Fraud, Airline Stocks, Private Prison Boom, Social Security Changes, Dogs of the Dow, Santa Claus Rally, Stock Market & Buying a Car

Watch out for record fraud when shopping. 

With technology, shopping has become so easy and set records in 2024 of around $5.3 trillion. While this by itself is a problem as some people are over shopping, it has also invited more fraud than ever before and for the first three quarters of 2024 there was an increase of 14.5% to $8.7 billion of shoppers who lost money to fraud. Two things are happening here. First, consumers may be too emotionally excited about the purchase and they forget to look for scams that could be happening to them.

The second item is the scammers are becoming smarter about how to scam people and they are making it more difficult to detect. To avoid being scammed, it is always wise to deal with a company that you know. However, even that may not guarantee your safety. Scammers can now use names that look very similar to the names you know. They can do this by simply adding or deleting a period or a letter somewhere in the title. So before you make that purchase, be sure it is the correct site that you want to be at and you’re not sending your money to some scammer from across the world!

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

It has been quite the year for airline stocks and there have been huge one-year gains for United Airlines at 138% and Delta Airlines at 49%. While it was a laggard compared with its peers, American Airlines still posted a strong return of 29%. It is forecasted for holiday travel between December 19th and January 6th, there will be a record number of travelers at 54 million.

Since our economy was reopened after Covid, consumers continue to enjoy traveling, which has benefited the airlines. Even with the record number of travelers and the large gains for the airline stocks, they still trade at reasonable price to earnings ratios of 9.7 for United Airlines, 10.1 for Delta and 10.5 for American Airlines. My concern is could this be a value trap going forward? The low price to earnings ratio might suck you in only to see a slowdown in travelers in 2025.

We could also see a little bit higher oil prices based on production not coming online quick enough to keep up with demand, which would hurt the profit margins for these companies. While they might look enticing, I wouldn’t be interested in adding these positions to my portfolio at this time.

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

In 2025 there could be a huge demand for detention centers and investors may benefit from investing in the private detention center called CoreCivic Inc, trading under the symbol CXW. CoreCivic has a market cap of about $2.4 billion and a FFO on a forward basis of $1.79. The company could benefit from recent statements from ICE saying it will need enough beds to detain a minimum of 100,000 migrants. The agency already has funding for 41,500 beds. Their competitor GEO has a head start already housing about 40% of ICE detainees.

It should be noted that CoreCivic was at $14 the day before the election and it climbed to $22 the day after. There was concern that some banks would withdraw funding from companies who participated in the immigrant detentions, however it appears that CoreCivic does not need any new capital to bring on new facilities or bring back idle facilities. The high estimate for deportation would be 1 million people in one year at a cost of $88 billion. It is estimated that there were 11 million undocumented migrants in the US as of 2022. These higher dollars could benefit the private prisons as a quick alternative if there is no room in the county jails.

I was disappointed that the company does not pay a dividend, but it has pulled back from a recent high of $24.99 a share to under $22 a share. At the price the stock would trade at a reasonable 12.29x the estimated FFO for 2025. An executive from the private company GEO group spoke about an unprecedented opportunity for their company, it could be a good investment opportunity for the small investor as well. 

“Big Social Security Changes Coming”

The Social Security Fairness Act is set to be signed into law next week and will impact Social Security benefits for millions of Americans. This bipartisan bill will eliminate the “Windfall Elimination Provision (WEP)” and the “Government Pension Offset (GPO)” which currently reduce social security benefits for workers and spouses who have public pensions. The Windfall Elimination Provision applies when someone has worked a job where they paid into Social Security and also a job where they did not pay into Social Security and receive a pension instead. In this case, the Social Security benefits are reduced based on how many years they paid into Social Security.

The Government Pension Offset applies when a spouse is entitled to a Social Security spousal or widow benefit but they also worked a job where they did not pay into Social Security themselves. In this case, the amount of their pension reduces the Social Security benefits they are entitled to receive. With the passing of this new Social Security act and the elimination of the WEP and GPO, Americans who were having Social Security benefits reduced will no longer see a reduction. This is one of the largest changes to Social Security in the last several years. The downside is, the increased benefits will cause the Social Security trust fund to run out sooner, even if the elimination results in a fairer benefit system.

Should you invest in the Dogs of the Dow for 2025?

The Dogs of the Dow has been a theory that is very popular after good years of performance but unfortunately people lose interest during the bad years. The concept was made popular in 1991 by Michael O’Higgins as a simple way to be a lazy value investor. The idea is from the Dow’s 30 stocks you invest in the 10 that have the highest yield, which in many cases can be due to a pullback in the stock price over the past year. The concept can make sense, but it’s not full proof and there are years where you could lose more than if you just invested in the Dow Jones.

People tend to forget that investing is a long-term strategy and should not be done for one year, but because of simplicity investors have tried it from time to time. The strategy can be very volatile and it can scare investors, which leads them to sell at the wrong time when they should maybe be buying instead. If you want to try the concept with an ETF, there is one called the Invesco Dow Jones Industrial Average Dividend ETF. It has around $300 million in assets and its approach is similar. The exception is that opposed to an equal weighting of the 10 highest yielding stocks in the Dow, it uses a weighted average on yield to invest in all stocks in the Dow that pay a dividend.

If you’re thinking of using the Dogs of the Dow strategy for 2025, your first investment would be Verizon Communications with a 6.8% yield. The other nine would include Chevron, Amgen, Johnson & Johnson, Merck, Coca-Cola, IBM, Cisco Systems, McDonald’s and lastly Procter & Gamble. If you try this concept, I believe it is best to do in a tax deferred account or a Roth IRA because you could have large taxable gains at the end of one year. As I mentioned it’s also important to remember that it doesn’t work every year. In fact the Dogs of the Dow have underperformed the Dow in five of the past six years.

The year the strategy outperformed was 2022, when it beat the Dow by 9.1%. If I had to place a bet, I believe the Dogs of the Dow will top the Dow next year considering they trade for an average forward P/E of about 16, which compares to the S&P 500 at 22x. 

Where was the Santa Claus Rally?

Here it is January 3rd and it seems like Santa Claus wanted to go back to the North Pole early this year as the Santa Claus rally never materialized. This period of time includes the last five trading days of the year and the first two trading days in the new year. It is generally a good period for stocks and is positive roughly 80% of the time.

Unfortunately, this year the measure fell short as the index was down about 0.5% during those trading days. I believe there was a lot of tax selling in the last couple weeks of December as investors were either taking gains or realizing losses. It’s always tough to guess what will happen in the short term, but I do believe we will see a good couple weeks in the first part of January as investors step back in to buy shares of some companies that were beaten up. I also believe many things have changed since the first recorded Santa Claus Rally back in 1972 from Yale Hirsch in his Stock Trader's Almanac.

Back then trading was much slower, you had to go through a broker and a much smaller percent of the population held individual equities. The Santa Claus Rally still sounds exciting and I think it still has some merit to it because I believe people feel better around the holidays, which can lead to more optimism in the markets. However, with the ease of trading today, I don’t think it is as effective as it was when it first came out over 50 years ago. With that said we’re looking forward to a good 2025. My optimism is not based on the overall market as I believe it will be the year of investors looking to get good value for their investing dollars, rather than chasing the Mag Seven higher.

Can the stock market continue to climb higher?

Even though the S&P 500 ended 2024 with four-straight down days, which would mark the first time that happened since 1966, it did have an impressive return of over 23% for the full year. While it was a great year, I find it even more impressive considering 2023 had a return over 24%. This means the two-year return for the index was a staggering 53.2%. This sounds exciting, but consecutive gains of 20% or more are extremely rare and it has only happened a few other times: 1935-36, 1954-55, 1995-96, 1996-1997, and 1997-1998. The following year returns varied for these periods as 1937 saw a decline of 38.59%. 1956 saw an increase of 2.62%, but that was followed by a 14.31% decline in 1957.

The tech boom was extremely crazy as the good times rolled on for several years and even 1999 almost hit a 20% return with a gain of 19.53%. Unfortunately, the party ended terribly as 2000, 2001, and 2002 all saw double digit declines. I have talked at length about my concerns over the valuations for the index so I’m not optimistic 2025 will be a boom year and I believe the downside risk is higher than the upside potential. If we did witness another tech boom like period and had strong returns this year, I would be extremely worried in 2026 as I believe we would then be in bubble territory. The concentration of the index in the tech names and in particular the Mag Seven is also extremely concerning as they are a major reason for the gains, we have seen the last two years and if they don’t continue to move higher, the index would likely stall or possibly even fall. 

If you’ve been waiting to buy a car, it looks like now you could be back in the driver seat!

On average across the country car dealerships now have good levels of inventory, which has given them an incentive to discount their cars on average by $3400. That is over a 25% increase from last December. When you go to the dealer, you may find low or 0% interest rate loans, cash back offers, and good deals if you are willing to lease a vehicle, especially an electric one. For 2024 it is expected that US car sales will come in around 16 million vehicles. That’s a pretty good number, but it still has not hit the 17 million annual vehicle sales before the pandemic that caused havoc in the U.S. car market.

There also appears to be a shortage if you’re looking for the smaller less expensive cars. Electric vehicles really seem to have some great deals as their sales have lost momentum and leasing may be a great option as sometimes your leasing payment could be nearly half of what it would be if you purchased the car. If on the other hand you are trying to find a deal on a popular car everyone else wants, the dealer will not be willing to negotiate at all. On a recent shopping trip, I discovered that problem myself as I was trying to replace my 2021 Escalade. I discovered only one or two new Escalades on the lot and when I was called the previous evening that the one, I wanted came in, it was sold by two o’clock the next day.

The same holds true for many Toyota lots as well. There are about 2.7 million vehicles on US dealer’s lots and on the road heading to the dealership, which is a 17% increase in inventory from last year at this time. It’s important to understand, if you want to buy the car of your dreams and it’s a care everyone else wants you likely won’t find a deal, but if you’re looking to find good transportation and aren’t so picky on what you would like to drive, you will likely be able to find some good deals now and probably even in 2025.