Smart Investing Newsletter

GDP 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. Utility Companies We have seen natural gas prices drop to around $2 per million British thermal units, a huge drop from around $9 in 2022. In the United States natural gas generates about 42% of electricity, so like myself you may be wondering why is my electric bill still increasing? On average, last year’s bills were up 10.2% nationwide. The reason we are given, which I still question is they say it’s the cost of transmission and distribution. It sounds to me like an excuse for the utility companies to keep their prices higher for their customers. Goldman Sachs I believe Goldman Sachs is looking for a downturn in the market in 2024 based on their prediction that stock pension funds will sell $325 billion worth of equities this year. That would be a 70% increase from the $191 billion sold in 2023. Based on many things I have read so far in 2024, I believe many big firms and money managers are realizing that technology stocks have gotten way beyond where they should be. It appears Goldman Sachs believes this will be a profit taking year, we will see come December 31st. Keep in mind I believe the overvalued equities in the markets are the ones that could see the most selling pressure, I don’t believe this will impact equities that are undervalued or trading at reasonable valuations. Tapestry I was disappointed to see the FTC sue to block Tapestry’s purchase of Capri Holdings. Tapestry owns Coach, Kate Spade, and Stuart Weitzman. Capri owns Michael Kors, Jimmy Choo, and Versace. The FTC claims the acquisition will eliminate fierce competition between the two companies, but I have a hard time seeing how this will impact the consumer. Will Jimmy Choo’s shoes now cost $1,100 instead of $1,000? I don’t see this happening, but mainly am trying to make the point that luxury goods are already expensive and I don’t see how this acquisition will harm a consumer that many people view are already over paying for consumer goods. The CEO of Tapestry rightfully points out there are no barriers to entry in this market. I believe this is another waste of time from an FTC that has already wasted tax payer dollars on trying to block other acquisitions. I believe this will be another example of a failed block by the FTC, which will ultimately be a cost funded by US taxpayers. Pennies Financially, I do pretty well, but it’s still ingrained in me from when I was a kid to count your pennies and don’t waste money. I remember a friend of mine from junior high school who I’m still in touch with, Gary. He would say I really knew how to pinch the penny, lol. So, you can imagine my shock when I read that Americans throw away as much as $68 million in coins on a yearly basis. If you do the math that is about $4.86 per person every year, almost enough to buy a Starbucks. I do see coins in the US eventually being a thing of the past, which would make sense and save the government about $700 million per year in making coins. It costs the government three cents to make one penny. I think that’s how politicians have gotten themselves into such a big debt, using that kind of logic on many things. Anyways, if you don’t want your coins, please feel free to send them my way. I would love to have them, lol. RoboTaxis I thought the reaction to Tesla’s earnings was just crazy considering the stock’s double-digit increase. First let’s look at the numbers, adjusted earnings per share of 45 cents missed the 51 cent expectation as net income dropped 55% from last year. Sales of $21.3 B missed the estimate of $22.15 B and were down 9% compared to last year, this was the worst decline since 2012. These developments also led to negative free cash flow in the quarter. So why did the stock increase? It likely had to do with Elon Musk discussing AI, robotaxis, or a new car model. It just amazes me how people still get so excited by Elon’s projections considering his poor track record. Let’s look at some examples. In 2015, Musk told shareholders that Tesla cars would achieve “full autonomy” within three years. In 2016, Musk said a Tesla car would be able to make a cross-country drive without requiring any human intervention before the end of 2017. In 2019, on a call with institutional investors that would help him raise more than $2 billion, Musk said Tesla would have 1 million robotaxi-ready vehicles on the road in 2020, able to complete 100 hours of driving work per week each, making money for their owners. Quite simply none of these things have happened. It’s also important to consider the fact that robotaxis will need to work with government regulators for approval. This is something that both GM’s cruise and Google’s Waymo have been doing. NBC News recently reported that Tesla hasn’t even sought permits that would allow it to test and operate robotaxis. The true fundamentals of this company still make absolutely no sense and frankly I’m not sure how people can have conviction in Elon’s predictions. If it isn’t clear, I definitely would not recommend buying the stock.

Retail Sales 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. Service Fees Service fees at Restaurant just drive me crazy. My wife and I went to a beautiful brunch at the Rancho Bernardo Inn and they first told us the price was $85 per person. I thought it was a little high, until I saw the nice spread, they did. I thought OK beautiful restaurant and a very large buffet, I’ll pay the $85 per person. We enjoyed the brunch and then I got the bill and discovered on top of the $170, they added a $49 service charge. When I asked what that was for, they said it goes to the waitress, the kitchen, and the staff. So, I asked if the bill already included the tip? With hesitation, they said yes. If you do the math, $49 divided by $170 is over 28%. I normally tip about 20% for good service. So, when you dine out, receive your bill, and see a service charge on top of the food and beverage charge, do you also add a tip? Copper Price Many commodities have been rising lately, including copper which last week hit $4.25 per pound. Like many things in 2024, year to date copper is up around 9%. Unlike gold which is up around 15% year-to-date, copper has many industrial uses like wiring. If oil prices continue to increase, that could send people back to buy more electric vehicles, which require quite a bit of copper. Companies that come to mind in this area would be Rio Tinto and Freeport-McMoRan. U.S. Postal Service The cost of a US stamp could hit $.73 come July if the Postal Regulatory Commission approves the US Postal Service’s request for the 7.4% increase. If you feel that it seems the price for stamps is rising rather quickly, you would be correct. From 2010 to 2020 stamp prices rose seven times and if the Postal Regulatory Commission approves this increase, it would be the sixth time in just four years. The US Postal Service did not give any specific reasons as to why they need to raise the price of a stamp, all they said was the price increase is necessary because of the rising cost for delivering mail. That sounds rather weak to me. If I had to speculate why, I think the price of mail is going up because the volume is declining but the service is still costing the same to get less mail to your home. However, when I open my mailbox every day, there still seems to be quite a bit of mail there. Could it be the post office is mismanaging their operation? Investing in Bitcoin There’s been a big push for Bitcoin by the CEO of Blackrock, which is the largest investment company in the country. This means when he speaks, people tend to listen. He has become a Bitcoin bull since they came out with the iShares Bitcoin Trust. I researched to see if I could find how much he has personally invested in Bitcoin, but unfortunately, I couldn’t find any concrete data. Personally, I don’t believe he holds any. Himself and some other Wall Street executives have tried to get brokers to allocate just one percent of their portfolio into bitcoin. In reality, that would not do very much for investors. Keep in mind if you have a $100,000 portfolio, 1% would only be $1000. If Bitcoin were to double that would only be a one percent return in your portfolio. In my opinion, such small allocations do not move the needle for your portfolio and ultimately, I believe they serve little value. I believe the only reason why people like Larry Fink are pushing Bitcoin is the greed on Wall Street. They’re just trying to push people into Bitcoin because they know there’s limited volume and this could increase fees for doing nothing other than talking up a hype investment. I continue to believe Bitcoin is not a real asset as it does not generate cash flows, provide much tangible value, and ultimately there’s nothing to analyze on it to derive its intrinsic value. As far as the talk of it being a currency is still a silly idea. The best currency is one that provides the most stability, not one with the volatility of Bitcoin. Just in case you’re unsure, we are still against investing in Bitcoin even as a speculative investment. Real Estate Investors Many people and real estate investors just look at the cost of the real estate, but there is so much more to it. A smart investor must look at the affordability of homes. The housing affordability index has dropped to levels not seen since the late 80s when the index was at 100. After the Great Recession in 2008, the affordability index rose dramatically to over 200 as rates fell and prices for homes stabilized. The affordability index, according to the National Association of Realtors, looks at family incomes, mortgage rates, the price of the home, property taxes, insurance costs, maintenance and repairs. When one adds it all up, you get a pretty ugly picture for the housing market. Home maintenance costs across the country on average are $6663 per year, which is an increase of 8.3% from one year ago. It’s also important to note that 50% of owner-occupied homes across the US were built 44 years ago. Keep in mind that repairs go up as the house gets older. Local governments are also pushing harder for more taxes from homeowners to meet their strained budgets. According to real estate data firm, Attom, property taxes were up 4.1% from 2022. Add it all up and I don’t care what people say, I just don’t see how housing prices can rise much above current levels for years to come. With today’s market don’t buy a house thinking you’re making great investment, buy a house to raise your family to live in. Entrepreneur Ideas I’m always impressed with simple ideas that make money like laundromats and vending machines. The first vending machine in the US sold gum back in 1888, today there are over 7 million vending machines doing business in the U.S. Entrepreneurs can make a good living off of vending machines, but don’t think it’s easy work. The cost of a machine is around $1000-$2000 and stocking a machine averages around $250/month. The income per machine is about $350/month and it will take about 2 to 3 hours per week of your time. If an entrepreneur would spend about 50 to 60 hours per week and had around 20 machines, they could earn around $100,000 per year. I just love capitalism and American business. There are no barriers to entry here if someone wants to do the work. Chinese Government I have said for many years that people do not understand the major differences between China and the United States. Let me give you a good example of how different things are in China. Here in the US, if you get yourself too far into debt, you can file bankruptcy and move on with your life. In China, there is no such thing as bankruptcy, you carry that debt for the rest of your life or until it is paid off. As I have said, China controls the country. If you cannot pay your debts in China, the government can seize your salary and restrict you from getting a government job. That may sound somewhat normal, but in addition to that, since everything is run by the government, they can restrict you from riding the high-speed trains and air travel. Forget about going on that vacation, if the government says no then you’re not going. Even if you try to go on vacation, the government will not let you stay in nice hotels and authorities can detain you if you don’t comply. Could you imagine if the US government tried to tell you that you can no longer take a vacation and where you can and can’t stay? China is a communist country and the government has major control over their people, businesses and the press. When investing in China, please understand it is not run at all like the United States.

March CPI 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. Tax Refunds April 15th is fast approaching and 40% of Americans are really counting on a tax refund to help their financial situation. That is up 4% from the 36% last year. It really doesn’t surprise me because many people look at that as a windfall, not realizing that they gave the government a free loan of the money for the past year. Depending on your income, people generally should be shooting for a refund of $100 or to have a tax bill of $100. If one were to receive a $1200 refund in taxes, they may be excited but unfortunately that could’ve given them the opportunity to put $100 a month in a 401(k) or IRA and receive a tax reduction along with tax deferred growth. AI Legal Issues It seems these days you can’t pick up a paper or turn on the TV and not hear something about artificial intelligence. One thing you’re not hearing about is the legal issues that are starting to arise. Section 230 protects social media companies from being sued, but that is not going to extend to the AI companies or companies that use artificial intelligence. In early 2023, even Supreme Court Justice Neil Gorsuch said, “Artificial intelligence generates poetry. It generates polemics today that would be content that goes beyond picking, choosing, analyzing, or digesting content. And that is not protected.” That sounds pretty concerning to me, but as time passes, we will see many more lawsuits against not just the AI companies, but also companies that use AI for the general public to read or see. This could definitely slow down the growth of AI and the elevated prices that are being paid for stocks related to AI. Venture Capital Venture capital is one of the more speculative areas of investing. In 2023 venture capitalists only raised $67 billion, which was the worst year since 2016. In the first quarter of 2024, investors seemed a little more comfortable with taking on some extra risk. Venture capitalists have raised $30 billion in the first quarter of 2024, which on an annualized basis would amount to $120 billion, close to twice the amount raised in 2023. Tax Brackets The current President and the media try to promote that the wealthy pay no tax or should be paying their fair share. Numbers from the IRS in 2021 prove that is totally incorrect. According to the data from the IRS, the top one percent, which is about 1.5 million returns with earnings above $682,500, paid 45.8% of the total income tax. However, they only make 26.3% of the country’s adjusted gross income. Compare that with the bottom half of earners, which was 76.8 million returns with adjusted gross income of $46,500, they only paid 2.3% of all the income tax. What the media and President Biden point to are the exceptional years for certain corporations or individuals who received large tax write offs for such things as setting up a foundation, a large charitable deduction, maybe some type of large loss on an investment or perhaps investing in equipment. These types of events generally do not occur every year. If one were to look at the wealthy’s tax returns over 10 years, they would see the numbers that I discussed in the beginning are very true. World Population I remember back about 40 years ago or so there was a big concern about overpopulation and the world running out of resources. Now, the US fertility rate stands at 1.7 births per woman and is expected to remain around that level for next 30 years. In 2007, it was 2.12 children per woman. If you do the math, you can understand the problem. If you have two parents only producing 1.7 children, the population will decline overtime. As our population gets older, they tend to want to slowdown and not work as much or maybe not at all. They live off their investments (hopefully they listen to us at Wilsey Asset Management and funded their 401(k) program) along with government programs. If the younger generation is shrinking, the only way to support a larger aging population is to increase taxes, or perhaps extend the retirement age, which in my opinion is probably the better way to go. One problem is if you increase taxation too much on the younger generation, they will lose their incentive to work and be less productive. There are some things that could save our country like immigration and AI along with automation. Immigration can immediately bring in working age people to produce in the economy. AI and automation should not be feared because what it will do is instead of taking maybe three or four people to do a job, it may only take one or two to do that same job. Throughout history, technological advancements have always been feared considering concerns all the way back to the Industrial Revolution. Technology advancements are coming faster than they used to, but if we use them properly, they can help the economy become more productive, which will help support an aging population who can then enjoy their golden years. California Politics The games that California plays with our voting system is just criminal. A coalition of California businesses is fighting Governor Newsom and his Democratic allies over the fact that they can increase local tax in California with a simple majority. The business coalition is putting on the ballot for November that for any tax increases, it would take a 2/3 approval, not the simple majority. They are calling it the taxpayer protection act. Sacramento is fighting this and has asked the California Supreme Court to take the rare step of taking it off the ballot, saying it’s unconstitutional. In case that doesn’t work, democratic legislatures are putting on the ballot that the taxpayer protection act would require a 2/3 majority to become law.

Krispy Kreme x McDonalds Do you like Krispy Kreme doughnuts? If you do, you’ll be able to get them at McDonald’s as they signed an agreement with Krispy Kreme after testing some locations a couple years ago. The rollout to McDonald’s for Krispy Kreme doughnuts will begin in the second half, but it will take until around the end of 2026 to be available at all McDonald’s. Krispy Kreme doughnuts is a public company and the stock had fallen below its IPO price many years ago which was under $12 per share. When the news released from McDonald’s the stock rose over 30% to $17 per share. This could be a profitable endeavor for Krispy Kreme, but it’s going to take years for the profits to flow through to the bottom line. Krispy Kreme trades under the symbol DNUT and pays a 0.9% dividend and has a 2025 forward P/E ratio of around 35x. No deal here, if you like the donuts enjoy them at McDonald’s but it appears you won’t make much dough with the stock. March Jobs Report 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. Gas, Hybrid and Electric Vehicles The US car buyer seems confused on whether to buy an electric vehicle or a gas-powered vehicle. So, they have decided to cut it down the middle and get a hybrid. In the first two months of 2024 this caused sales of hybrid vehicles to increase 50% over last year. Chinese Auto Makers China’s EV maker, BYD, surpassed Tesla last quarter in global sales of electric vehicles. BYD sold over 526,000 electric vehicles in the fourth quarter and made a profit of $1.2 billion. This was an increase of 19% from a year earlier. This Chinese auto maker is coming on strong and could cause more problems in the EV market. Credit Card Merchant Fees You may have heard that Visa and MasterCard are being forced to reduce their merchant fees to help merchants and consumers. It still requires approval from a federal judge in Brooklyn, New York, but as it currently stands the credit card companies would lower all rates by 0.04% for three years and the average rate across the networks would be lowered by 0.07% for five years. The legal team that struck the deal for the merchants makes the deal sound big talking about eliminating $30 billion in fees over five years. But as a consumer, before you get too excited, I don’t think you’ll see any difference at all. There is talk that some of the credit cards with big rewards (which benefits consumers) might have a disadvantage at the checkout counter. I think the only ones that will really get a big benefit from this is yes you guessed it, the attorneys. Tesla Stock I was shocked to see Tesla wasn’t down more on the day it released delivery numbers. If the company can’t return to growth, I’d say the stock is still extremely overvalued even with the rough start to the year. Tesla reported Q1 deliveries of 386,810 which fell well short of a mean of 11 estimates compiled by FactSet of around 457,000. It’s also important to understand these estimates have fallen since the start of the year, so Tesla couldn’t even clear a lower bar. I would say the bigger problem here is that deliveries actually fell 8.5% compared to last year. Even though the stock is down over 30% to start the year and it is still down close to 60% from its all-time high of $409.97 in November 2022, it still trades at 42x 2025 estimated EPS. For a company trading at that multiple, it better be growing! Secondhand Designer Purchases With high end purses like Chanel selling brand new at $10,200, consumers are picking up secondhand bags at sometimes half the cost from $3000-$8000 for the same Chanel bag. Worldwide the secondhand market for luxury bags is now nearly $50 billion, which has invited many scammers and copycats that pawn off their bags as the real thing at high prices. It has been estimated by some that about 20% of the high-end bags sold on the secondary market are good fakes, but yet sell at high prices. My suggestion to anyone paying such high prices for these secondhand purses is to verify the authenticity BEFORE buying. There are people out there who are experts that certify the bag for anywhere between $35-$100. Here are three people listed in the WSJ article. Keep in mind myself and the Wall Street Journal are not endorsing these three people, but just giving you their names as a suggestion. I would recommend you also verify their experience and again, please before you buy a secondhand bag and pay thousands of dollars for it get it certified by some expert. If you wait to get it authenticated after you buy it, you’ll be heartbroken to know that you’ve overpaid for it and the chances of getting your money back are extremely low. The three people listed in the Wall Street Journal were: Paola Tapia age 35 Atlanta, Georgia, Michelle Peeters age 38 Brooklyn, NY and Zekrayat Husein age 43 San Antonio, TX. I would highly encourage anyone to again pay to have the bag certified before paying for it and you should even take a few minutes to read the article in the Saturday/Sunday, March 23/24th 2024 edition of the Wall Street Journal Section B page one titled “You spent big on a bag. Now find out if it’s real”

Electric Vehicle Sales 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. Investing in Equities When investing in equities, it is important to understand who the customers are of the company you are investing in. Currently companies who serve the lower end consumer like McDonald’s, the dollar stores and other fast-food restaurants have seen a slowdown in sales. From what I can see this is caused by two factors. First, consumers who are under the age of 30 and are now ninety days late on their credit card payments or behind on auto loans has reached levels last seen in the 2008/2009 financial crisis according to the Federal Reserve Bank of New York. Please keep in mind this is not the average consumer. I believe this age group not being financially savvy, overextended themselves and tried to keep up with their friends to appear like they were doing well. This group is now struggling and has to come back to reality and not overextend themselves. The second thing hurting the lower end consumer is that according to the Bureau of Labor Statistics, the poorest fifth of society was hit harder by inflation as it was 1.6 percentage points higher than for the richest fifth of society from March 2020 to June 2023. However, during this time period wages for low wage jobs have risen faster than for the higher paying jobs. Now these consumers in the lower 20% of society appear to be just keeping pace with inflation in 2024. In my opinion, this is all good news for the overall economy as this will slow down demand for the next few months, which should ease inflation and allow interest rates to be cut by the Federal Reserve three times in the second half of the year. This will allow economy to continue to grow in the 2 to 3% range in 2025. Cyber Security In 2023, the US reported 3,205 data breaches from US organizations. If that scares you, it should because it was a record and climbed 78% from 2022. I would love to invest in a cyber security company, but unfortunately, they are all too expensive and maybe at this point in time for what is going on that could be justified. However, being a value investor, I will still stick to my discipline and avoid investing in expensive stocks. Unilever It appears that Unilever, who purchased Ben & Jerry’s ice cream in 2000 has had enough of dealing with the independent board of Ben& Jerry’s and the rising cost of making ice cream paired with declining sales. There is concern that ice cream sales are slowing down and with the new weight loss drugs, sales could get hurt even more. I know myself; I will never cut back on my evening consumption of ice cream. I’ve never been a consumer of Ben & Jerry’s, but since they feel the need to not just be in the ice cream business and instead be involved in politics as well, it may not be easy to sell this to another company or on the public market. The independent board will still be retained on decision-making about its “social” mission. There have been times throughout the last 24 years that its independent board and Unilever have had some major disagreements. At one point, it got so bad that Ben & Jerry’s sued Unilever. This is unheard of in the corporate world. The two sides did eventually settle but it appears the scars still run deep. To sweeten the deal, it will also include other leading brands such as Magnum, Breyers, and Klondike. I do believe the independent board will be a problem and it could cause a low sale price for Unilever. Credit Score Do you know what your credit score is? Are you above 800? Below 700? Looking at October 2023, the average credit score in the US was 717 and was down from a high of 718. Even though this was a slight decline, consumers still have great credit scores considering that in 2019 FICO scores hit a then record of 703. Sam Bankman-Fried Prison Sentence I was happy to see that Sam Bankman-Fried received 25 years in prison for his fraud in the cryptocurrency market. He was very defiant all the way until the day of sentencing when he became very apologetic. In my opinion too little too late. I hope this shows other financial predators that there are big penalties for defrauding the public in the financial arena.