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By Brent Wilsey 22 Mar, 2024
Lawsuits Against Apple On Thursday, March 21st, the Department of Justice (DOJ) filed an anti-trust lawsuit along with 16 states against Apple. The DOJ claims Apple’s iPhone ecosystem is a monopoly that drove its “astronomical valuation” at the expense of consumers, developers and rival phone makers. The lawsuit claims that Apple’s anti-competitive practices extend beyond the iPhone and Apple Watch businesses, citing Apple’s advertising, browser, FaceTime and news offerings. The DOJ also said in a release that to keep consumers buying iPhones, Apple moved to block cross-platform messaging apps, limited third-party wallet and smartwatch compatibility and disrupted non-App Store programs and cloud-streaming services. With pressure also surrounding the App store in the EU, I worry the expected growth from the services business could be under pressure. We have often said Apple is a great company, but trading at such lofty levels has left many investors open to declines in the value of their investment. The stock trading around $170 per share is down from the high of over $200 per share, and while this lawsuit will take a couple years to go through the court system, it could have a major impact on the growth of Apple’s earnings. At Wilsey Asset Management, we do continue to believe that Apple is overpriced and has no potential for growth going forward. Looking out a couple years from now the stock could still be trading around these levels due to the high valuation and limited prospect for business growth. We do believe it’s very possible for the stock to drop at least another 10% to 20%. Retirement Assets and Target Date Funds I was so disappointed to read recently that Vanguard has 63% of their US retirement assets allocated to Target Date Funds. I cannot stress what a poor investment these are. They make nice fees for Wall Street and people think it’s an easy way to retire but the allocation and numbers are just so wrong. A good example is as recent as 2022 when the bond index went down about 14% that year. Based on the theory of Target Date Funds and how they are invested, most of a 65-year-old retiree’s money would be invested in bonds. On a million dollar account a 14% decline would have led to an account value of $860,000 and now a couple years later, bonds are still lower. I do believe in buying and holding, but you must understand what you’re holding and why you’re holding it. It does make sense to just implement a blind strategy. If you have a target date fund, I would highly recommend that you sit down with a knowledgeable financial advisor that really understands and can explain how they work…. Yes, I’m available! Mind Games of Investing I learned a new word this weekend, counterfactual. In my 40+ years of investing I believed what this word meant, but I just didn’t know there was a word that described what I knew. What I’m talking about as it stares in your face where you would have been if you would’ve bought Microsoft, Nvidia or Tesla a few years ago. The emotional psyche is great at tracking the big misses and convincing you why you should’ve invested, but it never seems to remember the investment losses that you missed because you didn’t take that risk. Over the years we’ve talked about these types of companies many times. Just to remind you, take a look at the cannabis companies or during the pandemic had you invested in Zoom or Peloton. More recently, we just discussed in our newsletter about had you invested in electric vehicle companies you would’ve lost about 90% of your investment had you purchased at the top. Investing is hard, throughout your lifetime there will always be some companies that you “knew” were going to go up after the fact. Comeback to reality and realize if you can average about 10% on your investments, in 21 years a $100,000 investment would be worth close to $800,000. But if you lost principal along the way by taking on risk, you may not even have your $100,000. And if one of your friends tells you they bought one of these high flyers and they brag about it, ask them percentage wise how much does it make up of their entire portfolio? More than likely it’ll be less than one percent, but even at one percent be sure to inform them that the investment, even if it doubles in price would only add a one percent increase to their entire portfolio. And if you would like to use the new word counterfactual, the definition is what might have been an imaginary alternative to the actual past. Mortgage Points and Lender Credits When you apply for a mortgage, there’s a lot more to consider than just the interest rate. When you get a mortgage, there are closing costs that include things like title and escrow fees that are not part of the loan itself. Then there is prepaid interest which is the interest that accrues from the closing date through the remainder of the month. Since mortgage payments are paid in arrears, your first payment will be two months after the month you close. For example, if you close your mortgage in the beginning of April, you’ll have more prepaid interest at closing since you’ll have to pay interest for the bulk of April, but you won’t have to make the next payment until the middle of June. Also, at closing you might have points or credits. A mortgage point is an extra fee you pay in exchange for a lower interest rate. A lender credit is the opposite where you receive a higher interest rate, but the lender will provide you funds that can be applied to closing costs and prepaid interest. You can also choose to pay no points and receive no credits for an interest rate in the middle which is called the par rate. For example, if you were to get a mortgage right now your par rate might be 7%, or you could pay a few thousand dollars in points to receive a 6.75% rate, or you could receive a few thousand dollars in credits in exchange for a 7.25% rate. With where interest rates are at now, pretty much everyone agrees that mortgage rates will be coming down in the coming months and years. This means if you are considering buying or refinancing, even if you are using a 30-year mortgage, it is best to think of it as a 6, 7, or 8 month loan as there should be an opportunity to refinance in a few months at a lower rate. Therefore, if you are getting a loan now, you want to structure that loan so you have the lowest overall cost during the next 6 to 8 months. During a decreasing interest rate environment, this typically means accepting a higher interest rate and using the accompanying lender credits to cover as much closing costs and interest as possible. You might pay a few hundred dollars more in interest over the next several months, but that is worth it if you receive a few thousand dollars in credits upfront. Banning Tik Tok in the US I’m sure by now you have seen that the House of Representatives has overwhelmingly passed a measure to ban TikTok in the US. I don’t see why the Senate will not do the same, so I do believe that TikTok as we know it today is going to be history here in the US. It is unclear at this point in time when the official date it will be banned is, but you may be thinking this is going to be a great opportunity to invest in Meta which owns Facebook. After all, the advertising on TikTok will go somewhere which is estimated at around $6 billion. Will all of that go to Meta? Probably not, but a lot will. Before you go out and purchase shares in Meta thinking there will be a big boost from the $6 billion in advertising if Meta were to get it all, it is important to understand it would only be about 5% of Meta's total advertising. Not enough to move the needle much on their earnings. Dollar Stores Closing The owner of Dollar Tree and Family Dollar is going to be closing 1000 locations across the country bringing their total store count down to 15,700. The merger between Family Dollar and Dollar Tree has not worked out as well as the company expected. Trying to keep their low prices with inflation on products has been a struggle and add on top of that the increase in store theft, the company could no longer post a profit. The company will lose about $700 million in annual revenue going and forward full year sales should be around $31 billion. In the most recent quarter the company lost $1.71 billion, which compares to a profit one year ago of $452 million. The good news was sales were up about 12% to $8.6 billion. I’ve always thought the Dollar stores were an interesting investment, but if they can’t turn back towards profitability I would recommend staying away. Investing in Bitcoin Yes, here is another post about why to stay away from investing in Bitcoin in hopes of saving some people big losses. Over about the two months they have been trading, $20 billion has gone into nine new ETF Bitcoin funds and investors have pulled $10 billion from Grayscale’s Bitcoin trust. It appears that the ETFs are not bringing in new investors but instead it is current people who own Bitcoin are moving to the ETFs because it’s easier and the fees are lower. A big disappointment in the ETFs has been that the $30 trillion managed by professional advisors are not recommending people put any other money into Bitcoin. Being a professional advisor myself for nearly 40 years now, it makes perfect sense to me. The reason why this will not change is brokers and investment advisors could easily be sued and lose if Bitcoin were to fall anywhere near the 70% drop like it did after its peak in November 2021. Professional advisors still hear in their heads SEC chairman, Gary Gensler, that investors should remain cautious about Bitcoin and the Department of Labor also has concerns about cryptocurrencies in retirement accounts. If Bitcoin were to have a substantial drop, investors and attorneys would have a field day with lawsuits and settlements with professional advisors. Think about it, there would be no reason that a financial advisor could give to defend themselves why they put any of a client’s money into Bitcoin or any cryptocurrency. Healthcare Costs Healthcare costs have risen dramatically over the last few years, which means health insurance premiums have also gone up at an unprecedented rate. Now both employers and insurance companies are wrestling with the new weight loss drugs such as Wegovy and Zepbound that can cost $1000 per month per employee. These drugs were originally designed to help patients with diabetes, but it was discovered that they can also help people lose weight easier than going to the gym and dieting. Unfortunately, some people feel it is their right to take these drugs and have the insurance company pay for them not understanding that the insurance company is a risk pool and the higher the payments, the higher the premiums for everyone. Some employers are putting limits either on the dollar amount that they will pay out for these drugs or including factors such as a Body Mass Index (BMI) must be over a certain percent before they will pay for the drug. I learned in life years ago that when something is too easy, like taking a pill to lose weight, there are some other factors to balance the scales. I think everyone needs to know that every drug has some side effects and before trying to take the easy way out of losing weight, be sure you understand the side effects of these drugs and don’t simply ask your employer or your insurance company to pay for these just so you can lose weight. Liquid Money in the US I continue to talk about the trillions and trillions of dollars of liquid money in the United States. Proof of that is the average price of a home in Manhattan in New York City is $1.6 million. Back in 2022, 55% of the homes in Manhattan were paid for with cash. In the fourth quarter of 2023 the percent of homes paid for with cash jumped to 68%. There still is a lot of cash out there and I believe it will be there for at least a couple more years. Shopping Malls I remember a few years ago people were claiming that the malls in America were done and would eventually be gone. I believed they wouldn’t and that they would change how they do business and they will still be around and not only survive, but thrive. That is happening now and we are in the midst of that change. Our top-tier malls have surpassed the 2019 tenant sales levels even though traffic is lower. Shoppers are spending less time in the malls but they are spending more in high end retailers like Coach, Tory Burch, Lululemon and Gucci just to name a few. The big anchor department stores like Macy’s are becoming a thing of the past and being replaced by high-end gyms, pickleball courts, mini golf and high-end food markets. When a mall remodels to top-tier, they are receiving record high leasing volume and strong rent growth from previous years. New types of malls see attendance from a younger crowd with higher incomes who enjoy high-end shopping. I have to question if this is a trend of the future that young shoppers are not so conscious when it comes to spending on expensive items? Could this be trouble for retailers like Costco where it is all about price and not the experience of shopping in the warehouse? Trends change and people change. It’s so important for investors to understand this and to avoid buying high when it comes to investing. What is hot today could be out of business tomorrow.
By Brent Wilsey 15 Mar, 2024
CPI The Consumer Price Index (CPI) came in a little bit hotter than expected as the headline number for February showed an annual increase of 3.2% versus on expectation of 3.1% and the core CPI showed an annual increase of 3.8% versus an expectation of 3.7%. While it was not much progress, there was still a decline from last month’s core CPI reading of 3.9%. This marked the lowest reading since May 2021 when core CPI was 3.8%. Food was a bright spot in the report as the annual increase was just 2.2%. Food at home came in at an annual increase of 1.0%, while food away from home increased 4.5%. With wage pressures continuing, I believe this discrepancy will continue. Energy was also an interesting sector as the annual reading showed a decline of 1.9%, but the monthly reading was up 2.3%. Energy has been a big positive for the headline number, but as we lap easier levels it will likely not be as big of a benefit. One of the areas that remains very hot is motor vehicle insurance as it was up 20.6% compared to last year. I believe this item will remain hot for the next several months, but as we lap higher prices it should subdue. Shelter also remained a large weight on the report as it increased 5.7% over the last year and accounted for about two-thirds of the annual increase in core CPI. I feel like I sound like a broken record, but I continue to believe that this is heavily distorting the numbers and is it declines over the remainder of the year it should be a benefit to both headline and core CPI. I don’t believe this report does anything to change the expectation for three cuts in the back half of the year. PPI I was somewhat surprised to see the negative reaction to the February Producer Price Index (PPI). It seems as if people were fixated on the monthly jump of 0.6%, which doubled both the estimate and January’s reading of 0.3%. Looking year-over-year though the numbers still look quite manageable. The headline number increased just 1.6% and core PPI, which excludes food and energy was up 2%. I don’t think this report should have a major impact on the Fed’s expected interest rate direction. 401k It's no secret that I'm a big advocate of saving in your 401k, but I was surprised to see that according to a recent survey 77% workers believe that the unavailability of pensions is making it harder to achieve the American dream and 83% say all workers should have a pension to be independent and self-reliant in retirement. I was also surprised to see some UAW members are still unsatisfied with the automaker’s retirement plans as some are continuing to push for pensions. A Ford spokesperson recently shared the current retirement structure at their company, "The company contributes 10% of employee base wages, plus $1 per hour worked (capped at 2,080 hours a year), with zero employee contribution required.” I would take that over a defined benefit plan any day. 401ks give participants the power to grow their wealth more effectively, they are much better estate planning tools, and they are much more portable if changing employers. The key is you have to take accountability and actually participate in your 401k to reap the benefits. Bitcoin Peaking Point I admit it myself that I have no idea where bitcoin will peak. But the truth is, no one does. I do know that demand is high right now because Wall Street continues to build their ETF’s to collect their fees, which I have talked about before. But can we please get off some of the comparisons of Bitcoin to make one feel better, especially the one with gold and saying it is a digital gold. The value of all mined gold is around $15 trillion. A good portion of that is in gold jewelry. I know when I buy a gift for my wife like a gold bracelet or necklace, she’s going to be pretty happy, but I can’t even write the words how to compare if I gave her a gift somehow of a Bitcoin that she can open and do something with it. I think if I would try, I could be sleeping on the sofa that night. Also, let’s stop saying this will be the replacement currency if the dollar falls. Just think of the calamity the country would go through with a fall of the dollar in the United States. Do you think you will still be able to plug into the Internet and access your Bitcoin? You may not even have electricity to plug-in your electronic devices like phones, computers and laptops? Let’s really understand what Bitcoin is, it is a speculative game that is being played right now, and it really cannot be used for anything that is really of any value. There are smart economists like David Kelly from JPMorgan who have similar feelings. He recently told Barron’s, “I worry about the silly decisions investors make. People get misled by all sorts of fads and fantasies as to how they should invest. I worry about the money that’s been poured into things like Bitcoin, which is absolute nonsense. It is simply a focus of speculation. I worry that someday that’ll all go poof and people will lose money.” I’ve said it before, but congratulations if you have made money on Bitcoin, if you want to continue to hold it you should really think through what it is. If you don’t have a sound answer, you should sell it. Tax Brackets vs Your Tax Rate Most people believe tax rates are going up, which may be true. With the level of government spending and debt, it is logical to conclude taxes will need to increase to keep up. Starting in 2026, the federal tax brackets are set to increase due to the sunset of the current tax rates implemented in 2018. We may also see further tax increases to address issues like the deficit or Social Security. However, there is a difference between the tax brackets and the tax rate you will experience as an individual. Just because tax rates increase, doesn’t necessarily mean the rate you will be subject to will be higher or that your tax bill will be higher. Currently the federal tax rates are 10%, 12%, 22%, 24%, 32%, 35%, 37%, and they are expected to change to 10%, 15%, 25%, 28%, 33%, 35%, 39.6%, which is technically an increase. These are brackets which means the more income you have, the higher you get pushed into the brackets. What most people don’t understand is that your individual level of income will also fluctuate up and down over time, not just the tax brackets. In retirement you have much more flexibility in choosing where your income comes from, so while you’re working you might find yourself in the 4th tax bracket which is 24%, but in retirement with the right planning you may get to the 2nd tax bracket which could be 15% at that time. Even though tax rates increased, your tax rate could go down because you will be in a lower bracket due to your income level. I’m not saying taxes aren’t a problem in retirement, because they absolutely can be, but the way to address them is to understand how your individual income will change over time so you can take advantage of the tax system all along the way. Military Spending We can’t build those chip factories fast enough here in the US to make sure we can fabricate our own chips. Why do I believe that? It was released that China increased its military spending by 7.2%, this adds to the 20 years of increasing their defense budget. They now have sophisticated new weaponry and cyber capabilities along with military bases in Africa, Cambodia, and other areas around the world. Back in November, President Biden met with President Xi and he was not shy to mention that one day Taiwan will be unified with China. I’m happy to see China’s continued difficulties with their economy. This makes it more difficult for them to spend on a military budget. As our economy continues to grow here in the United States, we can continue to strengthen our military. It is nice to know that in 2022, the United States spent $812 billion on the military. I remember a saying from a long time ago from President Theodore Roosevelt to “speak softly and carry a big stick.” I hope the United States’ stick is big enough and going forward we continue to invest heavily in our military. Apple Stock Apple stock has struggled this year as there have been concerns about the health of its business in China and potentially another weak iPhone cycle. More bad news is coming because Europe’s new Digital Markets Act is going to give Apple some difficulty. In Europe, Apple will now have to allow third-party App Stores and also provide alternative payment options on their platform. Going back to 2007 when the iPhone first came out, they have had a closed ecosystem keeping competitors off their platform. How many phones in Europe this will affect is the question? Overall, Apple has about 33% market share of the mobile market in Europe. This could be a hit on Apple’s revenue and also open the door for other options on mobile phones that are less expensive than Apple. Experience in Investing I’ve been in finance or accounting for I hate to say it, but looking at 45 years. I love the experience that I’ve accumulated over all those years, but then I realize oh shoot, I’m old. I guess the only good thing about being old is how much wisdom you accumulate over those years. I have said many times over my years that the average investor returns on their entire portfolio overtime about 3%. Why is this? It is because the average investor spends very little time understanding what they are investing in and they want to be part of the latest fad or speculation that will give them great returns. Investments like technology and other high flyers (I will include Bitcoin here) are not invested in because the investor is buying something of value for today or tomorrow, but instead are looking for a quick get rich scheme. Unfortunately, today’s investors invest in things like Bitcoin, cannabis and too many others to mention not because they understand the value, but because it has gone up in price. Over my many years, I have always tried to look out for and help the small investors and tell them if you’re earning an 8 to 10% return per year on average over long-term on your entire portfolio you’re doing pretty well. But, if you’re regular reader of our social media post you’ll see some people push back on this and try to give me all kinds of reasons why Bitcoin or whatever the hype investment they’re into will make them a lot of money. I always try to be polite, but having been in the finance world for about 45 years I have seen a lot and I realize that experience and wisdom is more valuable than youth, excitement and ignorance. Legal Immigration Our economy is doing OK and our job market is strong with many unfulfilled positions. I have said many times I am for legal immigration. We need people to come into our country who want to work and while I do believe many people that are coming in illegally really just want a better life for them and their families and will work hard for that, we still need the immigration to occur through a legal process. Behind-the-scenes, the government agrees with this because back in 1986 employing undocumented immigrants was a criminal offense. However, on a yearly basis, only 15 to 20 employers are prosecuted for violating this law and the penalties are very low at between $676-$5404 per worker for the employers first offense. It is very obvious to me that the government realizes the benefits of people coming to our country to work at jobs that have high vacancies. Democrat or Republican I think it would be better if we focused on legal immigration and allowed immigrants to work and pay taxes above board. We could then focus on building our economy and spending money to keep out the terrorists and drug dealers that are currently slipping through. Maybe that’s too easy of a concept for the government to understand? Banning TikTok I can’t even believe that there’s a debate about getting rid of TikTok here in the United States. Do young people not realize the data that the Chinese government, which is a communist government, is getting? They are building so much information on what we are doing here in the US. Think about what they now know. The communist government of China now knows what our young people favor to buy, where to go, and their vulnerabilities. The young people of our country need to wake up and be on the side of banning TikTok. BlackRock If you’re a Bitcoin enthusiast, you’re probably telling everyone you know that the big Wall Street firm Blackrock, which back in 2017 said Bitcoin was for money laundering, is now a proponent. Why has Larry Fink, CEO of Blackrock, done a U-turn? If you understand how they charge fees for the Bitcoin ETF, it becomes clear. Blackrock will earn 0.12% for the first $ 5 billion in assets or the first year of the funds launch. After the first year or once the fund hits $5 billion, the fee will essentially double to 0.25%, so there’s a huge incentive for them to get more people into this fund. Surprise, they are already at $5 billion and are now charging the 0.25%. At my firm, Wilsey Asset Management, we are a fee based advisory firm and our fees work the opposite of BlackRock in this case. For an account of $100,000 our fee is 1.5%, but if you invest $2 million with us your fee drops down to 0.6%. Generally, the more money that is invested the lower the fees, which sounds fair to me. But the greed on Wall Street seems to be getting worse as time goes by. I don’t believe this will end well for the small investor. Growing Economy While February Retail Sales missed the headline number, we still saw a 1.5% increase compared to last year. I believe this is consistent with an economy that is still growing, but at a softer rate. Gas stations had a negative impact on the report as lower gas prices lead to a 4.5% decline on spending at gas stations. If this was excluded from the headline number, Retail Sales would have come in at a more impressive 2% increase compared to last year. As food price inflation has leveled off, spending at food and beverage stores has moderated and the report showed a gain of just 0.4% compared to last year. I would say less pressure on prices for food and energy is a positive for the consumer. Areas of the report that remained strong included nonstore retailers (+6.4%) and food services and drinking places (+6.3%). Building material & garden equipment & supplies dealers (-6.1%) and furniture and home furnishing stores (-10.1%) continued to be two categories that are struggling. Unions I’ve never been a big fan of the unions, but now they have definitely gone too far. Laura Sacks, the regional director of the National Labor Relations Board (NLRB), concluded that the basketball team at Dartmouth college, an Ivy League school, are employees and have the right to control the work performed by the men’s basketball team. They will be part of the 1500 Union members of SEIU local 560. I’m sorry but aren’t they supposed to be going to school to get an education to enter the workforce when they graduate? Playing a sport in college is a privilege and part of the college experience, so what is the team going to do? Are the players going to picket the games if they’re not happy with whatever the union comes up with that, they should be unhappy with? Fortunately, this will take years to play out in the courts, but the NCAA will have to pay attorneys to defend the legal challenges of the union. The sad news is this will line the attorneys’ pockets with money which is money that could be used to give scholarships or reduce tuition.
By Brent Wilsey 08 Mar, 2024
Labor Market While the headline number of 275k jobs created easily topped the estimate of 198k and sparked concerns the labor market remained too hot, the details of the report showed a much softer labor market. To begin, the prior two months saw a downward revision of 167k jobs, which more than offsets the beat we saw in the month of February. Also, while I generally am a little more skeptical of the household survey, it did show a decline of 184k in those that were counted as employed, which led to an uptick in the unemployment rate to 3.9%. This was above the estimate of 3.7%. I was also disappointed to see that government remained a large contributor in the establishment survey as the sector added 52k jobs. Outside of government, other areas that were strong included health care & social assistance (+90.7k), leisure & hospitality (+58k), and construction (+23k). Wage gains were also a bright spot in the report as average hourly earnings increased 4.3% compared to last year. This was below the estimate of 4.4% and below last month’s reading of 4.5%. I believe this report continues to put us on track for 3-4 rate cuts in the back part of the year. JOLTs Report The January Job Openings and Labor Turnover Survey (JOLTs) was right in line with expectations and the previous month as job openings totaled about 8.9 million. This remains well below the high of 12.2 million in March 2022, but is still well above historical norms as prepandemic we had not seen a reading above 8 million. I continue to believe job openings will continue to trend lower to come back in line with historic levels. This does not mean we believe we are seeing a weak labor market, but I would call it a normalizing labor market. We have also seen a normalization in quits which should be a positive for wage pressure. Quits in the month were 3.4 million. This compares to annual quits of 44.4 million or 3.7 million per month in 2023. Total quits in 2023 fell by 6.1 million when compared to 2022. Looking at prepandemic levels, quits totaled 42.1 million in 2019 which would have been an average of 3.5 million. Layoffs were also strong in the month as they totaled just 1.6 million. This is right in line with 2023 levels as for the full year they totaled 19.8 million and averaged 1.65 million per month. In 2019, layoffs totaled 21.7 million and averaged 1.8 million per month. I wanted to provide all this data to show the labor market may be softening from strong levels, but I believe there is still some room to have numbers normalize without tilting us into a weak labor market. China What happened to China? The country had such a robust economy just a few short years ago, but the writing was on the wall. Here are the problems that caused the economic downfall. A real estate boom which accounted for 25% of China’s annual economic output. The debt and inventory continued to rise in houses and condos but many remained empty with no one able to buy them. The government cutoff the debt to developers, which ended the real estate boom. Consumers who did buy into the expensive housing market in China leveraged beyond their means with the expectation that the growth would continue and they could sell out with a profit. Unfortunately, they are now sitting under water in much of their real estate, but still have to pay the debt and don’t have much discretionary income to spend in other parts of the economy. China is now experiencing deflation, which will give them negative growth in parts of their economy for perhaps years to come. China’s overall debts have now surpassed 300% of GDP with very little chance of the economy growing to pay down that debt. Many years ago, they put a cap on how many babies people could have and now that is hurting them with an aging workforce and a shrinking workforce. It will take years to reverse this. In the meantime, the economy remains underwater. Since 1998 foreign investment in China has always been on the upswing, but that run came to an end in the third quarter of 2023 as foreign companies sold out and left or just stopped investing in China. There is nothing left to build in China when looking at their infrastructure. They have built many roads, railroads and airports so there’ll be no future investment in infrastructure. China has always been a communist country and I don’t think they really understood capitalism very well. An economy will always go through the ups and downs, but the United States has been around for 200 years and we have learned some valuable lessons like 1929 and 2008. While we can’t avoid the down turns, we have learned how to minimize the depths of the down turns. Personal Consumption Expenditures The Personal Consumption Expenditures Price Index, known as the PCE and is the main inflation gauge that the Federal Reserve looks at came in with a good inflation number. Excluding food and energy the change from one year ago for January was 2.8%, which shows a nice downward trend from December 2023 of 2.9%, November 2023 at 3.2%, and then October 2023 at 3.4%. The numbers are going in the right direction, but they are now falling a little more slowly than the big jumps we had. I still believe by the end of the year we should be at 2%, which is the Fed’s target and they should start reducing rates by midyear. Even though they won’t be at their target of 2% by June or July they need to start reducing rates a little bit to prevent a recession in 2025. At Wilsey Asset Management, we do believe the Federal Reserve came to the rescue to reduce inflation a little bit late but have now done a good job on managing the economy. We continue to believe that the Federal Reserve will do a good job in 2024, but stay tuned as we will be on top of it each month as the data is released. Social Security Changes Coming? The State of the Union was this week and one of President Biden’s talking points was Social Security. He stated, “Working people who built this country pay more into Social Security than millionaires and billionaires do” so he vowed to “make the wealthy pay their fair share”. It is true that millionaires and billionaires whose incomes do not come in the form of wages or self-employment do not pay into Social Security, but they are also not entitled to Social Security benefits in retirement. Working class people do in fact pay more into Social Security, but they are also the only ones who receive it. However, for people who do pay into Social Security, benefits are subsidized by high-wage earners and business owners for the benefit of low-income earners. As an employee, 6.2% of wages are withheld for Social Security up to a cap of $168,600. The Social Security benefit amount is based on 35 years of earnings which is used to determine the average monthly earnings. The full retirement amount will be the sum of 90% of the first $1,174 of average monthly earnings, 32% of the next $5,904, and 15% of any monthly earnings above that. For example someone who made $50,000 per year would receive $2,014 per month at their full retirement age which is 48% of their earnings. For someone who made $150,000 per year, their Social Security would be $3,759 per month which is 30% of their earnings. Even though both paid the same 6.2% of their income into Social Security, the lower-earner received a much larger percentage of their income in the form of benefits. In the case of business owners, they have to pay double the tax for a total of 12.4% because they are considered both an employee and employer, and they have to pay 6.2% for all their employees. So a business owner is really paying more into Social Security than all their employees combined. In regards to making the wealthy pay their fair share, there have been proposed bills that would tax earnings over $250,000, over $400,000, or possibly tax investment income. However, it is unclear if these additional taxes would change the potential benefit amount of those paying them, or if they would just benefit lower wage earners. There is no doubt that the Social Security system needs some adjustments, but we must understand the facts before implementing change. Mega Cap Stocks Even after the run the higher in equities, a few indexes still have not recaptured their all-time highs which shows the narrow concentration of outperformance in the mega cap stocks. The S&P 500 Equal Weighted index closed March 1st at 6,633.8 below the all-time high of 6,691.21 on January 5, 2022, the Russell 2000 index closed March 1st at 5,160.35 below the all-time high of 6,070.83 on November 8th, 2021, and the S&P Mid Cap 400 closed March 1st at 2,910.66 below the all-time high of 2,925.93 on November 7th, 2021. I continue to believe that performance over the next few years will come outside the Mag 7 and the stocks that have carried the market over the last year or so. Apple Products It looks like my concerns for Apple in China with respect to Huawei's resurgence are coming to fruition. According to Counterpoint Research, over the first six weeks in 2024 Apple saw iPhone sales plunge 24% compared to last year, while Huawei saw a 64% surge thanks to its Mate 60 smartphone. Other Chinese brands also fared better than Apple with Huawei's spinoff, Honor, seeing sales climb 2% in the period, Vivo saw a decline of 15%, and Xiaomi saw a decline of 7%. While this is a concern considering much of Apple's revenue comes from the iPhone, I do also worry about the impact this could have on service revenue in the country given a potentially smaller installed base. Bitcoin You may be hearing about the next Bitcoin halving, what is it and what is it supposed to do? As Bitcoin gets closer to 21 million in circulation, which is expected to be reached around the year 2140, it is designed to halve the number of Bitcoins being released to create less supply and hopefully increase the price if the demand remains the same. The last time this happened was in May 2020 when block rewards dropped from 12.5 to 6.25. It appears that the next time that they are going to halve the distribution of Bitcoins will be April 2024. It is funny as I write this post, I feel that Bitcoin is still just a game that people are playing with computers because there is still no real value to the cryptocurrency. It reminds me so much of the tulip crisis back in Holland in the 1600s. However at least they got some pretty flowers out of it. What do Bitcoin holders get??? If you hold Bitcoin or any other type of cryptocurrencies and you don’t know what I’m talking about when I mentioned the tulip crisis in the 1600s, you may want to read up on history a little bit. Elon Musk & OpenAI Two items that are always in the news are Elon Musk and artificial intelligence, also known as AI, are now in the news together as Elon Musk is suing OpenAI and its CEO Sam Altman. His complaint is that they are no longer just developing AI, but funding what is known as AGI, which is artificial general intelligence where machines are able to reason like humans. Mr. Musk is complaining that this is to maximize profits for Microsoft rather than to benefit humanity. Mr. Musk is also claiming breach of contract, breach of fiduciary duty and unfair business practices. Elon Musk does have some skin in the game because between 2016 and 2020 he contributed over $44 million to OpenAI. In my opinion, this lawsuit could have some traction, especially with the toughness of Elon Musk. I also wonder if the United States government would get involved because they also have their concerns on where AI will take us in the future. Jerome Powell As I watch Federal Reserve Chairman, Jerome Powell, testify to the committee of senators, I noticed something very disturbing. There are so many empty seats except for the senator who is speaking. It seems to be that after each senator asks their questions, some of which I must say are rather stupid, when they are done they leave the meeting. It makes me wonder are they just trying to get on TV to collect votes and push their party’s agenda or are they padding their ego to be on TV? I don’t understand why they don’t stay there and listen to the other questions and answers so they learn more about what is going on with the economy and inflation AI I do believe that AI needs to have some guardrails in place. According to a Microsoft engineer there are some major concerns that need to be addressed. When entering text into Microsoft's Copilot Designer, some disturbing images can be produced for an app that is supposedly for all ages. The term “car accident,” generated images of sexualized women next to violent depictions of car crashes, including one in lingerie kneeling by a wrecked vehicle and others of women in revealing clothing sitting atop beat-up cars. The term "pro-choice," prompted images like a demon with sharp teeth about to eat an infant, Darth Vader holding a lightsaber next to mutated infants and a handheld drill-like device labeled “pro-choice” being used on a fully grown baby. The other scary part here is the number of deepfakes created has increased 900% in a year, according to data from machine learning firm Clarity. This could be especially troubling when it comes to election related misinformation. The Microsoft engineer, Shane Jones, has now brought these concerns to the attention of the board and the FTC, as his attempts to bring the issues to Microsoft appear to have been largely swept under the rug. The government has stepped in to slowdown self-driving vehicles, I think they should step in to slowdown AI until we understand it better. Elon Musk’s Pay Package I do worry that excessive legal damages are having a major negative impact on US businesses and in many cases they have gone too far. After Delaware struck down Elon Musk’s pay package that would have awarded him a $56 B pay package, the lawyers who argued against Musk are requesting a fee of nearly $6 billion in Tesla stock. The attorneys supposedly logged 19,499.95 hours which would equate to a pay rate of $305,550 per hour. The attorneys are also requesting $1.1 million for expense reimbursement. Also, for comparison attorneys who worked on the Enron case were awarded $688 million in fees back in 2008. I would say that situation was far worse than Elon Musk's pay package, especially considering the amount of value he has created for shareholders over the years.
By Brent Wilsey 02 Mar, 2024
401k Loans It was nice to see that retirement assets saw a nice increase in 2023. According to Fidelity, the average 401k was up 14% from a year earlier to $118,600 and the average IRA was up 12% to $116,600. While it is good to see this progress, balances are still short of the year end 2021 levels when the average 401k reached $136k and the average IRA stood at $131k. I was somewhat surprised but happy to see the average 401k contribution rate, including employer and employee now stands at 13.9%. With the decline in companies offering pensions, employees really need to make sure they are saving at least 10% of their pay to achieve an enjoyable retirement. On the other side of the equation, I was disappointed to see the percentage of workers who took a loan from their 401k, including for hardship reasons, increased to 8.9% from 7.8% at the end of 2022. Many times, people believe 401k loans are great option, but it costs you greatly when you consider the loss of compounding and the tax inefficiency. They are better than mounting high interest credit card debt, but they should only be used as a last resort rather than a tool to fund a vacation or buy a new toy. Hype Investing At Wilsey Asset Management we avoid hype investing. From time to time, we attempt to give evidence of how long-term, hype investing can destroy your portfolio. Here’s another example, in 2021, you may recall the hype around electric vehicles, people made it sound as if an internal combustion engine vehicles would never be sold again and we would all be driving electric vehicles. Well, the hype of the stock price matched that excitement, two examples are Lucid and Rivian automotive. The all-time high a couple years ago for Lucid was $35, recently it has fallen to under three dollars a share, a 91% decline. The other example is Rivian, in late 2021, it hit an all-time high of $146 per share and has recently fallen under $11 a share, a 92.5% decline. It is possible for these companies to turnaround and may do well in years to come, the massive decline in stock price is the reason we will not invest in a company which does not have earnings, and we will not pay more than 10 to maybe 12 times for those earnings going forward. We may miss out on some highfliers. but I’d rather take it slow and steady than try and hit the home run and lose 80 to 90% on an investment. For Lucid to get back to $35 a share that would be over a 1000% return. US Farmland Farmland in the United States has been on quite the ride for the past 26 years. Back in 1997, the average price per acre for farmland in the US was $1,270. It has now increased by over 430% to $5,500 per acre. Now before you people in San Diego think that is not that good because of the appreciation you’ve seen on your house, remember this is nationwide and a 400% plus return is very good on real estate. The question is, will it continue? Over the last 20 years, farm acreage has declined by about 50,000,000 acres to just under 900,000,000 acres nationwide. Development has been taking away some of the agricultural land which could drive prices higher. That could encourage farmers to take advantage of their high value real estate and retire. That would not be a good thing for our agricultural needs going forward. Is Long-Term Care Insurance Worth it? Most people know that elder care can be expensive later in life which begs the question, “Is long-term care insurance a viable solution?”. The long-term care insurance industry has evolved a lot over the last four decades. In the 80’s, 90’s and early 2000’s there were policies available that were affordable and provided more coverage, such as lifetime benefits. However, over time the insurance companies came to realize they weren’t making money because more people were filing claims than expected. As a result, most insurance companies have stopped selling this type of insurance all together, and the ones that remain have substantially reduced benefits and increased premiums on new and existing policyholders. Therefore, the cost/benefit ratio for long-term care insurance is not nearly as attractive as it once was and retirees are typically better off exploring other ways to pay for elder care. Bitcoin ETF With Bitcoin now being offered as ETFs, there’s a prospectus that is required by the SEC that tells investors the risk. My guess is 99% of people do not read the prospectus, but if you’re taking on such a high risk investing in a bitcoin ETF, you may want to take a look at it. The prospectuses for the new Bitcoin ETFs all warn, “new digital currencies could come along and reduce demand for and the value of Bitcoin. That might not happen for years if ever, or it might come suddenly out of nowhere." People try and compare Bitcoin to gold, but gold is an actual metal that needs to be mined out of the ground. Bitcoin, however, is created by technology and software. It is possible another digital asset could succeed bitcoin and become the new hot cryptocurrency. I would guess that 99% of people who own gold can tell you where gold comes from and how it is produced. On the other side of the coin, my guess is 99% of the people that hold Bitcoin if you asked them where it comes from and how it is produced, they really would have no idea. Underemployed College Graduates According to a recent study from Burning Glass Institute, five years after graduation, 45% of graduates are underemployed in their area of study. This means they have a job that does not require a degree or college-level skills. I have often said that not everyone needs to go to college and now some younger people are beginning to learn that maybe going to college was not the best financial decision. I have also said many times it is what you make of your degree, but for some students they think that having a bachelor’s degree means they should now make $100,000 a year. Just because a graduate has a degree in something that may be somewhat useless like recreation and wellness or some other degree that is not helpful to a business does not justify a business hiring that graduate and paying them a high salary. Today, businesses are looking for people with or without a degree that can bring profits to the business and justify a reasonable wage. According to the study, the worst degree was public safety and security where five years later 68% of the graduates were still underemployed. The top 3 degrees that were best for graduates were health professions and related programs at 23% underemployment, engineering at 26% underemployment, and business (math intensive) at 29% underemployment. It was interesting there was a divergence in business degrees as management, marketing, and HR saw underemployment of 57%. I know students going college want to take what they think they enjoy, but you have to think down the road and ask yourself will this make me a desirable commodity in the job market and will an employer want to hire me. Walmart Acquiring Vizio I was somewhat surprised to see Walmart announce an acquisition of TV maker Vizio for $2.3 B. But diving into the prospects for the deal, it really has little to do with the potential revenue from selling TVs. In fact, this is most likely an attempt to replicate Amazon’s success in the advertising business. In the most recent quarter, Amazon reported sales in its advertising unit grew 27% year over year to nearly $15 B. I’m assuming Walmart wants a piece of that market and Vizio provides a nice entry point. Vizio TVs come with a SmartCast operating system, which allows viewers to use their favorite streaming apps without needing a plug-in device like Roku. The company can then sell ads on the home screen, in its own free, ad-supported streaming app known as WatchFree+, or via a small inventory of ads that it can sell as part of agreements with third-part streaming companies. Currently the SmartCast system has 18 million accounts. Walmart can also use this operating system to replace Roku in its own in-house TV brand, Onn. Like Amazon, Walmart has a lot of data on its shoppers and this pairing could be a great potential growth catalyst for Walmart. Unfortunately, the stock is expensive trading at over 22x January 2026EPS. $100 Bills Do you carry hundred dollar bills around with you? If you do, does it give you a good feeling having one or two of them in your wallet? You should consider carrying a hundred-dollar bill If you’re having a hard time keeping to your budget and you continue to overspend on your credit cards. It has been proven that when you pay for something with a $100 bill, you feel bad when you don’t get it back. You actually see and feel pain by using real money. However, when you pay with a credit card, you feel no pain at all. You will also discover that some places when you try to pay for something with a $100 bill, they won’t accept it. What a great way to reduce your spending. Some other information on $100 bills is that they can last over 10 years longer than a one dollar and five-dollar bill because people are more likely to hold onto them. The number of hundred-dollar bills from 2012 to 2022 grew faster than any other denomination put out by the federal reserve. Even though $100 doesn’t buy what it used to, people say it still gives them a good feeling to have one or two of them in their pocket. Higher Hotel Rates If you’re now planning your summer vacation, you may want to pad your budget as the hotel industry appears to be on the verge of raising rates. In 2019, collectively, hotels were spending about $102.5 billion on compensation. For 2024, they are looking at spending around $123 billion, an increase of about 20%. The average hourly wage in the accommodation sector has risen to $24 an hour. But beware of union contracts coming up in places such as San Francisco and parts of Hawaii, as they are likely to push for big wage increases, for which consumers will be footing the bill. In addition to cost increases, you may also experience a decline in service. With less human contact, such as ordering room service via QR code, as opposed to speaking to a person. Some hotels are also experimenting with virtual check-in to save on cost as well. I prefer good service and people contact, but it appears this travel season I may have to accept a lower standard of service and pay a little bit more. Wall Street Gain from Bitcoin After the big boom Wall Street has experienced by launching the bitcoin ETF, 10 firms, including Blackrock, and Fidelity investments, have filed applications to put the second largest cryptocurrency into a new ETF. Wall Street will make billions of dollars from fees and when the tide turns and cryptocurrency falls, Wall Street keeps their fees but the investors are left holding the bag. I don’t blame Wall Street, if greed drives people to buy something which has no value, then in my opinion, the rule of buyer beware applies. Bud Light Super Bowl Commercial If you watched the Super Bowl, as many people did, I’m sure you saw the new Bud Light Genie commercial with Peyton Manning. Bud Light is trying to reverse last year's big decline due to their marketing fiasco. Unfortunately, Bud Light US sales from one year ago remain down 30%. Budweiser was a second worst decliner, down about 18%. Beer drinkers had to go somewhere and the beneficiaries of the Bud Light and Budweiser drop went to top benefactors, Coors Light, experiencing a 10% increase from one year ago, followed by Modelo which had an increase of about 6%. Anheuser-Busch, who produces Bud Light and Budweiser increased its Bud Light marketing spending but no dollar numbers were revealed.
By Brent Wilsey 23 Feb, 2024
Commercial Real Estate We hear that commercial real estate properties are having problems, but how bad are those problems? After the 2008/2009 financial crisis, by the second quarter of 2010 commercial property had a record $194.8 billion properties in distress. Compare that to the end of 2023, when commercial properties in distress totaled $86 billion. Also, think about how much commercial real estate has appreciated since 2010. Another point to consider, after the financial crisis there were not many funds on the sidelines and today real estate private equity firms are sitting on $544 billion in cash, which is a record level up from $457 billion in cash at the end of 2022. With that much cash, they will be interested in doing some deals and give a floor to many commercial properties across the country. Should You Buy Nvidia Now? We all know that Nvidia has done very well, and after the most recent report the stock is at a new high. I heard the dumbest thing from a money manager on CNBC, who didn’t own Nvidia and said you need to buy one percent of the stock in your portfolio. The reason I say it is dumb is because even if the stock doubles from here that would only increase your investment return by one percent. In other words, if your return was 10% over the next year, with the addition of Nvidia your return would be 11% if the stock doubles from here. This also assumes that had you invested one percent somewhere else it would’ve made no return at all. When it comes to investing, discipline is very important and yes, we all want to invest in investments that will increase in value, but an investor must understand their objective and their discipline, stay the course, and realize that one will not always own all the hot stocks and should not chase returns. Chinese Car Makers A Chinese electric auto maker, BYD, is sending chills across the auto makers in the US. Elon Musk said “If there are not trade barriers established, they will pretty much demolish most other car companies in the world. “In a memo from executives at Toyota, they stated Chinese companies have a 25 to 30% advantage over global competitors when manufacturing EVs. If not protected against, Chinese EV companies could storm the US market. In 2018, the Trump administration applied an additional 25% tariff on Chinese cars on top of the regular 2.5% tariff on all cars coming to the US. To get around this, BYD is looking at building a factory right across the border in Mexico. They have not purchased any land yet and this is a few years down the road, but it could be devastating to all car makers 3 to 5 years from now. I looked to see what the BYD cars look like and some of them are not that bad looking. Whoever becomes president in November 2024, I hope they look seriously at this situation to prevent BYD or any other Chinese carmaker from flooding our car market. Financial Planning: Investment Return of Annuities An annuity is exchanging your assets for income, you’re essentially buying a pension. It’s funny that pensions have such a positive connotation but annuities aren’t as popular, even though they’re pretty much the same thing. We don’t sell annuities and we don’t ever recommend annuities because when you look at the numbers, they aren’t that appealing for an investor. To illustrate this, I got a quote for a 65-year-old purchasing a $500k immediate annuity. In exchange for the $500k, they will receive monthly income of $3,000 for the rest of their life, which is a 7.2% yield. Keep in mind, the $500k is now gone, so they can’t decide down the road to do something else with their money. Statistically someone who is 65 has a life expectancy of about 83, or more 18 years. With this information we can calculate the expected return of the $500k investment and it comes out to 2.88% per year. In other words, if you were to invest $500k and then withdraw $3,000 per month for the next 18 years, you would need that $500k to return 2.88% per year to last the full 18 years. From an investment standpoint, most people wouldn’t be happy with an annualized return of less than 3% over almost 2 decades, but that’s what people agree to when they purchase an annuity. Don’t get confused by the 7.2% yield, which is misleading since those payments stop when you die. Instead, calculate the actual return to see if it still seems like a good idea. Keep in mind, the insurance company and the agent selling the annuity will not break down the actual return for you. Tech Company Layoffs Layoffs in the tech industry appear to be picking up in 2024 based on the first six weeks of the year. Layoffs at 120 tech companies stood at 32,000 compared to 2023 when for the entire year it hit 260,000. It probably is too early to make comparisons, but I do believe tech companies are trying to cut costs to keep their earnings as high as possible to justify their lofty price to earnings ratios. Funnies Re-Runs Last week for some reason, the delivery person who delivers my Wall Street Journal also included the daily edition of the Union Tribune. I thought OK I’ll skim through it and see what is in there. I was shocked to see that the paper still has two pages of the funnies. I remember being a kid and reading the funnies every night. Still in there were cartoons like Blondie, Beetle Bailey and Peanuts classics. I was wondering are these repeats that they keep using, or is someone writing new ones? I did notice for the Peanuts classic it says by Charles M Schultz, who has passed away. So, my guess is the paper is showing repeats of funnies from years ago? Prescription Pick-Up In an industry report from the Drug Channels Institute and the National Association of Chain Drugstores, they showed that Americans still prefer to pick up their prescriptions in person. In 2022, mail order pharmacies filled just 9% of US prescriptions compared with 47% filled by chain pharmacies. 12 years ago, the numbers were not much different with mail order pharmacies filling 7% of prescriptions and chain pharmacies filling 48%. The study didn’t list the reason, I’m curious why people feel they need to pick up their prescriptions in person. What is your preference? Fast Food Market Share What is your favorite fast food burger restaurant? I ask because three major burger companies, McDonald’s, Burger King, and Wendy’s are competing once again for market share. McDonald’s with the largest number of restaurants in the US at 13,530 saw sales increase just 3.4% per store over the past year, but their stock was up close to 10%. Burger King, which is owned by Restaurant Brands International (They also own Tim Hortons, Popeyes and Firehouse subs) has seen sales at Burger King restaurants climb by 7.4% which has helped drive their stock up close to 12%. A side-note, McDonald’s has most restaurants in the state of California, while you’ll find more Burger King restaurants in the state of Texas. Bringing up the rear in the fast-food burger wars is Wendy’s. They just never seem to be able to get out of their own way. It has been taken over by an activist investor named Nelson Peltz and the stock is down around 20% over the past year. Nationwide, it does have more restaurants than Burger King checking in at 7166. I’m not a big fast-food guy, but I’m thinking about going to Wendy’s for a burger and a shake. I just remember them being pretty darn good. Long-Term Investment Plan I always try to compare my investment performance to the smart guys in the industry and I’m not talking about some analyst or some investor that got lucky picking Nvidia a couple years ago. I’m talking about guys that manage portfolios, more specifically the endowments of the top-rated universities around the country like Harvard and Cornell. I figure these universities produce top students who are producing some very smart people. I feel comfortable saying they hire the smartest investment people they can find. I’m not sure why it takes so long to get this data, perhaps because the endowments of the universities don’t like to release it too soon, but the most recent data for the period ending June 30, 2023 was just released and showed an average return of 2.8% over the last 12 months. The Harvard University endowment fund with $50.7 billion in assets was up 2.9%. I release this information because it always seems like there’s some fund or someone out there that just did far better than your own portfolio, but realize the smartest guys in the room don’t always have the best short-term returns as they are more concerned about the long-term outcome. Be sure when you look at your portfolio, if you’re disappointed with the short-term return, understand was the objective a short-term gain (which is speculation) or a long-term investment plan that will grow well overtime like the endowment funds of the universities.
By Brent Wilsey 17 Feb, 2024
AI Outlook So Far Microsoft spent about $7 million per 30 second ad for the Super Bowl promoting their Copilot AI service. Some results are not coming in so good for Copilot with some testers after using the software for more than six months said it was useful but doesn’t live up to its price. Another survey adopter said the initial excitement wears off with a 20% drop in use after only a month. Executives at Microsoft expected billions of dollars in new revenue as their search engine Bing would take market share from Google. Unfortunately, nearly a year later Bing has only seen less than a one percent gain in market share. A survey from Boston consulting group said that roughly 90% of business executives said generative AI is a priority for the company this year; however, 66% said it would take a couple years for the technology to move beyond the hype. 70% of those executives said they were only going to do small investments with limited testing. I’ve been concerned about the over hype of the money going into AI and the return on investment taking years to payoff. This would not be the first time on Wall Street that the hype sent stocks into orbit, only to come back down to earth when reality set in. Investing in Technology More strange news with the markets. As of the week ending February 9th, the NASDAQ was up 6.5% this year and the S&P 500, which is also heavily weighted in tech companies had increased 5.4% in 2024. This compares to a return of just 0.84% for the broader Russell 2000 index. The S&P 500 has increased 14 of the last 15 weeks something we have not seen since the end of 1972. I’m not saying the market is going to crash tomorrow, but the 73/74 market period had a very long bear market. The difference here is that our market is so concentrated in technology that I think we could see a bear market, but many companies will still gain going forward because of the great value that has been ignored. Another example of exuberance in technology would be that fact that since the 2008 financial crisis, US companies with dividends above 5% gave investors a return of 450%. Over that same timeframe, companies that don’t pay a dividend have returned nearly 1200%. Going back to the 1870s, this flies in the face of normal behavior. The excitement in tech has led to some major gains for the big tech companies and Microsoft is now the most valuable company with a market cap around $3.1 trillion. It is almost twice the $1.6 trillion value of the entire S&P 500 energy sector, yet it’s annual free cash flow of around $67 billion is less than half the $135 billion from these energy companies. I do not know what will cause a drop or when it will happen, I just believe many investors do not realize the risk that they are taking by investing heavily into technology. Unfortunately, all parties do come to an end. CPI The Consumer Price Index (CPI) caused a lot of concern and sent stocks lower as the reading came in above expectations. Frankly, looking through the data I don’t think the numbers were that bad. CPI rose 3.1% compared to last year which was above expectations of 2.9%, but was lower than the reading of 3.4% in December. Core CPI, which excludes food and energy rose 3.9% and came in above the expectation of 3.7%. This reading matched December’s 3.9% rise which was the smallest increase since May 2021. It is important to remember that numbers don’t always go in a straight line and I believe this report should not have a major impact on the Fed’s rate decisions. Especially, when looking deeper at the numbers. The shelter index again continued to be a heavyweight on the report as it climbed 6% compared to last year. This increase accounted for over two thirds of the 12-month increase in core CPI. It was also interesting that there was a little bit of a divergence between the rent of a primary residence which was up 0.4% in the month compared to the owners’ equivalent rent of residences which was up 0.6% in the month. I believe this is a silly metric that distorts the CPI level. The Owners’ equivalent rent is obtained through surveys and asks members of a household: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished, and without utilities?" I don’t believe this is a great way for tracking shelter inflation and that these numbers should be taken with a grain of salt. Other areas of the report continued to see positive deceleration or even deflation in some cases. The energy index was down 4.6% compared to last year with gasoline falling 6.4%. Food at home showed a gain of just 1.2%, which compares to a peak of 13.5% in August 2022. Food away from home did have a larger increase of 5.1%, which likely stems from higher wages and the elevated demand we are seeing at restaurants and bars. Overall, as I said I don’t think this was a bad report, but investors need to realize that the Fed will not be cutting rates 6 times this year. PPI I was somewhat disappointed by the Producer Price Index (PPI), as I thought we would see better numbers. In January, PPI rose 0.3% compared to the prior month, which was the biggest move since August and it was well above the expected increase of 0.1%. Core PPI was even more troubling considering it saw a 0.5% increase, which easily topped the expectation for an increase of just 0.1%. Looking at the year over year increase, the numbers are less concerning. Headline PPI increased just 0.9%, but core PPI did see an increase of 2.6%. I wouldn’t recommend panicking over one report, but I will definitely be keeping an eye on inflation over the next few months. I still believe the broader trend will show a decline towards the 2% target, but there will likely be bumps in the road. Financial Planning: Health Insurance Before Medicare Most become eligible for Medicare at age 65. With Medicare you will have a Part B premium, which is $174.70 per month in 2024, and potentially an additional premium of up to $200 per month depending if you select a Medicare Advantage Plan or a Medicare Supplement Plan. If you retire before age 65, health insurance can be much more expensive and range into the thousands of dollars per month. For many this is a major factor in why they delay retirement. However, with the correct planning ahead of time, it is possible to retire early without being subject to exorbitant insurance premiums. When purchasing health insurance through the Health Insurance Marketplace, the actual premium is based on your income. This means if you can keep your income lower, you will qualify for the same coverage, but at a lower monthly cost. Some ways to keep income low is to keep extra cash, taxable brokerage accounts, and Roth accounts available as withdrawals from these accounts are not considered income. Therefore, these types of assets can cover livings expenses until reaching Medicare at age 65 while also keeping health insurance premiums, federal taxes, and state taxes at a minimum. This also means it may be necessary to defer other types of income such as Social Security, pensions, capital gains, pre-tax retirement account withdrawals, and Roth conversions until reaching age 65. There are many insurance plans available all with their own premium based on income, so it is important to choose the right plan to cover your individual medical needs, but with the right planning, there are affordable options available for early retirement. Investing In Real Estate A top commercial real estate investor who oversees $80 billion that is invested in commercial real estate around the world says he sees things turning around in 2025. My suggestion for investors is don’t wait until 2025, invest in 2024 so you won’t be late to the party and miss some good returns. He says the office market will turn around, but the bottom quartile of office buildings which are old and unrenovated are done. He also says the markets top 25% are full and charging top rents. If you want to invest in the commercial real estate market, unless you really know what you’re doing and have many years of experience, I would recommend you use a public REIT but be sure you understand what that REIT is investing in and where their properties are located. At our firm, Wilsey Asset Management, we do have a portion of our portfolio in commercial real estate and are willing to wait 12 to 24 months for a good return and in the meantime, we are collecting a dividend of around 7 to 8%. Remember when you invest, it is generally best to buy low when things look terrible, be patient and then sell when everyone has come in and the price has gone up to expensive levels. Digital Banking I remember many years ago how simple banking was. You would go to the bank, deposit the check, and then pay your bills by writing a check and dropping it in the mail. Fast forward to today and there are so many different ways to do banking and pay your bills. Your choices include Apple Pay, Venmo, Google pay, Zelle and I’m sure you can think of some that I forgot. Well brace yourselves because it could get more complicated as Apple, Alphabet, and Amazon are trying to become your financial bank through their digital wallets. Fortunately, the Consumer Financial Protection Bureau is fighting this because they see a conflict of interest when the same company can do your banking and commerce as well. It is also uncomfortable because banks have many watchdogs over them and many regulations to follow that currently the big tech companies are avoiding. To me that is rather dangerous because of the amount of strength they have now. Why are the big tech companies doing this? It is not for the amount of money they’ll make off of the digital wallet, Apple only makes 0.15% in fees off Apple Pay. What the big companies want is to monetize consumer data by building networks and keeping more customers in their ecosystem along with selling them more hardware, software and other products as well. It would be even more difficult to switch from an Apple phone to an Android phone if all your financial data is on Apple. It is difficult to switch already without adding another layer of problems. On the surface it may sound like it would be a convenient, easy way to do everything in one place. I’m not sure if I would trust big tech companies with all my financial data. What are your thoughts? Would you feel comfortable having big tech have all your information with no oversight on what they’re doing compared to the regulations banks currently have? Bitcoin With bitcoin now in ETFs, Wall Street is pushing it hard because of the fee revenue they will bring in. Smart people like Lee Reiners, a lecturing professor in economics at Duke University, stated in the Wall Street Journal that this is a new opportunity for Wall Street to get fees. In January, FINRA, which stands for Financial Industry Regulatory Authority, said that when looking at a review in 2022 that analyzed over 500 crypto related communications only 30% had no problems. The other 70% could be in violation of rules that prohibit false or exaggerated communication with the public. Once again, Wall Street will find ways to make big fees and the financial consumer in the end will suffer. Watch out for these exorbitant claims and promises that you will see tied to bitcoin. Digital Financial Transaction In today’s world, people are having less and less contact with other people and want to do more things electronically when it comes to business. I still do many things face-to-face and I was happy to see that two of America’s biggest banks, Chase Bank and Bank of America will be opening up more branches for face-to-face contact. As an example, JPMorgan, which owns Chase Bank, has opened over 650 new branches and entered 25 new states since 2018. This method seems to be working considering over the last 10 years their deposits have doubled to around $2 trillion. Going forward JPMorgan plans on opening 500 new branches within the next three years. They are not building these branches for the day-to-day financial transactions, but they want their people in front of customers for financial advice, loans and guidance. The long-term goal for JPMorgan is to put 70% of the US population within a 10-minute drive of a branch. Bank of America has a goal to have 80% of the population within a 15-minute drive. I still go in to my Chase bank branch about once a month to do a transaction but mostly just to say hello to everyone and not just be a number. Consumer Spending The retail sales report initially was a disappointment as the headline number declined 0.8% in January, which compared to the 0.4% gain in December and was worse the estimate of a 0.3% drop. While I wouldn’t say the numbers were great, sales still grew 0.6% compared to last January. The decline in energy prices also weighed on the report as spending at gas stations fell 7.5%. If this category was excluded from the headline number retail sales would have actually climbed 1.4% compared to last January. While the troubled areas like furniture and home furnishing stores (-9.8%) and building material and garden equipment and supplies dealers (-8.3%) continued to struggle, other areas of the economy remained strong. This included nonstore retailers (+6.4%) and food services and drinking places (+6.3%). Overall, I don’t think it was a great report that showed a booming consumer, but I still think it was good enough to show that the consumer is willing to spend. US Debt I remember the old saying I’ve got some good news and bad news, which would you like to hear first. I will give you the good news first and that is for fiscal year ending September 30th, the budget deficit is projected to drop to $1.6 trillion. The bad news obviously is that it’s still a deficit and our debt will probably increase to over $35 trillion by the end of September. Another concern is that we have a reasonably strong economy that should be generating more revenue than expenses going out. Unfortunately, that is not the case. It is surprising that nearly 2/3 of the government’s annual spending goes to entitlement programs which includes Medicare. We either have to increase revenue by growing the GDP or decrease expenses. No one ever wants to decrease expenses so we are left with the fact that we need to produce more revenue. I think we will continue to see the gross domestic product grow in 2024 and 2025, I’m just hoping it will grow faster than the expenses.
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