoption of these cryptos is fading fast.

Harrison: "Alternative Investments in Retirement Accounts”

Credit Card Fee’s Running a small business is very hard, one must handle all the expenses, new accounts, and customers. But one thing that irritates me is when I go to a small business, and I use my credit card and they try to ding me for the 3% credit card fee. To me it’s just an easy out for them but it really is nothing more than a cost of doing business and is a convenient way for the customers to pay for their product. I’ve been going to the car wash place in Scripps Ranch for over 20 years and the last time I was there they charged me the 3% credit card fee, I told them that’s the last time they will see me. I’d rather see a business increase their prices and include all their expenses then try to hit me with a 3% credit card fee. What is next? Do they want us to pay their utilities? At my firm, we do allow our clients to pay for their financial planning fees by credit card and I would never think of charging them a 3% fee. I’m all for small businesses, but if you must charge a 3% credit card fee, you’re doing something wrong or you’re being greedy.

Inflation Decreasing I continue to say that I believe we will see more of a decrease in inflation overtime because I look at the raw cost of the goods and the cost of shipping those goods. One cost is shipping a standard 40-foot container from China to California. The peak cost was in September 2021 with a cost of $12,000. Today the average cost for that same 40-foot container is $1444. That is a decline of $10,556 or 88%. Another reason why I think prices will continue to fall slowly going forward.

Short vs. Long Term Thinking Last week’s strong economic information means we will probably see short term rates on the three- and six-month T-bill perhaps climb to 5% in the near future. Don’t get too excited about this. I want you to remember the old story about the tortoise and the hare. Do not drop your high-quality equities that are trading at reasonable valuations with decent dividends to rush into a 5% short term yield. Your short-term thinking will destroy your long-term investment results. Based on what we have in our portfolio, I would even be willing to bet that we should outperform the short-term treasuries. Remember in the fall equities are not looking where they are today but in the spring of 2024.

Harrison - "When to file your taxes"

Even with all the negative headlines, the labor market data remains resilient. The recent JOLTs report for December showed job openings increased 572,000 to a 5-month high of 11 million. This easily surpassed the estimate of 10.25 million openings and would mean there are 1.9 job openings for every available worker. Quits continued to remain elevated at 4.1 million. This is down from the peak in 2021, but if you look at the chart below you will see prior to Covid we hadn't seen a quits level above 4 million. Layoffs did climb slightly in the month to 1.5 million, but looking at the pre-Covid levels we are still below historical norms. I would continue to say we will see a reversion to normalcy rather than a crisis.

Jobs Report

The jobs report was impressive to say the least. Headline payrolls for January increased 517,000, which blew past the estimate of 187,000 and comes on top of upward revisions to November and December which netted a gain of 71,000. The household survey showed an even larger gain at 894,000 and produced an unemployment rate of 3.4%, which was the lowest level since May 1969. Job gains occurred in every major sector with leisure and hospitality leading the way with an addition of 128,000 jobs, professional and business services added 82,000 jobs, government added 74,000 helped by the end of a strike from university workers, and healthcare rose by 58,000 jobs. The leisure and hospitality sector are now just 2.9% or 495,000 jobs below is February 2020 pre-pandemic level. Wage inflation was also reasonable with a 4.4% gain compared to last year. This was a deceleration compared to December's gain of 4.6%. The only major negatives I see are the participation rate and employment to population rate as they both remain below pre-pandemic levels. The participation rate came in at 62.4% vs 63.3% pre-pandemic and the employment to population rate was 60.2% vs 61.1% pre-pandemic. Overall, I'd say this was a very strong report and it continues to provide data that makes me believe we will not have a major recession.

Tailored Shareholder Reports

Usually new regulation complicates the issue rather than clarifies it for the consumer. Recently, the SEC came out with a final rule called Tailored Shareholder Reports (TSR) which deals with mutual funds and exchange traded funds (ETFs). What I like about the rule is it mandates a 2-3-page document that will outline a fund's performance and fees, and give a brief summary along with some other information using plain English and charts. For those that invest in mutual funds and ETFs, this could be a good tool for comparison where to invest. If you’re working with a broker who is putting your investments into mutual funds, or ETF’s I’d recommend asking for the TSR on the investments they are putting you in or recommending.

Super Bowl Streaming

The Super Bowl is now less than two weeks away and if you cut your cord from cable, you may have problems watching the Super Bowl. Last year it was easy because NBC carried the game, and you could simply switch over to Peacock and pay their $9.99/month subscription to watch the game. This year the big game is on Fox, and they don’t have a streaming service. You may have to look into sites like Hulu Plus, YouTube TV, or Sling TV. These are just a few suggestions but be prepared to pay more than $9.99/month. One other option you do have is good old rabbit ears antennas, which actually have advanced pretty well over the years. Fox still broadcasts over the air so that may be a free alternative. I’d start thinking about this soon, if you wait until Super Bowl Sunday morning, you may be running around to your neighbor's house to try to catch the big game.

Harrison – “Tax planning with the new RMD age”

Harrison : "Shared Equity Agreements"

Big news on the inflation fronts today as the Producer Price Index (PPI) in December showed a monthly decline of 0.5% vs the estimate for a decline of 0.1%. Year over year the index showed an increase of 6.2% which is the lowest annual increase since March 2021 and is far from the high in March 2022 of 11.7%. This is a major positive as for over a year now I've been saying the CPI won't come down until the PPI comes down, as producers have needed to pass the higher costs onto consumers. A problem in the report is energy was a major benefit as the energy index fell 7.9% in the month and gasoline in particular was down 13.4%. Given the current landscape I do expect energy prices to increase from current levels, but not enough to make a dramatic difference to the inflation reports. Overall, this report gives me confidence in my estimate that we will see inflation in a range of 4-6% for 2023.

Consumer Spending

Retail sales for December fell 1.1% compared to the prior month, this missed the estimate of 0.8%. Looking at the results compared to last December, retail sales climbed 6.0%. This did not keep pace with the CPI increase in the month of 6.5%, which likely means most if not all of the growth in retail sales was a function of higher prices. Areas that saw good growth compared to the prior year included non-store retailers as they were up 13.7%, food services and drinking places were up 12.1%, and grocery stores were up 7.3%. With lower gas prices in the month, gas stations saw a month over month decline of 4.6% but compared to last December sales were still 5.2% higher. Areas that struggled in the month continued to be electronics & appliances as sales fell 5.6%, department stores saw a decline of 0.6%, and furniture & home furnishing stores had a small gain of just 0.3%. I would say this report wasn't good, but again it wasn't overly concerning. It appears consumers are still spending but continue to prefer experiences rather than the products they loaded up on during Covid.

Debt Ceiling

You may have seen the news about the concerns regarding the debt ceiling of $31.4T being reached. Frankly, I'm not too concerned about major problems stemming from this as it has been a recurring issue. In fact, from 1997-2022 the debt ceiling has been increased 22 times, which is essentially once per year. I do believe a deal will be reached to avoid jeopardizing the creditworthiness of the government. My concern is that we need to fix spending as we should not have to keep increasing this debt ceiling every year. 

Costco Buyback Program

I saw Costco announced a stock buyback program but looking at it closely it's unimpressive to say the least. The program authorizes $4 B worth of buybacks but that is through January 2027. The previous authorization was set to expire in April of this year and was adopted in 2019 with the same $4 B limit. Interestingly, the company only repurchased $1.4 B worth of shares under the program. Looking at the market cap for Costco of about $210 B, if the $4b was fully implemented that would only represent 1.9% of the overall shares. Also, considering the shares trade at about 30x 2024 earnings I believe repurchasing shares at this level would be a waste of capital.

Harrison – “Life Insurance Review”

As anticipated, the CPI report showed a deceleration in inflation as the index gained 6.5% for the 12 months ending in December. This compares to 7.1% in the month of November and the peak of 9.1% in the month of June. Areas that remained extremely elevated included eggs up 59.9% over the last 12 months, fuel oil was up 41.5%, and airfare was up 28.5%. There are some areas that showed year-over-year declines with televisions falling 14.4%, used cars and trucks were down 8.8%, beef and veal were down 3.1%, bacon and related products were down 3.7%, and gasoline was down 2%. Gas prices have declined substantially and were a major contributor to the month over month decline of 0.1% for the CPI. I do worry energy prices could struggle to maintain these levels as China reopens and the US no longer releases oil from the SPR. Shelter continues to be a major problem as it rose 7.5% compared to the prior year. This continues to weigh heavily on the report as it occupies a weighting of around 33% with close to 8% coming from rents and 24% coming from private housing. I do believe with the affordability issues this growth rate will slow as the year progresses. I believe inflation will continue on its deceleration path and will maintain a level of around 4-6% in 2023. It is important to note the Fed prefers to use a measure known as the PCE and that will be released on January 27th. It appears this report has continued to come in lower than the CPI. As examples, in November PCE was 5.5% when CPI was 7.1%, in October PCE was 6.1% when CPI was 7.7%, and in September PCE was 6.3% when CPI was 8.2%. If that trend holds, we could see a PCE number that has 4 at the front end of it. While still a concern, I believe inflation will be a much smaller problem in 2023.

Santa Claus Rally

The Santa Claus rally did happen this year, but you may not have noticed because it was only a gain of 0.8%. This is for the official Santa Claus rally which went from December 23 to January 4, 2023. It doesn’t happen every year, but this is the seventh year in a row that we have seen the Santa Claus rally. Don't be fooled by other imitations of the Santa Claus rally, the official one going back to 1971 is the last five trading days of the year and the first two trading days in January of the new year.

Stocks

At my investment firm we like to invest in companies that pay and raise their dividends over time. We are happy to say that in 2022 the S&P 500 companies paid approximately $561 billion in dividends, up from $511 billion one year earlier. It's also worth noting that 373 companies in the S&P 500 increased their dividends in 2022 about 20 more than the 353 that increased dividends in 2021. Another benefit for shareholders is stock buybacks, which was about $960 billion in 2022. We believe this will decline somewhat because our wonderful lawmakers in Washington decided to add a 1% excise tax which will take effect in January on companies buying back their stock.

NFL

NFL ratings were down about 3% from a year earlier hurt by the Thursday Night Football games on Amazon. Nielsen ratings said viewership fell to 9.6 million viewers that streamed on Amazon during those Thursday night games. That was a large decline from the 16.2 million viewers last year when the game was on Fox, the NFL Network, and Amazon. There could be a problem with advertisers who were guaranteed by Amazon that they would average 12.6 million viewers per game as they missed that mark. Also, for comparison, normally Sunday afternoon game viewership is around 19 million viewers. Fox and CBS carried Sunday afternoon games.

Harrison Johnson, CFP®: "529 to Roth Rollover"

The jobs report brought plenty of welcome news as the headline payrolls grew by 223,000 in the month of December, which easily topped the estimate of 200,000. This was a decrease from November's gain of 256,000, but it's important to remember that we've been discussing a deceleration in the jobs market for months now. Areas that remained hot included health care and social assistance at 74,400, leisure and hospitality at 67,000, and construction also grew by 28,000 jobs. Interestingly, Julia Pollack who is the chief economist at ZipRecruiter pointed out, “Health care has recovered to its pre-pandemic levels, but nowhere near its pre-pandemic trend, and hospitality is still not back to its pre-pandemic levels.” On the downside, information jobs saw a decline of 5,000 and professional and business services saw a decline of 6,000 jobs in the month. Overall, the unemployment rate fell back to 3.5%, which ties the lowest level since 1969. Part of this stems from the lower participation rate which currently stands at 62.3%, a full percentage point below where we were in February 2020 before the pandemic. Also, another measure of unemployment that takes into account discouraged workers and those holding part-time jobs for economic reasons also declined, falling to 6.5%. This is the lowest-ever reading in a data set that goes back to 1994. Probably the biggest market mover was the fact that wage inflation was up just 4.6% compared to the estimate of 5.0%.

Supply Management (ISM)

One survey that doesn't get a ton of media coverage is the Institute for Supply Management (ISM) non-manufacturing PMI. This is an economic index based on surveys of more than 400 non-manufacturing (or services) firms' purchasing and supply executives. The recent report showed a reading of 49.6 which missed the estimate of 55.0 and was down from 56.5 in November. This was the first time since May 2020 the reading was below 50. A reading below 50 indicates a contraction in the service economy. The area I thought stood out the most was new orders received by service businesses as they fell 45.2 from 56.0 in November and marked the lowest level since May 2020 and was the weakest reading since 2009, excluding the collapse during the pandemic. The reason this is so important is that Fed Chairman Powell is pointed to concerns over price increases in the service economy, but if the demand is not there it will be harder to raise prices. Hopefully they will take this into account at their next meeting.

Tech Employees

You have seen the headlines about all the laid off tech employees and may be thinking this is bad for the economy. What the media does not show you is the other side. A recent survey from ZipRecruiter shows that 79% of the laid off tech employees found a new job within three months. The job market remains strong, which I believe points to a recession that will be shorter and milder than other recessions.

Harrison Johnson, CFP®: "Secure Act 2.0"

As expected, inflation continued to decelerate in the month of November. I was thinking there was a small possibility we might see a reading for the headline number in the high 6% range, but the headline number ended up coming in at 7.1%. This was lower than the expectation of 7.3% and below October's reading of 7.8%. As a reminder the peak came in June with a reading of 9%. Some areas that stood out were eggs which were up 49.1% compared to last year, airfare was up 36%, energy was up 13.1% as electricity was up 13.7% and unleaded gasoline was up 9.8% and shelter was up 7.2%. One item that hasn't been discussed much is that the US has had one of the worst bird flus in history, which has impacted the price of eggs. As for energy I continue to believe next year the comparisons will be much more favorable, especially considering the energy index fell 1.2% compared to last month as gas prices fell 2%. Housing costs, which make up about 1/3 of the entire index, have shown signs of cooling and I believe they will be much more muted in 2023. Also, I wanted to point out that used car prices fell 3.3% compared to last year. Remember at the beginning of the year when used car prices were up 40% in the month of February compared to the prior year? I believe like used car prices many of these categories that are extremely elevated will normalize next year also helping to reduce inflation. My expectation is that for December we will see a reading that shows at 6 at the front of it and for next year inflation will be in the range of 4-6% for the year. I believe this will bode well for the right stocks in 2023.

The Fed Report

Markets did not like what Fed Chair Jerome Powell had to say after the Fed's meeting. The decision to increase rates 50 basis points or 0.5% was widely anticipated. It brings the target level to a range of 4.25% - 4.5%, which is the highest level in 15 years. What the market did not like was the terminal rate, or the point where the Fed expects to end rate hikes as it was higher than expected at 5.1%. I continue to believe this would be too high as the Fed should give the rate hikes and quantitative tightening (QT) more time to work through the economy. The Fed has been allowing a capped total of $95 B worth of bonds to roll off the balance sheet each month and since early June the balance sheet has declined $332 B to $8.63 T. I believe that inflation will naturally continue to decelerate next year and a reduction in the terminal rate could occur in the first part of the year. A softer tone from the Fed would be beneficial for the right stocks.

Job Market

I continue to watch the jobs market looking at both past information and future information because I believe a strong job market will keep a recession very mild and it may not even be noticeable. I continue to hear from people that they are seeing all these layoffs from tech companies, but I talk about how there are many other companies that are hiring in 2023. Based on a recent survey, a nationwide staffing firm, LaSalle Network, says about 84% of companies it works with are planning to hire in 2023. This is roughly 20% higher than those planned to hire a year ago. The CEO Tom Gimbel says he has seen a 50% increase from last year in demand for salespeople and this is a positive sign because when a firm increases staff in the sales department they believe they have room to grow. So don’t just look at the headlines of 10,000 employees being laid off at some big tech firm and think the entire job market is collapsing. Look at the overall economic job market.

Harrison – “Sole proprietor or S-Corp pt. 2”

Although the headline Producer Price Index (PPI) number saw a gain of 0.3% compared to last month, I actually thought the report was in line with what we’d been expecting. If you look compared to last year the PPI increased 7.4% which is a nice deceleration from the 8% level in October and the peak of 11.7% in March. Part of the reason for the deceleration is the comps are getting harder. What I mean by that is last year the PPI showed an annual gain of 10% compared to the prior year. When we lap the 11.7% number in March, I believe it will be hard to grow another 7-8% off that number, especially with the decline in many commodities from their peak levels. As a reminder we don't believe inflation will be disappearing in 2023, we believe it will be decelerating to a level of around 4-6% for the full year.

Freight Costs

More positives on the inflation front. Remember how constrained shipping was last year and how expensive it had become? Well now if you look at the prices, they have come way down. Freight costs from Asia-U.S. West Coast have fallen 90% compared to last year and now stand around $1,426/FEU (forty-foot equivalent unit). This pushed prices down by 5% when compared to 2019 levels. Freight costs from Asia-U.S. East Coast now stand around $3,723/FEU which is down 78% compared to last year and costs from Asia-Northern Europe are around $3,974/FEU which is 73% lower than last year.

Big Tech Companies

I learned a long time ago not to just read headlines and think you understand what is going on. People have been saying things are getting worse because they see the big tech companies laying off people with headlines showing numbers like 10,000 layoffs coming. We have said that’s only a small part of the big picture and if you look at the recent jobs report, you will see the information sector, which includes many tech jobs, had a net increase of 20,000 jobs. I know it takes time to read the details when information comes out but if you don’t, you won’t have a clear understanding of what is really going on.

Plant-Based Meat

Remember about three years ago the fad was no one was going to eat red meat and the company Beyond Meat was going to take over the meat aisle in the grocery store. Fast forward to today and the company has seen its grocery stores sales declining 12% even as they are cutting prices to try to boost their sales. In the most recent earnings report the revenue fell 23% year after year yielding a quarterly loss of $102 million. I still remember some people telling me I was missing out that I did not get it that people were switching over to plant-based meat. Back in the summer of 2019 the stock had peaked over $196 and is now down over 90% trading at $14 a share. When it comes to investing, I will always take strong fundamentals over the hype of the next best thing.

Harrison – “Sole proprietor or S-Corp”

Job gains showed a nice increase of 263,000 in November which easily topped the estimate of 200,000. Leisure and hospitality remained a major leader with job gains totaling 88,000 in the month as the sector continues to battle back from Covid. This sector still remains 5.8% or 980,000 jobs below February 2020. Retail trade and transportation and warehousing were the standout losers in the report as both sectors saw a decline in payrolls. Retail trade fell by about 30,000 jobs as general merchandise stores saw employment decline by 32,000 jobs and electronics and appliance stores saw employment decline by 4,000 jobs in the month. Transportation and warehousing had a decline of 15,000 jobs in the month. I was somewhat surprised to see these two sectors decline considering it's the holiday season, but the excess inventory levels could be weighing on employment as retailers could be trying to focus on expenses including labor and transportation and warehousing. The item I believe weighed most on the markets was the increase of 5.1% in average hourly earnings. It surpassed the estimate of 4.6% and it could give the Fed more ammo to continue on its rate hiking path as it tries to bring down inflation. I do believe this should not be a major concern for the Fed because, like inflation overall, I think wage gains will begin to slow to a more normalized level next year as the job market decelerates.

Personal Consumption Expenditures (PCE)

The PCE, which is known as the Personal Consumption Expenditures, came out at 6% for October over the last 12 months. As we had predicted months ago these inflation indexes would show signs of easing. This is why there has been some recovery in equities. The PCE is what the Federal Reserve looks at in regard to interest rates so there probably will not be any surprises going forward. We continue to believe that inflation will slow down and if you’ve been out of the market and in particular the right equities since summer you have missed out. There are still some opportunities to get back in for quality long-term investors but sitting on the sidelines for the next 6 to 12 months based on current data will be a mistake.

National Retail Federation (NRF)

You’ve probably heard that this is not going to be a great Christmas for retail. But as we say many times in our posts and other commentary, it’s important to understand what is being said and how it is being said. The estimate by the National Retail Federation (NRF) for holiday sales is expected to be between $942 billion to $960 billion, an increase of 6-8% over the $889 billion in 2021. This was a 13.5% increase over 2020. If we look back to 2019 when the economy was pretty strong, and everyone felt good, the NRF said holiday sales were $716 billion. Comparing the low end for 2022 of $942 billion, that’s a 31.6% increase from 2019. It does appear holiday shopping has gotten off to a good start considering the record of 196.7 million shoppers from Thanksgiving Day through Cyber Monday. This topped last year's level of 176 million shoppers and easily surpassed the NRF's estimate for 166.3 million shoppers. I don’t know about you, but I think those are pretty good numbers, all things being equal.

SEC

The SEC, also known as the Securities Exchange Commission, had a busy fiscal year, which ended September 30th. Their penalties were up 67% from the previous year, hitting an all-time record of $6.4 billion. I wonder where that money will go, or will it get lost in the tangled web of government administration? The money is supposed to go to a fund that either protects investors, a fund that refunds investors who lost money, or the third option, the US treasury general fund.

Harrison – “Change for charitable donations this year”

Home Sales Mark down 9 straight monthly declines in existing home sales as there was a decline of 5.9% from September to October. With an annualized pace of 4.43 million units in the month of October, existing home sales fell 28.4% compared to October 2021 and registered the slowest pace since December 2011, excluding the brief drop that occurred during the beginning of Covid. Demand has clearly taken a drastic fall but supply still remains an issue. With just 1.22 million homes for sale at the end of the month there's still just a 3.3-month supply at the current sales pace. With prices still expensive and mortgage rates likely to remain high, I'm still expecting a weak housing market in 2023. S&P 500 Companies As interest rates are rising, corporations are paying off debt to reduce expenses. The S&P 500 companies have about $9.3 trillion in debt and with businesses performing well, they are sitting on about $2 trillion in cash which is close to $500 billion more than these companies had in 2019. This will strengthen the businesses even more, increasing the value of many of these companies. Costco vs. Sam’s Club We all feel that the price for everything is going up, but there is one thing I found that for nearly 40 years has stayed at the same price. That is a hotdog and drink at Costco. Since 1985 that price has stayed at $1.50 and also, they have not done any shrinkage to the product. If you want a better deal than that you can now head on over to Sam’s Club and get a hotdog and drink for $1.38. To keep prices low this is what the economy needs, more competition & more supply, not a reduction in demand.

Harrison Johnson (CFP) - Income Related Monthly Adjusted Amount (IRMAA)

Job Market I continue to believe that the feared recession will be mild. I have talked about how the strong job market has continued but one other aspect that is continuing is a lot of liquidity in the economy through what is known as the M2. M2 is a measure of the amount of money that includes currency, deposits, and shares in retail money market mutual funds. Like the job market this is holding strong at just under $22 trillion. Compare that to about three years ago when it was well under $16 trillion. So not only do consumers have a job to provide cash flow but savings accounts are flush with cash to continue to consume.

CBDC’s (Central Bank Digital Currency) I have talked in the past about CBDC’s which are known as Central Bank Digital Currency and said that countries are moving in that direction. No surprise that governments move slowly, but as of today more than 100 countries and monetary authorities which include the European Central Bank, and the United States Federal Reserve are looking into how to digitize their currencies. But the direction they are going is not what you would think. They are not turning to the popular cryptocurrencies like Bitcoin or Ethereum for advice, they are turning to the big tech companies like Microsoft, Alphabet and even Amazon. The reason they are turning to these big tech companies is because of their development of digital wallets and smart phone apps. I still say if the world goes in this direction of Central Bank Digital Currencies the use of crypto currencies would be worthless.

Cryptocurrency Balance Sheets Balance sheets matter! I did a post on these crypto exchanges a few months ago questioning the assets for many of these crypto exchanges and now we are seeing the repercussions for weak balance sheets and overleverage as FTX announced solvency issues. FTX and its CEO Sam Bankman-Fried were seen as leaders in the crypto space and now it is collapsing. Bitcoin fell to under $17,000 this morning and many other cryptos are faring even worse. As a reminder, Bitcoin's all time high was close to $70,000. There is nothing in the world of crypto at this point in time that entices me, and this only adds to my concerns for the "investment" category.

Another good report for the labor market as payroll employment climbed by 261,000 in the month of October. This topped the estimate of 205,000 but was the slowest pace of gains we have seen since December 2020. Although this may sound concerning, after recouping the losses that were generated from Covid we have anticipated the labor market to slow. There is a big difference between slowing and declining. For a good reference point, if you go back to 1939 the average monthly gain in payrolls is around 122,700. The job growth was broad-based as every category saw gains in the month. Healthcare and social assistance led the way with a gain of 71,000 jobs. That was followed by professional & business services at a gain of 39,000, leisure and hospitality at a gain of 35,000, and manufacturing was up 32,000. The major problem within the report is that it does not provide much evidence for the Fed to let off the brakes, especially considering the wage inflation of 4.7% compared to last year. 

September JOLTS

Even with the increase in interest rates, businesses have continued to remain active in the labor market. In the recent September JOLTs report there were 10.7 million job openings. This was an increase of 437,000 openings when compared to August and it easily beat the estimate of 9.85 million openings. At this level there are still 1.9 job openings per available worker. I've said it before, but I'll say it again, if the labor market remains this strong, I do not see a major recession on the horizon.

Facebook (META)

Facebook's (META) stock price has fallen through the floor from the 52-week high of $353/share as it now sits around $94/share. I’m sure some people are now thinking wow this is a steal. Before you jump you need to think about a couple of things. The most recent earnings release was the second revenue decline in a row as the company is fighting a tough macro-economic climate. This is coming from growing competition from TikTok and Apple's changes to ad tracking. On top of that, Meta’s reality labs unit had an operating loss of $3.7 billion and they expect the loss to grow even more next year. I think it’s important for an investor to have a very clear understanding of what the future holds for the metaverse. Be careful of earnings estimates for December 2023 of $9.80, I believe in the future weeks these estimates will fall dramatically.

Microsoft workers

I recently read an interesting survey from Microsoft which I think is true for the current work environment. A survey of 20,000 people at Microsoft found 87% of the employees said they were productive at work. Unfortunately, when asking the leaders at Microsoft only 12% said they have confidence that workers are being productive. There appears to be a big difference in what employees think they are doing and what employers believe they are doing. I feel perhaps maybe it’s always been that way over the last hundred years, but maybe now employees are more vocal since the job market is so strong and they feel confident that they could get another job somewhere else If they were to lose their current one.

Harrison - "Traditional and Roth IRA Income Limits"

Oil Companies You have heard all the bad news about the big profits that oil companies are making but what you don’t hear is how much they spend and what they are doing for a green future. Both Exxon and Chevron are building offshore wind farms which will supply millions of homes on the East Coast with electricity. They’re also preparing production of hundreds of millions of gallons of fuel which will come from plants, garbage and even kitchen grease. Oil giant BP just spent $4.1 billion acquiring a company that replaces fossil fuel gas from wells with natural occurring biogas from landfills. The oil companies know that the times are changing and while they are accused of paying out big dollars to the shareholders, they are investing their profits for a greener future as well. Product Shortages Things have really changed 180° from less than a year ago when there were shortages of products available. Inventories are now so large warehouses are bursting at the seams. The vacancy rate in warehouses in the third quarter 2020 was 5% that has now declined to 3.2%. Currently, businesses are paying more per square foot in warehouses. Last year in the third quarter it was $7.13/square foot, the average has now climbed to $8.70/square foot. What does that mean to you as a consumer? Retailers want to get rid of these items costing them money just sitting in the warehouse. Consumers could see some great sales coming up in the future, keep your eyes open.

Harrison Johnson, CFP®: "How spouses age difference affects social security"

Home Sales Existing home sales have now fallen for the past eight months as mortgage rates hit 6.92% and probably will soon crossed over into the 7% range. September sales for existing home sales declined 1.5% in September to an annual rate of 4.71 million homes. The percentage number looks far worse if you look at the September sales on an annual basis, the decline is 23.8%. Home inventories continue to rise which will be the beginning of more price declines in housing prices.

Harrison Johnson - "Last Chance for Series I Bonds"

Inflation numbers were released today rising 8.2% over the past year. Initially the markets were down about 2% but by the end of the day markets rallied up over 2%. Perhaps inflation is not as bad going forward as we think. One reason for that is the lapping of year over year. September 2021 inflation began increasing rising 5.4%, October 2021 at 6.2%, November 2021 up 6.8% and December 2021 inflation increased by 7%. What I believe is happening and why I think we will see inflation slow down its supply chains have improved, consumers have pulled back on some of their spending (reducing demand) and as we lap higher inflation numbers from the previous year the percent growth will not be as high. 

Tomorrow morning Friday the 14th the big banks release their third-quarter earnings. Very important to hear what they say if there is not unexpected bad news in the reports I believe it would be seen as a positive and we could have another rally.

Strong Dollar

Earnings will be coming out over the next few weeks and the strong dollar which is up about 17% against the weighted index could play havoc on some companies with big earnings coming from overseas.

I was surprised to see that QUALCOMM gets 96% of its revenue from outside the US. Other companies that you need to watch out for would be caterpillar with 62% of revenue from outside the US and even meta-platforms and Netflix both receive 59% of the revenue from outside the US. Another surprise to me was Citigroup with 52% of revenue from outside the US.

Crypto

With the decline in the crypto market, investors are becoming less comfortable with the space. According to a recent Bankrate survey, in 2021, nearly 35% of Americans said they had some level of comfort investing in digital currencies, compared to about 21% in 2022. Millennials saw an even larger fall with 49% in 2021 saying they had some comfort level investing in digital currencies and that fell to almost 29% in 2022. My guess of why this is the case is digital currencies have yet to show a meaningful use. It has not proven to be a viable currency for transactions, it has not proven to be an inflation hedge, nor has it proven to be a hedge against declining stock prices. I still don't see the allure of investing in this space.

Cars

The problems are starting already with the forced demand of electric vehicles. Lithium which is used to make the batteries have tripled in price this year and there’s no end in sight for supply meeting demand. Lithium is not used just for electric vehicles but also for grid energy storage. You may be thinking no problem just produce more lithium which is nice and theory but not reality. To bring new production online studies must be done, permitting, capital must be raised before any lithium is produced which can take 3 to 5 years.

It’s always a disaster when the government forces demand on any type of product, what it does is increase prices that the consumer ends up paying for.

Oil

The leaders of United States continue to put the country in peril trying to force green energy too quickly. We are now going to deal with the nasty regime of Venezuela to pump oil to help our situation. For this use of oil the best we got is that their dictator said he will open talks if the US eases sanctions. To me that’s the same as giving a kid who did something wrong a gold star and tell them not to do it again.

Since talks with OPEC did not go well the leaders of our country have decided to retaliate against OPEC and Saudi Arabia. They are now threatening legislation that would charge OPEC members and subject them to US antitrust law. Have our leaders forgotten the 70s how the oil embargo crushed our country on the energy. It’s like we are trying to play chicken with them and that’s a game we will lose. I wish people would write their Democratic congressman and everyone else to please get on the side of the oil companies and start pumping as much oil as we can.

And please vote in November not for who’s personality you like but who you think you do the best when it comes to running our country

Inflation

People are concerned about the rising debt of the federal government, as they should be. We are also concerned about rising inflation but you may not realize that rising inflation is a positive for the debt situation of the government. The reason is that it makes the debt more manageable because it will be repaid in less valuable nominal dollars. The debt also declines in real value because with inflation of 10% cumulative $30 trillion is now $33 trillion and the debt remains at $30 trillion.

Fossil Fuels

People on the green side want to completely eliminate oil and fossil fuels. We have spoke many times about how oil is also used for many things like plastics, IV bags and clothing that use synthetics along with thousands of other items. One can’t just use the refined oil for asphalt which makes up 94% of all US road miles that are paved. Asphalt is made from a byproduct that is left over after the process of making fuel.

 I don’t think people who want to illuminate fossil fuels have thought this process through.

Nike

If you’ve been holding onto Nike since November 1 of 2021 you have seen the price fall from $177 a share to current price of around $88 a share, roughly a 50% decline. Unfortunately another number does not bode well for the stock and that is the inventory numbers for Nike which have climbed 65% from a year ago. You may want to sell the stock and buy those Michael Jordans you’ve been wanting to get.

Businesses

Things in the third quarter 2020 was 5% that has now decline to 3.2%. Currently Businesses are paying more per square foot in warehouses, last year in the third quarter it was $7.13 a square foot, the average has now climbed to $8.70 a square foot. What does that mean to you as a consumer? Retailers want to get rid of these items costing them money just sitting in the warehouse. Consumers could see some great sales coming up in the future, keep your eyes open.

Used Cars

The used car market could be improving soon with vehicle inventories increasing to 33 days worth of supply in September. That was four points higher than August, one year ago inventories were only lasting 20 days. What is surprising to me is that car payments over $1000 hit a record 14% of sales nearly double 8% of sales one year ago. If you’re car shopping you may want to be patient, used vehicle prices came down 3% in September from August. There could be more to come, you may want to keep that old clunker running a little bit longer before spending more on a new ride.

Lumber Prices

I recently posted that lumber prices have fallen nearly 60% this year which will help ease inflation. Also dropping dramatically is PVC which is a plastic that makes pipes and other uses as well. It is down nearly 50% quarter over quarter. This could affect Warren Buffett‘s 20%purchase of occidental petroleum stock which is one of the three largest suppliers of PVC. I know Mr. Buffett purchases for the long term but it may take some time for the company to make up that lost revenue.

Meme Stocks

I was reading last night and the meme stocks popped into my head. I remember when this hype was going on people were saying fundamental analysis is over. Well once again the strong will prevail, let’s take AMC entertainment for instance, back in 2021 the stock traded as high as $56 a share. Where does it stand today? right around six dollars a share roughly 90% below the $56 peak. I feel kind of bad for people who were playing the special speculative game with the meme stocks. But on the other hand there was plenty of information out there telling the meme investors this was not going to last. Hopefully many have learned a valuable lesson about investing. 

The global economy is dropping dramatically, but the US is the bright spot. I always tell people we do not depend on the world to buy our products we buy products from the world. Some bright news that might help you hold on during these difficult times is according to the Wall Street Journal, some US manufacturers are bringing production from overseas back to the US and are boosting investment. It should also be noted that contracting US business activity was better in September than in August. The US composite purchasing managers index, which includes both manufacturing and the service sector, climbed to 49.3 in September, a nice improvement from the August showing of 44.6. We are not out of the woods yet but do not sell your quality equities that are well priced and have a good business. And don’t forget to look down the road a year or two and not a week or two!

Costco 

I love going to Costco as do many other people. You get some great deals in the warehouse but one deal that is lacking is the stock price. The stock is down roughly 20% from the $600 high but with the price/earnings ratio still over 37 that is no deal. They do have a great business model and there is a potential membership price hike perhaps next year. Even with that, 48% of Costco members in a recent survey say they’re willing to pay more for their memberships. Costco depends on increasing volume as the profit margin always hovers around 3.6%. If volume falls off the stock price could tumble as well.

Market

Trying to time the market has always proven to be a dangerous game as it is heavily reliant upon one's emotions. In the long term you have a better chance of winning the lottery. Many people don't realize how quickly stock prices can move and by the time stocks have risen they are left asking the question of whether they should get back in or will they fall again. Looking back over the last 40 years the best 10 days (out of more than 10,000) accounted for almost two-thirds of the stock market return & in the last 20 years, the best 10 days accounted for 75%. Through the beginning of this year the market returned 284% over the last 20 years, but had you missed those 10 best days the total return was just 76%. The funny thing is the massive up days all came in the most difficult years of 2008, 2009, and 2020. The single day returns ranged from 6.3% - 11.6%. Nobody knows what is going to happen in the short term as there are too many variables to try and predict. That is why owning great businesses at great prices has proven to be a successful long term approach to investing.

Income Increase

US median household income was $71,000 for the year 2021 which was pretty much unchanged from 2020. That was quite a surprise, I believe we will see a jump in 2022 when those numbers are released about a year from now.

Luxury Homes

Luxury home sales have hit a brick wall dropping 28.1% across the US for the three months ending August 31st. No surprise California was hit the hardest with sales falling 64% in Oakland, and San Jose as well as our hometown San Diego saw decreases of more than 55%. So far prices have not dropped significantly, but as sales continue to drop, I believe people will reduce the sales price of their homes not wanting to see the big gains vanish and they will start cutting their prices to keep some of the profits. Those who wait too long could be very disappointed I believe we will see a far different luxury market in the spring of 2023.

Apple

Apple has dropped plans to increase production of the iPhone 14 saying demand is not as strong as anticipated. The stock fell while the market was up and could be a big problem if sales and earnings are worse than expected.

Oil

 After the strategic petroleum reserve reached lows not seen since the 80s the government is considering the idea of getting into energy trading. Their idea is to buy oil when it is under $60/barrel and when it goes above $90/barrel to sell and use profits to fund electric vehicle infrastructure. I can’t wait to see how well the government does trading commodities such as oil.

Electric Vehicles

 I have often wondered if EVs are so great why are there so many subsidies to get people to buy them? The International Energy Agency says that by 2050 if projections go as planned annual global lithium production will be 28 times what it is today. In the past we have talked about the problems with how the batteries are made and the use of cobalt which comes from Congo using child labor. But with that type of high demand on lithium batteries, prices will multiply. In just one year they have increased by 300%, can you imagine the cost 24 years from now with a 28 times increase in demand? There’s also a new report from the US energy department laboratory that electric cars total lifetime cost will be 9% higher than a gasoline car. I believe there’s a lot of hype in electric vehicles and in the distant future we will question what we did and question electric vehicles.

September

As we anticipated September has been a difficult month, but we still remain extremely optimistic about our businesses with many now trading around 6-8x earnings. Remember the long-term historical average is 16.6. Much of the selloff has been driven by fears over the Fed hiking interest rates. I want to take you back to 2018 when Fed fears led to a stock market selloff in the month of December of close to 16% in that month alone. The Fed was raising rates and it was feared they were going to increase rates two more times in 2019. This ended up being an overreaction and the Fed ultimately ended up cutting rates in 2019. This led to a rapid increase in stock prices with the market climbing more than 19% from its low on December 26th, 2018, through February 22nd, 2019. For the full year in 2019, the market climbed 29%

The market is not liking the CPI report today as the inflation rate of 8.3% topped the expectation of 8.0%. It was down from July's 8.5% rate, but it remains stubbornly high and likely cements a Fed Funds Rate increase of 0.75% at next week's meeting. Energy was down 5.0% in the month and gasoline was down 10.6% in the month, but year over year energy is still up 23.8% and gasoline is 25.6% higher. Food remains one of the major concerns as prices increased 11.4% year over year. Shelter, which occupies close to 1/3 of the CPI, also remains high with the year-over-year gain at 6.2%. With the huge surge in housing prices over the last couple years I continue to believe this category has more room to run over the coming months. I also worry that while energy prices have come down month over month, companies have not been able to effectively offset these costs and more price increases could be on the way. This remains especially true in the transportation services component, which saw a year-over-year gain of 11.3%. Inflation remains a major problem in the economy, but I still believe we can exit 2022 with an inflation rate of around 6% barring a major supply chain disruption or a major spike in energy prices.

Oil

We keep saying we need to pump more oil here in the US and some people are saying the Biden administration is doing everything it can. In the first 19 months the administration will have leased federal acreage for oil drilling of 130,000. At first glance that may sound like a lot, but it is the lowest amount of acreage leased since President Kennedy in the early 1960s. Do you want to guess what our energy consumption is now compared to 60 years ago?

IPO’s

With a difficult market in 2022 initial public offerings also known as IPO‘s have really been rather scarce. It has now been over 115 days since the last traditional IPO of more than $25 million. The last time that happened was in 2008. I don’t believe much will be changing for the rest of 2022. At this point in time, we’re taking a wait-and-see attitude for 2023 and will be having a clearer view of what to expect from markets probably by mid-November.

Bitcoin

When the country El Salvador made bitcoin its legal currency bitcoin advocates promoted this is the beginning of worldwide acceptance. You haven’t heard much about how bitcoin has done in El Salvador because it has been a disaster at best. The poor country which has $800 million in government bonds coming due in 2023 and 2025 is current looking like they will not be able to make that payment. Yet they’re authoritarian rule leader Bukele has spent $250 million on digital infrastructure including setting up 200 bitcoin ATMs which apparently have high fees and can take up to six hours for a transfer from dollars to bitcoin. The country set up digital wallets for its citizens with a $30 bitcoin bonus. After the citizens used the $30, 80 percent never used it again. 92% of the small and medium size businesses say it has been immaterial for them and prefer cash or credit cards. The IMF, the world bank and international bond markets still oppose bitcoin and no other country has followed El Salvador in making bitcoin their currency after a year in existence. The citizens of the country still prefer to use what they have use this 2001, the US dollar.

Entertainment

Amazon is really pushing forward in the entertainment industry spending $15 billion this year on that division. They face heavy competition from companies like Netflix, Disney, Paramount, and Warner Bros. discovery. The consumer could win here with all the competition prices should remain stable and not increase for a while

Transportation

One potential event that could be absolutely disastrous for inflation and our economy would be a U.S. rail strike. Currently, 10 of the 12 railroad worker unions have struck deals with companies like Union Pacific, Norfolk Southern, and CSX, but the remaining two unions, Brotherhood of Locomotive Engineers and Trainmen and the International Association of Sheet Metal Air, Rail, and Transportation Workers continue to holdout due to disagreements over attendance policies. While a large majority of the unions have settled, these two unions represent over 90,000 rail employees or about half of railroad union workers. It's estimated that a shutdown of this magnitude could cost the US economy $2 B/day. It would also create a new supply chain crisis that would send shockwaves across many retailers, transportation companies like UPS and FedEx, and have a negative impact on food prices. I'm optimistic we'll see a deal by late Friday, but if not congress can step in to block the strike.  

US Jobs

It doesn’t seem that long ago we were complaining about US jobs going overseas. Well, that trend seems to be reversing with an expectation of 350,000 jobs returning to the US this year. That is the largest increase since 2010.

Producer Price Index

As an update to our CPI post yesterday, the Producer Price Index (PPI) was released today and saw an increase of 8.7% compared to last August. This is the lowest increase we have seen since August of last year and it is well off the highs we saw of 11+%, but at this rate I believe companies will still need to pass on these higher prices which will continue to cause elevated rates in the CPI.

Banks

Banks get audited every year to verify that all the numbers are correct, and your money is safe. How would you feel if you found out that your bank has not gone through an audit in five years but was saying they will try to get one done in a few months? Well, that is what crypto firm Tether Holdings is saying. They are the firm that is promising each token can be redeemed for one dollar. They have been promising to do an audit since 2017 and now the chief technology officer of Tether Holdings Limited is saying it is just months away. I don’t know about you but when a company is avoiding audits for this long, I believe they have a lot to hide. Could this be the other shoe to drop on cryptocurrencies with no bottom in sight. I still wonder why anyone would hold onto any type of cryptocurrency with a hope that it will rebound in the future.

Crypto

There are some big changes in the crypto world with Ethereum. It has changed from what is known as proof of work to proof of stake. The big benefit is it's change will improve energy efficiency by more than 99%, which has been one of the big concerns on cryptocurrency production. The risk with what is being called “The Merge” is there could be glitches, outages or even lost tokens as the current Ethereum blockchain merges with the new one called Beacon. It appears it went smoothly last night, but it's important to follow the next few days as well as the merge settles. There are also other losers such as mining companies who have spent hundreds of millions of dollars on hardware. And even the large chip maker Nvidia, who produces chips for miners, cannot predict how this will hurt their demand. Year to date the stock is down over 50% perhaps the writing was on the wall.

China

China exports to the US in August fell by 3.8% year over year. This is good and bad. It’s nice to see the decline in imports from China; however, that may be putting a squeeze on some products that we use and that could push up inflation on those products.

Office Vacancy

Office vacancy in the city was 17% in the second quarter compared with office vacancy in the suburbs at 16.8%. It's the first time that has flipped since 2002. More people are now going back to the office; however, it appears they prefer not to go into the city but to the suburban offices instead.

We knew the day was coming when streaming would have bigger viewership than cable TV. It officially happened this past July. Streaming services accounted for 34.8% of total US TV viewing compared with cable at 34.4%. The 34.8% streaming services viewing climbed dramatically from 23% one year earlier. We may see similar numbers in August but in September we may see a switch back to cable as major networks launch new seasons and new shows. Streaming businesses are still losing hundreds of millions of dollars as witnessed in the latest quarter. Part of this is because of the cost to create new content and it is so easy to switch from one streaming company after a specific show/series is over to another streaming company. Remember how difficult switching cable companies was? You had to have a cable guy come out for an appointment that was set a week ago and then wait half a day at home for them to show up to switch your service. Now you can switch your streaming service just sitting on your couch in the comfort of your living room. I think the winner long term in the streaming services will be those that have the most titles in their libraries, along with the best studios to produce new content in.

Student Loans 

The news from President Biden around student loan debt is quite frankly idiotic and dangerous in my opinion. To begin with we are delaying payments on student loan debt again to the end of December 31st, because people have not had enough time to prepare? What about the last 2+ years of not making payments? Also, the $10,000 worth of forgiveness is estimated to cost another $300 B. In an inflationary environment the type of loose spending we have been seeing does nothing to help reduce the inflation burden for the average consumer and in fact likely fuels inflation higher. It is also just unfair to the people that have diligently paid off their debt, opted to join the military to receive the GI bill, or just avoided college due to the high cost. The biggest problem here is this does absolutely nothing to solve the root cause of the problem and in fact may just fuel the cost of college higher. Students borrowing money today will continue to rack up debt and will likely want another handout in just a few years. I don't see how this does our economy and our country any good.

Federal Reserve

I have been thinking both the stock and bond markets were taking the Federal Reserve and its interest rate policy too lightly. Powell has now made his intentions clear, making some strong comments like, "While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” Unfortunately, I don't believe the battle with inflation is over and I believe interest rates will continue to rise.

Inflation / Interest Rates Rising

The Fed's preferred measure for inflation, the personal consumption expenditures price index (PCE), showed inflation easing somewhat as in the month of July the index climbed 6.3% year over year vs the 6.8% gain in the month of June. While inflation is easing, it is still well above the 2.0% level the Fed targets, which is why I believe they will continue to move forward with quantitative tightening and interest rate hikes. I'm still optimistic we will see inflation ease as we exit the year, but there is still a way to go before inflation is no longer a concern.

Bed Bath & Beyond

I hate to say it, but I really don't feel bad for these meme investors that are getting hammered the past few days. Traders in Bed Bath and Beyond (BBBY) saw shares fall more than 40% on Friday and they are down more than 60% if you bought last Wednesday morning. The reason for the crash is Ryan Cohen exited his position in the company and he was a major reason for the excitement from the Reddit crowd. He definitely capitalized off the small investor who will yet again be stuck holding the bag for these silly investments. When will they learn?

Subscriptions / Cell Phones 

Wireless subscriptions are still growing at a rate of 3.9% year over year. One area that has grown dramatically is for children between the ages of 8 and 12-years-old. Back in 2015, 24% of that age group had their own cell phone. Today nearly half or 43% of kids in that age range have their own cell phone. I have no idea why an eight or nine year old needs a cell phone other than to talk to mom or dad.

Electric Vehicles

Not everyone thinks that electric vehicles will be flooding our streets in the near future. Jack Hollis who is executive vice president of sales at Toyota Motor North America believes a high sticker price and a poor public charging infrastructure will likely keep customers from widely embracing battery powered vehicles. He also has concerns on the rising cost of raw materials such as lithium, cobalt and other crucial battery inputs which will be pushing electric vehicle car prices even higher. In the near-term Toyota will continue to focus on hybrids and plug-in hybrids believing they will appeal more to a mass market. The hybrids are also more affordable and another concern keeping people from going to full electric vehicles is range anxiety of being stuck on the road with a dead battery. However, 8 to 12 years down the road it appears to be a different story.

Tesla 

On Thursday morning Tesla investors will wake up to have three shares for every one share of Tesla stock they had on Wednesday. Going back to August 2020, for every one share you had of Tesla you will now have 15 on Thursday. That sounds like a big win, but valuations still matter in the long run. If Tesla stock drops by 30% that would be a decline of $90. That doesn’t sound like that much, but if you go back prior to August 2020 the equivalent share price would be about $4500, and the dollar drop would be $1350. Tesla still has a price/earnings ratio of around 109 which means based on current earnings it would take you 109 years to get back what you paid for the stock. Don’t be fooled by financial shenanigans as companies play with stock splits. With rising interest rates, a slowing economy, higher expenses on EV parts and competition coming from all of the car makers, the stock still remains way overpriced. The number of shares you have when it comes to splits does not matter, it is the value of each share based on the company's fundamentals.

Housing Market 

The demand side of the equation in the housing market continues to show signs of weakness as pending home sales were 19.9% lower in the month of July compared to last year. We have discussed how the lack of supply has kept prices elevated, but pricing is starting to show some cracks as people simply can't afford these high home prices with higher mortgage rates. According to the National Association of Realtors, higher rates have pushed the typical mortgage payment up by 54% from a year ago. This has pushed housing affordability to its lowest level in 30 years. Assuming a 20% down payment, it currently requires 32.7% of the median household income to purchase the average home. This compares to about 20% of a household's median income before the pandemic. The 25-year average is 23.5%. The affordability appears to be starting to impact prices as in the month of July prices declined 0.77% compared to June. This was the first monthly decline in approximately 3 years and was the largest monthly drop since January 2011. Year over year price growth remained strong as prices were up 14.3% compared to July 2021. I believe we will continue to see double digit year over year gains as we conclude 2022, but as we lap these higher prices in 2023, I believe it is likely we will start to see year over year declines.

Harrison - "How interest rates affect pensions."

The jobs report today showed the labor market strength is slowing, but overall, it still remains in a very healthy spot. The headline number saw payrolls increase 315,000, which was essentially in line with the estimate of 318,000. While this was the slowest growth since April 2021, it is still a good growth rate and people need to realize the blockbuster job gains we saw from job recoupment are now in the past. One negative note for job growth was the previous two months were revised lower by a net 107,000 jobs. The headline unemployment rate rose 0.2% to 3.7%, but I view this as positive as it was driven by an increase in the labor participation rate of 0.3% to 62.4%. The labor force participation rate still remains 1.0% below the February 2020 level. The gains in employment were broad based with every category seeing growth, but business and professional services continued to lead the way with an addition of 68,000 jobs and healthcare and retail trade were close behind with additions of 48,200 jobs and 44,000 jobs respectively. Leisure and hospitality has seen some of the strongest growth but saw an increase of just 31,000 jobs in the month of August, which was substantially lower than the 91,000 job increase in the month of July. This sector continues to remain beaten down compared to pre-pandemic levels as the total number of payrolls is still 1.2 million jobs below where we were in February 2020. One area of the report I found interesting was the number of people that were counted as long-term unemployed (those jobless for 27 weeks or more). It currently stands at 1.1 million and accounts for 18.8% of all unemployed persons. I hate to say it, but with job openings nearly 2x higher than the total number of unemployed persons how have they not been able to find a job?

JOLTS

The JOLTs report continues to show strength as job openings in the month of July saw results of 11.24 million openings, easily top the estimate of 10.3 million. This was a slight increase from the month of June which saw openings total 11.04 million. The job openings level is still close to 2x the number of available workers as they totaled just 5.67 million in the month of July. While this report is a major positive for the labor market, it remains concerning on the inflation front. The discrepancy between openings and available workers adds pressure to wage inflation as companies compete over employees and it makes me wonder if we have enough people in the labor force to help resolve the supply chain issues we have been seeing in the economy.

Wall Street  

We have seen speculation in cryptocurrencies falter along with the meme stocks. I’ve always said Wall Street is great with coming out with products that they can make money on investors who speculate on trying to get rich quick. You now will begin seeing what is known as single stock ETFs which use various high-risk techniques along with options and futures and in some cases leverage. Three very risky tools. This will allow investors to speculate more on short term moves up and down of popular stocks like Tesla, Apple, Nike and in the works, you may even find companies like Boeing and Salesforce. They promote the benefit that you can’t lose more than what you invested, and you don’t need to sign margin agreements or any other pesty paperwork. And of course, Wall Street will make their money off of fees that seem to range from 0.95% to 1.15%. Once again people with little knowledge of how these work and with the excitement and enthusiasm that they will get rich will jump into these new ETFs which they hope will fill their dreams of getting rich quick. I can see down the road I would guess 3 to 5 years people who lost their money complaining it was unfair and someone needs to reimburse them. It was not their fault they did not read the paperwork or understand what they invested in. Would someone please tell these people to stop speculating and invest in good quality companies for 3 to 5 years and be happy with a potential annual average return of 8 to 10%. Once again investors are being warned of another great moneymaker for Wall Street and a big loser for them.

September

Buckle your seatbelt as September is historically the worst month of the year for stocks. Going back to 1928 both the S&P 500 index and the Dow Jones industrials have an average loss of around 1% in the month of September. Keep in mind an average does mean there have been up months in the past. For September I see 3 things that can weigh on the market. First off would be another interest-rate increase of 3/4 of a percent, second would be oil rising back to $100 a barrel and lastly more bad news coming out of the war in Ukraine. This does not mean you sell your stocks and go to cash. It means be prepared for some pullbacks and be aware that September is the worst month of the year.

Reserves

On August 31 we will get an update on where the strategic petroleum reserves now stand after taking 1 million barrels a day from the reserves. The most recent data shows there were 453.1 million barrels in the reserves, down from 621.3 million barrels one year ago. What worries me here are two things. First this was meant as a temporary fix with the hopes of increasing production, which does not appear to have happened. In addition to that there is talk that the Middle East may reduce their production. My second concern is in 30 days or so when this program is over it appears the levels in the SPR will be somewhere around 390 million barrels, not a good comfort feeling. In addition to not replacing the production of oil, what will the government be doing to replace the oil they took from the strategic reserves. I’m also assuming the oil they used to meet the shortfall was lower priced oil than what they will be buying it back at especially since they're buying will increase the demand for oil. I believe in a long-term program to a good clean energy policy, but in the short term they really need to focus on a fix for how to produce more oil and gas. I hope they had a plan for this when they began the 1 million barrel a day reduction in the SPR.

Labor/Job Security

I have said I do believe the recession will not be as dramatic because people not only have a job but feel comfortable that their job is secure, or they could obtain another job if they wanted to at equal or greater pay. It has been estimated that the US labor market is still down about 7 million workers from the pre-pandemic days. It also has been estimated that those who took early retirements reduced the labor supply by 2% and those gig jobs that people picked up has been estimated to have reduced the labor force by another 4%. It is also estimated that roughly 3% on a floating monthly basis of US workers are infected with Covid -19 which still requires mandatory days to stay at home. To help with the supply of labor it is possible some of those who retired will become concerned about inflation and the recession and return to the workforce.

Investments

The S&P 500 has had a nice rebound since June 16 rising around 11%, but still remains down 15% for the year. Traders now seem to be getting nervous. Net short positions against the S&P 500 futures are reaching levels that have not been seen in two years. This could cause a lot more volatility in September, which is the worst month of the year in regard to performance. Check your investments and your equities to make sure they can handle the storm.

Growing Jobs

We just saw a great JOLTS Report, which stands for Job Openings and Labor Turnover Survey. I now see Honda and LG are going to build a $4.4 billion EV battery plant starting early next year in Ohio. Tesla announced recently they are building a $4 billion EV battery plant in Oklahoma and not to long ago, Intel announced spending $20 billion in two different cities to build chip manufacturing plants. What I’m thinking is jobs, jobs and more jobs. First off construction of these multi-billion-dollar production plants will take 2 to 3 years to complete. Then the workers to work on these plants will also be making good wages as well. This will also generate the ripple effect of more jobs as the money flows into these communities. I feel pretty good about the long-term job market here in United States.

FAST ACT Bill

The California legislature passed a bill known as the FAST act for fast food chains that establishes a fast-food council charged with setting pay and workplace standards for the entire industry. The bill would allow the council to set pay for workers up to $22 per hour next year. This is backed strongly by the unions of course who never seem to understand the fundamentals of running a business or making a profit. Governor Newsom has about 30 days to decide to approve or veto the bill, restaurant owners are pushing hard to obtain a veto. I believe if this passes you will see closures of some fast-food restaurants or food prices at the franchises climb by 20 to 25% so the business can make a profit. My other fear is this will creep into other businesses causing more closures of other businesses and much higher prices in California.

Russia Oil Revenue

You may have figured out that because of the increase in the price of oil Russia is now drowning in cash. Their oil revenues are up substantially compared to before the war in Ukraine. Russia is now averaging oil export earnings of $20 billion/month, an increase of 37% from the earnings of $14.6 billion/month in 2021. Indirectly the United States is helping Russia generate more revenues in oil by producing less. The United States needs to open all oil wells, pipelines, and do whatever it takes to produce oil anywhere they can to shut Russia down. Let’s put the green energy objective on hold for a year or so to shut down Russia. If we did that the war in Ukraine would be over rather quickly.

Harrison Johnson, CFP®: "Understanding all risks in retirement"

Harrison Johnson, CFP®: "Moving Out of State in Retirement"

Harrison - Charitable Remainder Trusts 

Harrison Johnson, CFP®: Medicare Irmad  (Income related monthly adjusted amount)

Harrison Johnson, CFP®:

Harrison Johnson, CFP®: “Understanding Internal Rate of Return (IRR)”

Harrison Johnson, CFP®: "Tax-loss Harvesting"

Harrison Johnson, CFP®: Social Security “Spousal” vs “Survivor” benefits

Harrison Johnson, CFP®: "Is now a good time for a Roth Conversion?"

Harrison Johnson, CFP®: Deducting California taxes for Business Owners

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)

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

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

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)

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

• 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.

Harrison Johnson, CFP® will be discussing The Augusta Rule