Job Openings, Jobs Growth, Climate Mutual Funds, Private Equity, 401(k) Loans, MicroStrategy Tax Bill, DeepSeek, Europe’s Economy, Car Buyers & Amazon

Job openings post a sharp decline

The Job Openings and Labor Turnover Survey, also known as the JOLTs report, showed job openings of 7.6 million in the month of December. This was below the estimate of 8 million and the reading of 8.09 million in the month of November. While this may sound disappointing, this still leaves the ratio of open jobs to available workers at 1.1 to 1.

A softening labor market is still not a bad thing considering it is coming from such a strong spot where workers have had an immense amount of power over employers for a couple of years. The Fed wants to make sure the labor market isn't too strong as it could cause inflationary concerns, so I actually see this as a positive considering it is still a good report, but not too strong. I still believe the labor market could soften further without it being problematic for the economy.

Jobs growth still looks positive

Although the nonfarm payrolls growth of 143,000 in the month of January missed the expectation of 169,000, I still see the number as healthy for a growing economy. This number also came after upward revisions of 100,000 for December and November. The January number was slightly off the average of 166,000 in 2024, but I would expect to see a lower total in 2025 given the fact that the unemployment rate is extremely healthy at 4%.

I was surprised to see wage growth accelerate to 4.1% in the month, which was higher than last month’s reading of 3.9% and was at the highest level since May 2024 when it also registered 4.1%. At this level I wouldn’t say wage inflation is problematic, but I would say it is worth watching. If it reaccelerated to a higher level that could pose problems for the battle over inflation. I would say overall the job report looked healthy with no major surprises and for the most part it would point to a labor market that is continuing to soften, which I believe is good for our economy as a whole. 

Redemptions are high for climate mutual funds

Climate mutual funds, sometimes called green funds, grew quite rapidly from 2019 through the beginning of 2024. Apparently, investors began realizing that the equity concentration in these mutual funds really hurt their returns in 2024. Redemptions of $30 billion means investors wanted to leave these climate sensitive mutual funds to invest elsewhere. It is estimated worldwide that climate focused mutual funds are approximately $534 billion.

Redemptions of $30 billion is a pretty big hit considering that equates to around 5 to 6% of fund assets. Based on how times are changing, I believe going forward investors should not expect their returns to keep pace with the overall market. Another problem for investors is when redemptions in these funds are high, the fund manager must sell off assets to raise cash, perhaps at lower prices which can really hurt the performance of the fund going forward. This is because the stocks have been sold out of the portfolio to raise cash and if the stocks rebound, the fund performance will lag because of the missing equities that had to be sold. On the other side, if they sell positions with a gain, this will create tax consequences for investors. 

Behind the curtain of private equity

Private equity over the last few years has become the cool thing in investing. Investors have been trying to get into private equity as an alternative asset, which I personally do not believe in because of the behind the curtain details no one knows what’s going on.

Over the last 10 years, private equity assets have increase 300% to around $4 trillion. What’s even more amazing is that the fees collected by these private equity firms has increased 600%! A trade group by the name Institutional Limited Partners Association has had enough. They are pushing for new guidelines to standardize financial reporting for private equity investors including public pension plans, university endowments, and charitable foundations. What I thought was crazy is that private equity firms will vary how much they disclose to their clients based on how much they invest.

The small investors will get less information than the bigger investors. In my opinion, it is not a wise place to put your money as I like to know what is going on with my investments. There are ways that the private equity firms are enhancing returns by using certain types of financial engineering as opposed to the old way of selling the companies they buy and returning cash to the investors. The most revealing thing I could find was the median fee that the small investors pay is somewhere around 2%. I have said many times in the past if your broker is trying to sell you or put you into the hot private equity market, I recommend saying no thank you and find another broker.

Are 401(k) Loans a Good Idea?

Taking a 401(k) loan may seem like an attractive option for quick access to cash, but it often comes with significant financial drawbacks that make it a bad idea. When you borrow from your 401(k), you are essentially taking money out of your retirement savings, which means losing potential investment growth and compounding returns that are crucial for long-term wealth accumulation. Although you repay yourself with interest, the interest rate is usually lower than what your investments could have earned if left untouched.

Additionally, 401(k) loans must be repaid within a set timeframe, and if you leave your job, either voluntarily or involuntarily, the outstanding balance becomes due. Failure to repay results in it being treated as a distribution, triggering income taxes and, if you are under 59½, an additional 10% early withdrawal penalty, plus a 2.5% penalty in California. This can lead to a significant tax burden and further reduce your retirement savings. Moreover, and this is the biggest drawback in my opinion, when you repay the loan with interest, even though you are paying that interest to yourself, you are paying that interest with after-tax dollars which means you are being taxed twice.

First you have to earn that money and pay taxes on it in order to pay the interest, and you are taxed again when you withdraw that money in retirement. Many people also fall into the trap of taking multiple loans, which can create a cycle of dependency and derail long-term financial security. While a 401(k) loan might seem like a convenient way to borrow, the risks of lost investment growth, tax consequences, and potential repayment difficulties make it an unwise financial move in most situations.

MicroStrategy has a $3 billion tax bill

MicroStrategy, known for its large bitcoin holding around $50 billion depending on the day, has a potential tax problem. Under the Inflation Reduction Act that was passed in 2022 was a corporate alternative tax that was created with a tax rate of 15%. The kicker is crypto assets fall into this category and corporations must pay a 15% tax on gains even if they did not make any sells and realize those gains.

It is estimated that the unrealized gain on the crypto assets at MicroStrategy is roughly $20 billion and at a 15% tax rate, MicroStrategy would owe the federal government roughly $3 billion. Since their other businesses are unprofitable, and the company has not only used all its cash but has borrowed money to buy more bitcoin they would apparently have to sell off a large sum of bitcoin to pay their taxes. This new information was disclosed by the company in January, but no one seemed to notice or maybe care?

A change in 2025 accounting rules affecting MicroStrategy that was passed by the Financial Accounting Standards Board, says MicroStrategy must show the fair value of its bitcoin on its balance sheet and the fluctuations in value will be included in earnings. Obviously if bitcoin goes up, they’ll have great earnings, but if it goes down, they will have large losses. Apparently, all everyone seems to care about for now is the price of bitcoin. If the IRS does not change the rules by 2026 on bitcoin taxation that could be the beginning of the end of this unprofitable company!

DeepSeek monopolizes business stories

This past weekend, no matter what publication I picked up almost every article I read the new Chinese company, DeepSeek, was either a major portion of it or was fit into the article somehow. I read about how the Mag Seven will actually benefit from this new company. But of course, no matter what the Mag Seven does or says they always seem to come out the winner, no matter their valuations.

Who am I to argue paying 30 to 40 times earnings for a company with growth of only 6%? Even when I looked at reading an article about energy stocks, the first sentence I read was DeepSeek discussing running sophisticated models without using so much energy. Maybe the business media was on vacation and just didn’t feel like writing about much else. Even the recent news around tariffs seemed to get less press than DeepSeek.

What I got out of everything I read about the new Chinese company this weekend is AI is still the way of the future, but just as in the tech boom and bust there will be companies that will come out of left field that will destroy companies that became overvalued from the hype. Be careful how much you pay for any business or company; history does have a way of repeating itself. It just takes longer sometimes when you live through it.

Europe has a sick economy

For the last 20 years, Europe has had problems with the near collapse of the euro, a flood of refugees, Britain leaving the EU and the Russia/Ukraine war. I remember back in the 90s the EU was supposed to be a strong power that would have a great economy that competed with the US. However, over the last five years, which did include Covid, their economy has only grown 5%. People who like big government and regulations should take note due to the heavy regulations in Europe.

Think about the big tech companies in Europe... Yes, that is right you can’t think of any because there are none, the EU has pushed so hard to regulate big tech companies they have all left. With AI being the next big thing in technology, Europe leads once again with the number of AI laws passed. Another example of scale is energy and that would be Exxon with a value that is 600% greater than the value of BP, but sales are only twice as much. The reason appears to be Exxon continues to work on oil and gas production while BP switched its focus towards renewable energy, which is unprofitable at this time.

Going forward for 2025, add to Europe‘s problems the Tariffs coming from the US, which is looking for free trade. Europe is already calling foul claiming how can we treat our friends like this by adding tariffs. It is not the responsibility of the United States to carry Europe’s economy. They need to learn lessons from the United States to not increase regulations, but to reduce them and build an economy that produces rather than regulates.

Consumers buying a car would be hit hard by Tariffs

If you’re looking at buying a car in the next couple of months and you love Volkswagen models, you may want to wait until the tariffs are over or consider another brand. Volkswagen with about 42% of sales in the US coming from Canada and Mexico also owns Audi, Porsche, Bentley and Lamborghini, which also could be exposed to the tariffs. Honda has about 33% exposure and Toyota has roughly 28%. Surprisingly, Hyundai does not have much exposure at about 6% of sales and BMW checks in around 10%.

In 2023 roughly $200 billion worth of vehicles and auto parts came from Mexico and Canada, the bigger provider was Mexico with $147 billion. The average price of a car in the US is now around $46,200 and as the tariffs flow on through that will add another $3000 or so to the price of a car. Automobiles are already considered expensive. Since 2019 before the pandemic car prices have increased by 33%, which is taking quite a bite out of consumers budgets.

Companies making parts and assembling cars in Mexico or Canada are already in negotiations trying to have the car companies absorb some if not all of the costs. Some of the companies in Mexico or Canada will not be able to be profitable with the tariffs and could perhaps put them out of business. That will put pressure on the leaders of Mexico and Canada to abide to the requests in negotiations or risk economic decline if the tariffs last for months. My opinion, the United States will win the tariffs war and benefit in the fall.

Amazon can’t run a brick and mortar 

I guess I shouldn’t say Amazon can’t run a brick and mortar because they are running them, but they’re just not doing it very well. There’s no argument they are the best online retailer in the country and maybe the world for that matter. They have said they would like to be successful in the brick and mortar business as well, but looking at the results of the physical stores, sales only increased from $5 billion in the first quarter of 2023 to $5.2 billion in Q3 of 2024. That is only a 4% increase compared with their online stores that had sales growth of over 20 % during that time period.

I’m not sure why Amazon is so focused on growing brick and motor stores. Over the years they have had to close bookstores, fashion outlets, and a concept called 4-star that sold the best selling items from its website. Even the recent trial of Amazon Go stores have been a flop with the company reducing their footprint from 32 stores to about 16.

The convenience store marketplace is rather overcrowded with over 150,000 convenience stores across the US.

Whole Foods, which Amazon bought in 2017 was successful before they bought it but it doesn’t seem that Amazon has added much more value to the concept. Is it possible that Amazon just doesn’t understand in person relationships with customers? What is successful for Amazon is a technology called “Just Walk Out” which they have sold to more than 200 retailers, but they just can’t seem to use that technology themselves to build a major brick and mortar presence.