Smartinvesting2000

First Time Homebuyers Hit a Record Low With the high cost of housing and higher interest rates, people trying to get their first home dropped to a record low around 23% in 2024. The average age of the first-time homebuyer has increased 10 years over the historical average to 38 years old. The median income is now $97,000 and the first-time home buyers are coming up with an average down payment of 9% of the value of the home. Many of these young buyers are using FHA loans, which require a very small down payment and according to research roughly 30% of all FHA mortgages have a debt service ratio of over 50%. This means more than half of these buyers' incomes is going toward servicing debt. This could be a hard pill to swallow for young buyers with not much money left over for luxuries like vacations and new cars. However, if when they buy the home, they understand that if they really tighten their belts for the next three to four years, they will probably be fine. New home builders are doing what they can to try and get rid of the largest inventory of unsold homes on their lots since 2009. The median price of a new home is currently less than one percent higher than the median price of existing properties, which historically has seen a 17% premium. The home builders are using profits from their homes to buy down mortgages. Even though the 30-year mortgage was recently around 6.8%, home builders can buy these mortgages down which led buyers of new homes to a rate around 5%. Buying down these rates has cost home builders about 8% of the purchase price of the home. This reduces their profits but better than the alternative of sitting on unsold homes with a carrying cost for the builder. I don't see this situation getting better anytime soon because I'm not looking for a large decrease in mortgage rates and incomes over the next year will probably increase somewhere around 3 to 4%. We continue to believe the rapid increase in the price of homes over the last few years will not last and it will now take some time to get back to normal market. Maybe we will see a better real estate market in 2027 or 2028.   Is Bitcoin coming to your 401k? I have been concerned with bitcoin and crypto as a whole for several years for many reasons including fraud, illicit activity, and the fact that there is really no way to derive an intrinsic value for it since there is no earnings, cash flow, or anything really backing the asset class. I was disappointed to see the current Labor Department removed language that cautioned employers to exercise “extreme care” before making crypto and related investments available to their workers. They cited “serious concerns” about the prudence of exposing investors' retirement savings to crypto given “significant risks of fraud, theft, and loss.” While this isn't necessarily a full-on endorsement for placing crypto in 401k plans, it definitely seems like the administration is continuing on its path to try and normalize crypto as an established asset class. Even with this change in language I would be surprised to see a huge surge in cryptocurrencies within 401k plans. Ultimately, ERISA bestows a fiduciary duty on employers and company officials overseeing 401k investments and that means legally employers must put the best interests of 401(k) investors first and act prudently when choosing which investments to offer (or not offer). Given the extreme volatility within crypto I believe it would be a huge risk for these companies to offer it as it could open them up to lawsuits if there are major declines. We'll have to see what other changes are made as time progresses, but I don't believe crypto has any place within a 401k plan at this time.   Inflation report shows continued progress The personal consumption expenditures price index, which is also known as PCE and is the Federal Reserve's key inflation measure, showed an annual increase of just 2.1%. Core PCE, which excludes food and energy, showed a gain of 2.5%. Both results were 0.1% below their respective estimates. Overall, inflation has continued to cool and is now quite close to the Fed's 2% target. The question that remains is how will tariffs ultimately impact inflation? An economist from Pantheon Macroeconomics said that he believed core PCE would peak later this year between 3.0% and 3.5%, if the current mix of tariffs remained in place. I would say it is difficult to forecast the tariff impact since we don't know what will ultimately be passed on to the end consumer. It will definitely be interesting to see what numbers look like in the coming months, but ultimately, I believe most of the concerns around inflation are overblown and even if the rate for PCE is around 3%, I don't see that as being problematic for the economy.     Financial Planning: What it Means to be an Accredited Investor An accredited investor is someone who meets specific income or net worth thresholds—such as earning over $200,000 annually ($300,000 with a spouse) or having over $1 million in net worth excluding their home—and is allowed to invest in private securities offerings not registered with the SEC. These investments, which include private REITS, private equity, hedge funds, and startups, often promise high returns but carry significant risks such as illiquidity, limited transparency, and the potential for total loss. While many of these offerings are only available through fiduciary advisors—who are legally obligated to act in their clients' best interest—investors must still exercise caution. Fiduciary duty applies only in certain contexts (such as investment advice) and may not extend to related areas like insurance or commission-based products. Additionally, what qualifies as “acting in your best interest” is often subjective and open to interpretation. Working with a fiduciary does not guarantee protection, and investors should remain vigilant, ask questions, and independently evaluate any recommendation. Also, private investments aren't necessary better than public investments, so just because you qualify as an accredited investor doesn't mean you should be investing in private securities.   Companies Discussed: Regeneron Pharmaceuticals, Inc. (REGN), Intuit Inc. (INTU), Target Corporation (TGT) & Toll Brothers, Inc. (TOL)

The U.S. just received a downgrade to its credit rating, should you worry? Last week, Moody's announced it downgraded the United States sovereign credit rating from AAA to Aa1. While a downgrade is important to understand and can have negative consequences for interest rates, this downgrade did not seem too problematic. I mainly say that because Moody's was the last major credit rating agency to have the U.S. at the highest possible rating. The first downgrade carried the most weight in my opinion as it had the highest shock value. Standard & Poor's was the first to move in August 2011 and the stock market fell 6.66% the session after the announcement. Fitch then lowered its rating on U.S. debt in August 2023 and the stock market lost 1.38%. After this Moody's downgrade the stock market seemed to have little reaction as it actually had a small increase following the news. While this downgrade may sound scary, I don't believe it will have long term consequences considering the fact that US debt is still viewed as a very safe asset. With that said, the US does need to address the growing deficit problem as further downgrades from these credit agencies could cause problems.   Demand for electric vehicles is falling dramatically Electric vehicle sales in the month of April declined 5% while the overall car market grew by 10%. This is only the third monthly decline in four years for electric vehicles. The reason for the decline is consumers are watching their spending more than they have in a while and many of the deals and promotions for electric vehicles have disappeared. It was not just Tesla who had difficulty because of Elon Musk's political association, but even Kia, Hyundai and Ford experienced drops. Rivian was hit hardest on their R1T pickup truck as it saw a 50% decline in sales for April. With some of the crazy electric vehicle lease deals gone, consumers are also asking the question about charging related concerns. There are some car buyers who were considering buying an electric vehicle but they said it's not worth the stress of charging your vehicle all the time. It's just much easier to pull into a gas station that is always easy to find. This is only one month of electric vehicle sales and not a trend that has been going on for a while, but with the increased production of oil from OPEC and a large potential supply of oil in the future, gas prices should decline which takes away the incentive of paying more for an electric vehicle.   High risk, private market investments are showing up in more 401(k) plans Another big 401K provider called Empower who oversees $1.8 trillion in 401(k) assets for about 19 million people has decided it will start allowing private credit, equity and real estate in some of the accounts they administer later this year. I think this is a terrible idea for investors. I have seen the back end of these private deals and many times investors have made no money from them and can only get out a little bit of their money at a time, while they are suffering from low returns and high fees. No surprise Wall Street loves these private market investments because of high fees, which range anywhere from 1% to 2% of the portfolio balance on an annual basis. One way they are trying to sneak in the private market funds is with a 10% allocation in the popular target date funds. This is pretty sneaky because you may be thinking you're getting a pretty conservative stock and bond fund that becomes more conservative as you get older, but with a 10% allocation in these private assets I believe it will increase the funds risk and lower the returns going forward. As always, the bankers on Wall Street only care about generating more fees, and don't care if investors lose money as long as they bring in their billions of dollars in profits. If you see these in your 401(k) options, cross them off the list and stick to the traditional long-term investments that have worked for so many years now.   Financial Planning: Who Benefits from the new SALT proposal? The current SALT deduction allows taxpayers who itemize to deduct up to $10,000 of certain state and local taxes, most importantly their state income taxes and property taxes, from their federal taxable income. The new proposal in the House bill would raise this cap to $40,000 for households earning under $500,000, with a phaseout that fully eliminates the expanded deduction at $600,000. Married and single tax filers alike with incomes over $600,000 would be subject to the $10,000 SALT limit. This change is intended to benefit middle- and upper-middle-income taxpayers in high-tax states, while limiting the benefit for higher earners. The proposal also includes annual 1% inflation adjustments beginning in 2026. If the bill is signed into law in its current form, the larger deduction would apply beginning in tax year 2025. If passed, tax payers who make less than $600k in high tax states who own a home with a mortgage will see the biggest tax benefit and they may want to adjust their tax withholdings or estimated tax payments to account for it. However, the bill has not passed the Senate, and the final terms are likely to change.   Companies Discussed: CAVA Group, Inc. (CAVA), First Solar, Inc. (FSLR), Levi Strauss & Co. (LEVI), & UnitedHealth Group Incorporated (UNH)

U.S. Tariffs are hurting China Exports from China have dropped dramatically which has weighed on China's economy. This has caused protests due to lost jobs and wages in their economy. Exports from China to the United States dropped 20% in April, but China did pick up exports from other countries like Indonesia, Thailand and Africa. While this may help a little, the export dollars for China to these other countries pales in comparison to the mighty consumption of the US consumer. China's economy depends on exports considering the fact that in 2024 1/3 of GDP growth came from exports. The Chinese government is panicking a little bit with the central bank in China saying it would cut interest rates and inject more liquidity into the financial system. Some factories in China are pausing their production and laying off workers until things pick up again. Goldman Sachs estimates that roughly 16,000,000 jobs in China come from exports to the United States. With the news that tariffs are being lowered for 90 days it will be interesting to see how companies and these countries react. The US will still have a 30% tariff on many Chinese products, but that is much more manageable than the 145% that was in effect. It is important to remember this is a pause and that rhetoric could pick back up as negotiations continue. I do believe a reescalation in the trade war would really hurt the Chinese economy more than ours and I'm optimistic we will see a trade deal reached, but it will likely take time. I believe it is worth waiting for as a better trade agreement will benefit us for decades down the road.   Inflation continues to cool The headline Consumer Price Index (CPI) for the month of April came in at a 12-month rate of 2.3%, which was below the estimate of 2.4% and marked the lowest reading since February 2021. Core CPI, which excludes food and energy, came in at 2.8% which matched expectations and was in line with March's reading. Energy was a major help to the headline number as it fell 3.7% compared to last year with gasoline in particular down 11.8% over that timeframe. While this is all great many economists are worried about what the next few months will look like on the inflation front due to tariffs. Joseph Gagnon from the Peterson Institute for International Economics said he believes a 10% average tariff rate would add as much as 1 percentage point to the CPI after about six to nine months. While I would agree with the idea that inflation will likely increase in the months ahead, I still don't believe it will be to a problematic level for two reasons. First, we should remember there are several players that can absorb the costs from these tariffs. You have to consider the companies importing products can reduce their margin, there would be shipping/transportation companies that can reduce their costs, the company's manufacturing products can lower their prices, and then yes, the consumer is the last piece of the puzzle that could now have higher prices. With all that said I don't believe a 10% tariff would result in a 10% increase in prices due to all the places in the supply chain that can absorb some of the cost. The second reason I wouldn't be overly concerned is I wouldn't see the tariff as embedded inflation and it could likely be viewed as a one-time lift to prices that would then be lapped next year. Nonetheless this story will be interesting to monitor in the coming months to see what the actual impact is, but I do remain optimistic about our economy and the inflation outlook.   Could artificial intelligence create more jobs? Many people think that artificial intelligence, also known as AI, is going to reduce jobs for people. The CEO of IBM, who admits that AI has replaced hundreds of workers, said it has created more jobs than it has eliminated. He went on to say it frees up investment that the employer can put to other areas that include such jobs as software engineering, sales, & marketing. Normal things like creating spreadsheets and other routine tasks can be done with artificial intelligence, but it still takes a human to do the critical thinking on how to use that data to enhance business for the company. If you're working for a company and you don't have much contact with other workers that relate to your job, your job could be at risk of being replaced by AI. Make sure your job involves using data to work with other people, which should give you job security in the growing world of AI.   Oil at $50 a barrel? There is talk that we could see oil drop from around $60 a barrel down to $50 a barrel, which would be a big benefit for consumers at the pump. The reason for this is that OPEC and its allies are increasing production of oil faster than anyone expected. By June they could be producing nearly 1,000,000 more barrels of oil per day compared to current levels. The United States is currently the number one producer of oil in the world with production of nearly 15,000,000 barrels per day. If you're wondering does that meet our consumption? It does not as that stands at 19.6 million barrels per day. OPEC is not taking this sitting down and they want to regain market share. To do it appears they're willing to see lower oil prices. The reason why oil prices are expected to drop is that the demand is about the same as it was just one year ago, so the increase in production means we'll probably have an oil glut for a while. At $50 a barrel most oil companies can still make money off of producing oil, but US oil companies might stop doing stock buybacks and could no longer build new wells. What this would do is hurt supply in the future and oil would turn around and increase once again. If you invest in oil companies, you have to realize that supply/demand of oil will rule the price of the stock. But fortunately, most of the big oil companies pay a good dividend, which makes it a little bit easier to hold on when the stocks have a temporary decline. For consumers, this means the average cost per gallon of gasoline across the country, which is now around $3.20 per gallon, could drop to levels around $2.50 per gallon. Consumers in California may not see declines in the prices at the pump as California continues to drive refiners out of the state and reject refined gasoline from other states that do not meet a ridiculously high standard. If you want to blame someone for higher gas prices in California you can blame the governor and Sacramento for ridiculous policies on gasoline.   Financial Planning: Trusts and Retirement Accounts Do Not Mix Naming a living trust as the beneficiary of a retirement account—such as an IRA or 401(k)—is generally not a good idea due to potential tax inefficiencies and administrative complexity. Under the SECURE Act, the "stretch IRA" option has been largely eliminated for most non-spouse beneficiaries, and replaced with a 10-year rule requiring the entire account to be withdrawn within a decade of the original owner's death. If a trust is named as the beneficiary and it isn't specifically drafted to be the beneficiary of a retirement account, it may not qualify for this 10-year treatment and could face even faster distribution requirements, such as a 5-year distribution period, accelerating taxes significantly. Instead, it's typically better to name individual beneficiaries directly on retirement accounts to preserve flexibility and minimize tax impact. For those needing control over distributions—for example, to protect minor children or spendthrift heirs—a carefully drafted trust designed to meet IRS requirements should be used with the help of a qualified estate planning attorney. For most other cases, listing actual people or charities as beneficiaries is a much simpler and more efficient strategy.   Companies Discussed: Dick's Sporting Goods, Inc. (DKS), Charter Communications, Inc. (CHTR), Krispy Kreme, Inc. (DNUT) & Lyft, Inc. (LYFT)

Why I won't be buying Palantir technologies anytime soon When I'm out in public many times people ask me what my opinions are when it comes to investing, the markets or individual stocks. I have to say the one stock that people seem to be asking the most about recently is Palantir Technologies, their ticker symbol is PLTR. I believe I'm asked about this company because investors look at the hype of the past performance and the fact that this stock is up over 1,000% since going public in 2020. That creates excitement for investors, but is it worth buying now? The company currently trades around 60 times next year's estimated sales, and again that is sales not earnings! That makes it the most expensive stock in the S&P 500. There are signs that growth outside of the US is slowing and I don't like that they have three unnamed companies that accounted for 17% of the total revenue last year. Usually hype like this goes the same path, which ultimately results in large losses for buyers at this point in the cycle. A more recent example comes from the company Snowflake. In 2021, Snowflake hit an all-time high over $400 per share. Today that stock is down nearly 60% and trades around $167 per share. You don't hear much about it now, but I remember back in 2021 many people were asking about this company as well. I'm also not thrilled with Palantir's CEO, Alex Karp, who during an interview just a few months ago had some pretty nasty comments about analysts who don't agree with him on the stock price. He said “I love the idea of getting a drone and having light fentanyl laced urine spraying on analysts who've tried to screw us.” Maybe I'm old school, but I don't think that is anyway for the CEO of a company of any size to talk about anyone that does not agree with the CEO's position. Especially considering many times they aren't knocking the business, just the fact that this company's valuation is extremely crazy! I will also try my best to refrain from making any comments on Mr. Karp's hairstyle, but it just seems a little bit outlandish for a CEO to have that type of hairstyle. As far as the stock goes, maybe the craziness will continue and perhaps it does go higher, but if people ask me if they should buy, sell, or hold the stock, I would definitely say sell! I guess I now have to be careful of drones flying above my head that could be spraying fentanyl laced urine on me.   Good news, only 26% of big money managers are bullish A recent poll from Barron‘s magazine, which they conduct twice a year, found that only 26% of big money managers were bullish and thought stocks would go up while 74% were either neutral or bearish on stocks. They said 32% of respondents were bearish and that was the highest percent since 1997 while the 26% that were bullish marked the lowest reading since 1997. I think Barron's Magazine is a good source of information, but I was disappointed that they did not list the years of experience of the managers that were being polled. The reason for my concern is that the last big negative in the economy and the market was in 2008, which was 17 years ago. A current manager that graduated school at age 23 would now be 40 years old and they did not experience managing money through 2008. Living through and managing money through a challenge like that provided me with extremely valuable lessons that younger managers would not understand. But why is this negative report a good sign in my opinion? Their current asset allocation is only 64% in equities with 36% in other investments like fixed income and cash. They will not stay bearish forever and if they change direction in the next 6 to 12 months, they will start buying equities again, which will push up prices. If you're looking for value, the least attractive sectors were energy, real estate, and utilities. I have talked about my concerns around the Magnificent Seven and now only 10% of these managers think the Mag Seven will lead the market over the next six months. Even looking out 12 months only climbed 32% thought the group would lead the market. When asked about the strength of the US dollar going forward 12 months, 68% of the money managers said it will be weaker, which I agree with. Only 15% of the managers think it will be stronger a year from now. These surveys also provide an interesting insight into what other money managers are thinking.   Apple's stock continues to amaze me There seems to be so much negative news that continues to come out against Apple, but the stock continues to remain relatively steady given the amount of negativity. We all know about the tariffs and the delayed AI rollout, but I was definitely concerned by a couple announcements that would have large impacts on Apple's service revenue. This segment has been a bright spot for Apple, but in the most recent quarter it missed expectations and grew at just 11.6% compared to last year. The big concern I have is around Alphabet's estimated payment of around $20 billion annually to be the default search engine. There is concern if this will hold up given the ruling that Alphabet holds a monopoly and the need for remedies, but also this week Apple executive, Eddy Cue, added additional concerns. He stated the searches in Apple's Safari browser fell for the first time in April, something that has never happened in 20 years. He then added that the iPhone maker is looking at adding AI search options to the Safari browser. If they did this, would Alphabet really want to keep paying $20 billion a year for that right? I don't think so! The other major concern that seemed to get little attention was the fact that in a recent ruling a judge ordered Apple to immediately stop imposing commissions on purchases made for iPhone apps through web links inside its apps. This has enabled developers like Amazon and Spotify to update their apps to avoid Apple's commissions and direct customers to their own website for payments. This commission rate was around 27% for Apple and it could cost Apple billions of dollars annually. All this comes with the fact that Apple still trades around 25x 2026 earnings even though revenue is only estimated to grow low to mid-single digits. In my opinion, Apple really needs some good/exciting news to get this stock moving higher and at this time I don't see where that is going to come from.   Financial Planning: Breaking Down Retirement Income Taxation Retirement income varies widely in tax treatment, with some sources being far less tax-friendly than others. In order from worst to best, pension payments and traditional IRA withdrawals are among the least favorable—they're fully taxable as ordinary income at both the federal and state levels. Interest income from bonds, CDs, and savings accounts, as well as annuity earnings from non-retirement accounts, are also taxed as ordinary income at both levels and can trigger the additional 3.8% Net Investment Income Tax (NIIT) if income thresholds are exceeded. Rental income is similarly taxed but allows deductions and depreciation to offset some of the tax burden. Long-term capital gains and qualified dividends receive preferential federal tax rates—as low as 0%—but are still taxed as ordinary income in California and many other states. Social Security is partially taxed at the federal level—between 0% and 85% is included as taxable income depending on total income—but is not taxed in most states, including California, making it relatively tax-favorable. Roth IRA withdrawals are the most tax-friendly, being completely tax-free at both the federal and state levels if qualified. Understanding how each income type is taxed can help guide investment decisions during working years and inform how to structure withdrawals in retirement for optimal tax efficiency.   Companies Discussed: The Scotts Miracle-Gro Company (SMG), Block, Inc. (XYZ), Amazon, Inc. (AMZN) & McDonald's Corporation (MCD)

Should the United States delist Chinese stocks? At first thought with all the craziness of the trade war it sounds like delisting all the Chinese companies from the American stock markets may be a good idea. It is important to know that there are 286 Chinese companies listed on major US stock exchanges. You'll recognize some of the names like Alibaba, Baidu and JD.com. It is estimated by analysts at Goldman Sachs that US institutional investors currently own about $830 billion worth of Chinese stocks. That is more than two times what the Chinese own of US stocks as that is estimated around $370 billion. But a quick sell off could bring down stock valuations and make it difficult to get out of many of these stocks on both sides. An important piece of information I brought up a couple years ago was the Accountable Act which came to be in 2020. This allows the Securities Exchange Commission to ban foreign companies from trading if American regulators are not allowed to inspect the auditors for three years in a row. I always worry about Chinese companies because of what I call government accounting. They are not held to the same accounting standards there and I believe companies may list financial statements based on what the government tells them. There have been some Chinese companies that delisted themselves rather than going through an audit. I think that tells you quite a bit. My feeling is we should not delist all the Chinese stocks that trade on American stock exchanges under what is known as ADRs, but be sure that the Chinese companies have the same transparency as American companies when it comes to their financial statements. If we can't get that transparency, then those companies should be delisted.    Jobs report shows more evidence the economy is in good shape US nonfarm payrolls grew by 177k in the month of April, which easily topped the estimate of 133k. Jobs remained robust in health care as the sector added 51k jobs in the month of April and employment in transportation and warehousing and financial activities was also strong as the groups added 29k and 14k jobs respectively in the month. Other categories like construction, manufacturing, leisure and hospitality, and retail trade saw little or no change in payrolls, while government declined by 9k jobs in the month. Government jobs are now down by 26k since January, but remember employees on paid leave or receiving ongoing severance pay are still counted as employed. This likely means we will continue to see losses accelerate in this category as the year continues. Negatives in the report included the fact that employment numbers were revised down by a total of 58k in the previous two months. Also, April's reading was lighter than March's reading of 185k, but considering the unemployment rate remains at 4.2%, I still see these jobs gains as impressive, especially with all the negativity that people have been discussing. With that said, I still do anticipate weaker numbers in terms of the payroll additions in future months, but if the unemployment rate remains low I don't see that as a problem. On the inflation front, we also got good news with average hourly earnings rising just 3.8%. I see this as a healthy increase that does not put pressure on inflation like when wages were growing over 5% in 2022.     Job openings look problematic on the surface In the March Job Openings and Labor Turnover Survey, job openings totaled 7.2 million. This was below February's reading of 7.5 million and the estimate, which also stood at 7.5 million. This is still not super concerning to me. We tend to forget how strong the labor market has been and while we continue to see a softening, there is plenty of room before I see cause for concern. Just for reference, job openings in 2019 averaged approximately 7.2 million, in 2018 they averaged approximately 6.8 million, and in 2017 they averaged approximately 6.2 million. Compare that to where we are today and that should give you more comfort. Another area I saw as positive in the report was the fact that quits totaled 3.3 million, which produced a quit rate of 2.1%. This is important because if people were truly concerned about a major slowdown and thought they would not be able to find work elsewhere, I don't believe they would be quitting their jobs. These quit numbers are still quite close to 2019 levels, which many considered as a very strong economy. That year quits averaged approximately 3.5 million and there was an average quit rate of about 2.3%. Also in the report, we saw layoffs remained quite low at 1.6 million. Back in 2019, layoffs averaged around 1.8 million per month. There is no doubt that uncertainty remains and that will have some impact on businesses and their hiring plans, but in terms of it pushing the economy into a major recession, since we are coming from such a healthy level, I just don't see that happening.   Are we in the middle of a recession? The first reading of Q1 GDP showed a decrease of 0.3%. A recession is generally defined as two consecutive quarters of declining GDP, so some may argue we are half way there. Let us not forget in 2022 we did see two consecutive quarters of declining GDP as Q1 declined 1.4% and Q2 showed an advance estimate that was down 0.9%. After further research the second quarter ended up seeing a total reversal and it is now reported to have actually grown by 0.3%. Even with the difficult start, that year ended with a 2.1% growth rate. We also can't forget that the National Bureau of Economy Research (NBER) makes the official call on recession and they use a broader set of indicators that led them not to declare a recession in 2022. I say all of this because I still believe even if we hit a technical recession, if employment remains strong, I don't believe we would have an “official” recession. I am still unsure that we will even see Q2 GDP decline and we could also see revisions to Q1 that lift it to a positive reading. I say this because if you look at the actual underlying numbers in the report, it is not nearly as bad as the headline decline. On the positive front, consumer spending actually grew 1.8% in the quarter as services showed a nice increase of 2.4%. Also, private domestic investment saw a surge of 21.9%, this was led by investments in equipment as they grew 22.5% in the quarter. You might be asking with numbers like these how did we see a negative GDP? To start, government spending fell 1.4% in the quarter. This was led by a decline of 5.1% in spending by the federal government. The group as a whole ended up subtracting 0.25% from the headline GDP number. While this was impactful, the real reason for the decline in GDP was trade. Companies were trying to get ahead of looming tariffs and imports surged 41.3%. This compared to an increase of just 1.8% for exports. The huge discrepancy caused the trade component of GDP to decrease the headline number by 4.83%! While the economy is no doubt digesting these trade conversations and the tariffs, I still believe the economy is in alright shape when you look at the underlying numbers. I did also want to mention more good news on inflation as the March headline PCE showed an increase of 2.3%, which compares to last month's reading of 2.7% and core PCE came in at just 2.6%, which was a nice decline from February's reading of 3.0%. I believe these numbers will likely increase with the tariffs, but underlying inflation looks to be quite healthy.   Financial Planning: Protecting Yourself from Home Title Theft Home title theft is a type of real estate fraud where someone illegally transfers the ownership of your home by forging your name on title documents.  This is often done using stolen personal information to file fraudulent deeds with the county recorder's office. Once the title appears to be in their name, the thief may try to take out loans against the property, sell it to an unsuspecting buyer, or use it in other schemes that could put your home and finances at risk. This crime can go undetected for months if property owners aren't actively monitoring their title.  Having a mortgage or HELOC on your house can make it more difficult for a thief to steal your title since the bank has a lien against the property, but it is still possible. There are private companies that charge monthly fees to alert you of changes to your home title, but they do not prevent the title from being stolen.  You can also purchase home title insurance that will help pay for legal fees if you have to go to court if your title is stolen.  Homeowners in San Diego County can access a free alternative called “Owner Alert”. Jordan Marks who is the San Diego County Assessor/Recorder/County Clerk was behind this, and it is a great benefit that all San Diego property owners should take advantage of.  This service works by notifying you by email whenever a document is recorded against your property, helping you catch potential fraud early.  Signing up is simple and can be done on the San Diego County Assessor's website. You just need your name, email address, and parcel number and it provides the same type of monitoring offered by paid services, making it unnecessary to spend money for peace of mind when this tool is already available for free.   Companies Discussed: Zimmer Biomet Holdings, Inc. (ZBH), Take-Two Interactive Software, Inc. (TTWO), Northrop Grumman Corporation (NOC)Alphabet Inc. (GOOG)

Should you invest in gold for the long term? Gold has been a great asset to hold over the last year, but I remain a skeptic of investing in gold long term. I personally don't own any gold nor would I recommend buying gold at this point in time. While the recent gains in the price of gold look attractive, given the fact it is up over 20% so far this year in a difficult market, the long-term results aren't enticing. There are periods of time where gold has been a strong performer, but trying to guess those periods is extremely difficult. If we look at January 1980 gold reached $850 per ounce, but the important number here is that the inflation adjusted price was $3,486 per ounce. This means it was not until recently when gold hit $3,500 per ounce, we see an all-time high on an inflation adjusted basis and essentially you made no real gain for over 45 years. At the end of the day gold is just a piece of metal worth only what the next person will pay for it. It has no earnings, no interest, no rents. This makes it extremely difficult to value and given the added expenses for trading and holding gold, it just does not make sense to me. I will continue to invest in good strong businesses at fair prices as I believe that is the best strategy for long term wealth creation.   Why is the government supporting universities with large endowments? I've never really thought about this before. I have known that some big universities have multibillion dollar endowment funds, but I did not realize that 658 institutions have approximately $874 billion, which is nearly $1trillion in endowment funds. When I dug a little bit deeper, I discovered that in addition to these universities receiving money from the federal government via grants, some pay little or no income tax and also get a waiver on property taxes. If you're starting to get a little bit irritated at this point because your hard-working dollars are going to universities like Harvard that has a $53 billion endowment or Yale with a $41 billion endowment, you might be like me and think it's time that things change. The cost of tuition at Harvard is $57,000 per year and the President makes about $1.3 million a year. The president of San Diego State University has a salary of $531,000 and the cost for one year of tuition is about $8700. I'm sure the students at Harvard do receive a more prestigious education than at San Diego State University, but is it 6 1/2 times better? Do the students that graduate from Harvard make a salary that's 600% more than a graduate from San Diego State University? I don't think so. I wondered where money from these endowments goes and basically 48.1% of endowment distributions go to fund student financial aid, 17.7% goes to academic programs and research, 10.8% is used for endowment faculty positions and nearly 17% of the endowment funds are used for other purposes. Wouldn't it be nice to know what those purposes are? I think we need to take a hard look at what universities have in their endowment funds, their tax benefits and grants, and let's have more students here in the United States benefit from those billions of dollars to get a good education as opposed to the fat cats in the Ivy League towers of the universities. One other point I found interesting was the investing philosophy for these endowment funds. The goal is to earn around 8% per year and pay out 4.5% to 5% to fund those various expenses. This should then allow the endowment fund to continue growing. A big problem is many have not been able to achieve that goal with only 25% of 152 schools that were surveyed being able to meet the 8% return over the last 10 years. The other concern is if they can't cut expenses if there is a lack of grants, many endowments are not liquid. Harvard for example had 39% in private equity, 32% in hedge funds, 5% in real estate, 3% in real assets, and just 3% in cash. With all this said I really believe this system should be reviewed to better the entire country, rather than just the Ivy League system.   Could the trade wars hurt home prices? We are starting to see some cracks in the housing market, such as the delinquency rate on FHA mortgages, which cater to the high-risk borrowers who can't qualify for a conventional mortgage because they either have a small down payment or weak credit. The delinquency rate for FHA currently stands at 11% according to the Mortgage Bankers Association, it has not been at this level for 12 years. Unfortunately, and we warned against it, but many people have stretched themselves too far financially to get into a home over the last few years. Because it's only been two or three years since they bought their home, after fees and commissions they may not have much if any equity built up in that home. Another area of weakness that is being seen is with the homebuilders who have really increased their incentives because they have more completed but unsold homes. The builders are getting a little bit worried because they have not seen this many homes sitting on their lots with no buyers since 2009. The average incentives for homebuilders is usually around 5% of the total value of the home, but we are starting to see some incentives around 13% from big builders like Lennar. The volatility of the 10-year treasury, which mortgages generally trade off of, has not been helpful because it has had a wide trading range lately. This then makes it difficult for homebuyers to lock in a good rate. At this point in time, I think I would be waiting to buy a home until maybe late summer. I think there should be some good deals at that point in time as the tariff war should continue to progress and we should have a clearer picture of the economy by that time.   Financial Planning: Why converting 100% of pretax is bad Roth conversions can be a powerful tax planning tool, but like any tool, using it the wrong way can do more harm than good. One of the most common mistakes we see is the idea that you should convert all of your pre-tax retirement savings, like a traditional IRA or 401(k), to a Roth account. Everyone loves the idea of a tax-free retirement. When you convert money from a traditional IRA to a Roth IRA, you're moving it from a pre-tax account to a tax-free account, but there's a price, the converted amount is considered income and you must pay ordinary income tax in the year of the conversion. Once converted funds grow tax-free. The best way to think about money in a pre-tax account is that it is deferred income.  It will be taxed, it's just a matter of when.  When you make contributions to a pre-tax account, you are not receiving a tax deduction, you are deferring income to a future year. When performing a Roth conversion, you are voluntarily deciding to pay tax on that income, even though you don't have to yet.  This only makes sense if you are able to convert at a lower tax rate than you would otherwise be subject to if you did not convert.  This most commonly happens between the beginning of retirement, typically in your 60's, and the beginning of your required distributions at age 75. During that period taxable income is generally lower which means conversions may be done at a lower tax rate than when required distributions begin at 75. Required distributions can be a problem because if you have too much in pre-tax accounts, your required taxable distributions may push you into a higher tax bracket and trigger IRMAA.  Roth conversions help this by shifting funds from pre-tax to tax-free, therefore reducing the level of taxable distributions beginning at 75.  However there is an efficient amount that should be converted for every person.  Converting 100% of pre-tax funds means you will likely be in a lower tax bracket after the conversions, and will potentially not have any tax liability at all.  This doesn't sound bad, but it means you likely paid too much in tax to convert the funds in the first place.  Again, money in a pre-tax account is deferred income that will be taxed.  The goal is to have that income taxed at the lowest rate possible.  If you convert too aggressively you may be settling for a higher tax rate on the money coming out and not receive enough tax-free income from the Roth to justify it.  Instead, structuring withdrawals and conversions to keep your taxable income consistently low all through retirement will result in a higher level of after-tax income.   Companies Discussed: Netflix (NFLX), The Walt Disney Company (DIS), Albertsons Companies, Inc. (ACI) & UnitedHealth Group Inc (UNH)

Can the heartland states save our country? The heartland states are 20 states pretty much in the center of the country. They have been regaining economic strength over the years and currently about 39% of the US population lives in these states, according to the census bureau for 2024. The population growth in this area was above the rest of the country for the last five years with numbers that have not been seen in over 65 years. Employers in this area grew by 13.2% between 2020 to 2023 and business capital expenditures totaled $76.9 billion in 2023 and have seen an average annual growth of 9.43% since the beginning of Covid. These 20 states on average have established more business-friendly policies along with tax incentives and grant programs that draw businesses to their area. The East and the West Coast just can't seem to compete with the affordability of states in the middle of America. These mid America states have lower cost for land and utilities are far less being as much as 1/3 less than the rest of the country. This is according to the Energy Information Administration (EIA). The overall cost of living is lower, so wages can also be lower and still provide a good standard of living for their employees. In my opinion, states like California and others need to wake up and realize that perhaps stats in Middle America are on to something with policies that are attracting new residents. It would appear that foreign companies coming to the United States would build and prosper in one of these 20 states rather than states that are against business or have high taxes and other costs.   Consumer actions aren't matching their words We continue to see negative surveys about consumer confidence and sentiment, but you wouldn't think consumers feel bad after looking at the recent retail sales report. March sales climbed 4.6% compared to last year and if gas stations, which fell 4.3%, are excluded the report was even more impressive as it climbed 5.3%. Some of this is likely due to concerns over looming tariffs as consumers pull forward demand before expected price increases. Some areas that are likely more impacted did see large gains as motor vehicle and parts dealers saw an increase of 8.8% and sales at furniture and home furnishing stores climbed 7.7%. With those said gains were quite widespread in the report and areas that would not see a pull forward in demand like food services and drinking places still saw a nice gain of 4.8%. If people were truly worried about the economy, they would not be spending money at restaurants, especially considering the fact that dining out has gotten quite expensive. While I am expecting the tariffs to have a short-term impact on the economy, we must remember the consumer is coming from a point of strength with relatively low debt levels, a low unemployment rate, and balance sheets that have seen asset prices significantly increase over the last several years. I continue to believe that our economy and the consumer will be able to whether this volatility, but the numbers will likely decelerate from here. We will continue to watch these reports closely, but I again remain confident we will get through the concerns about these tariffs.   Are TV networks tapped out on sports deals? Last year Disney signed a $2.6 billion a year deal with the NBA; however, ESPN said goodbye after a 35-year relationship with the MLB where they were paying $550 million a year for their package of games. One area of growth that surprised me was Formula One car racing as over the last six years it has seen viewership double to 1.1 million viewers in a season. Liberty Media, who owns F1, is trying to get a rights package between $150-$180 million a year and all they're hearing is crickets. Research firms estimate that it is worth over $100 million but it is not at the $150-$180 million that Liberty wants. Netflix, Warner Bros. Discovery, Fox, Amazon and NBC are not showing much interest in the asset. Netflix will probably not bid since there's no real gain for them considering the estimate that 75% of F1 fans already have Netflix subscriptions. With so many people having Netflix, multiple big dollar sports packages probably don't make much sense for the company. In a couple of months around June, Warner Brothers is distributing an Apple film called F1, starring Brad Pitt. If you want to watch this movie, which is projected to be a blockbuster, you must subscribe to Apple TV. I almost feel like I want to add Apple TV to the five or six other subscriptions I have, but I can't watch everything I have access to now, so I should probably resist.   Financial Planning: Why Life Insurance Is a Poor Retirement Vehicle (And What to Do Instead) Cash value life insurance is often pitched as a tax-free retirement strategy. On the surface it sounds great. You get tax-deferred growth, tax-free loans, no contribution limits, and a death benefit, but when you look under the hood the numbers often don't work out. First, the returns simply don't compare. With Indexed Universal Life (IUL) or Whole Life, your cash value growth is limited by caps and participation rates, and you miss out on dividends. Add in the cost of insurance, admin fees, and other hidden charges, and the actual return on cash value often falls well below the market. Second, the fees get larger over time. The older you get, the higher your cost of insurance becomes which directly eats into your cash value. If you're taking policy loans and the policy lapses, you could even get hit with a massive tax bill in retirement. Third, the opportunity cost is huge. The high premiums needed to fund a policy could instead be invested in assets with better returns, more liquidity, and lower fees. Meanwhile, better tools for tax-free retirement income already exist. Most 401(k)s now offer a Roth option, allowing you to contribute after-tax dollars and grow your money tax-free, exactly what cash value life insurance offers. You can pair this with a Roth IRA or even a Backdoor Roth IRA if your income is too high to contribute directly. Together, these vehicles allow for substantial tax-free retirement savings without the complexity, high fees, or risk of policy lapse that come with life insurance. Don't let marketing hype cloud your long-term strategy. Run the numbers and stick with what works.    Companies Discussed: Nvidia (NVDA), Hertz Global Holdings (HTZ), Car Max, Inc. (KMX) & (DOW)

Why I'm so excited about the tariffs You may be thinking I'm a little bit crazy or blind to what is happening now, but I really wish people would be a little more patient and give this a few months to see the benefits. I want to remind people that the path we were on could've led to a collapse just like the great Roman Empire in 476 A.D. The United States in 2024 helped other countries grow their economies by sending them over $1 trillion in trade, not even close to fair trade and that is money we will never see again. Also in 2024, we saw our national debt climb to $35.5 trillion, an increase of roughly $2.5 trillion dollars in just one year! If that continued for the next 10 years, we would have debt of nearly $60 trillion, which would be unsustainable. Let's not even talk about the interest payments on a debt level that high. What is already starting to happen is not the foreign countries, but rather the foreign companies themselves want to continue to be profitable and understand they must produce and be located in the United States. Companies like Siemens from Germany, Taiwan semiconductor and Foxconn along with others have already made huge financial commitments that will benefit their companies and also our country as well. As the days, weeks, and months pass along, I believe you will be hearing about more companies coming to the United States. I believe immigration will also change because we simply do not have enough workers to fulfill all these new jobs. This could lead these foreign companies to bring their workers along, which would make them part of the US consumer base that buys houses, cars, and simple things like go to the grocery store and go out to dinner and even get haircuts. This is quite a bit different from the problems we have with immigration now as it has become a big burden on the US economy. I believe this would create a major win for our country, please be patient!   Good luck if you are trying to time the market If you have sold out of strong companies at good valuations during this market pullback, I believe you have made a huge mistake. As I have said there will be positive news that comes about and moves the market higher, which then leaves you with the question of what do you do now? Get back in? Wait for it to pull back? These trading mistakes can cost you immensely in the long run. I was surprised to see that going back over the last 20 years, seven of the top 10 days in stocks came within a two-week period of the worst 10 days. Which means many people that sold during the worst 10 days likely also missed those great days and the eventual recovery. A great example showing how quickly the tide can turn came on Wednesday after the announcement that there will be a 90-day pause on the full effect of tariffs since more than 75 countries have contacted US officials to negotiate a solution. There was also news that there is an “on the water clause” for cargo entering the US ports. This means any cargo “loaded onto a vessel at the port of loading and in transit on the final mode of transport on or after 12:01 a.m. EDT April 5, 2025, and before 12:01 a.m. EDT April 9, 2025, and (2) are entered for consumption, or withdrawn from warehouse for consumption, before 12:01 a.m. EDT on May 27 2025, are subject to the 10% additional rate in lieu of the country-specific rate of duty.” This is important as it will give companies more time to plan for elevated tariffs. These announcements led to a huge gain in stocks with the Dow climbing 7.87% on the day and the S&P 500 climbing 9.52%. The thing that surprised me was many companies that have China ties also rebounded substantially, but the tariff charged to China will be 125%, effective immediately. I'd be careful buying the dip here on all companies, but the important point I want to show is that the tide can turner quicker than you think!   How does the United States collect tariffs? It is quite the system and it's not as simple as a country/importer sending a check to the United States. The US doesn't do the calculation for every shipment that comes into the country. No matter how it comes in, if it is by truck, plane or ships the country doing the importing is the one that calculates the tariffs and sometimes they use what are known as customs brokers to do the calculation for them. It may surprise you that it is somewhat on the honor system. Before a shipment approaches the border, the importer or the customs broker files electronically the paperwork and says what they are bringing and how much they owe. When the ship pulls into port, the information is reviewed by customs agents before they allow the goods to be unloaded and released. It is kind of like when we file our tax returns. It is on the honor system that you put in all the correct information and just like you may be audited on your tax return, customs do perform random inspections to verify what is being brought in and that the tariff amount is correct. Importers have an account with customs and pay the duties to them. If they use a licensed customs broker, then that broker would make the payment. After all this is completed, whoever imported the goods has 10 days to pay the duties. The penalties are pretty hefty if the importer does not pay within 10 days as they will be hit with admin fees, interest, and other penalties along with the biggest concern which would be suspension of deliveries to the United States. I would definitely say it is in the best interest pf these importers to pay the United States customs within 10 days.   China may look at other avenues to hurt the US in this trade war I've said this before, but the tariffs on Chinese goods hurts them more than their tariffs on our goods. The simple math on it is the U.S. exported $143.5 billion of goods to China in 2024, while importing products worth $438.9 billion. Trade is way more important to their economy considering the fact they are a net exporter and a large one at that. In 2024, China exported roughly $3.58 trillion worth of goods, while importing just $2.59 trillion worth of goods for a surplus around $1 trillion. This makes trade a huge part of GDP as net exports contribute around 20% of GDP. The US on the other hand is a net importer so our trade deficit actually subtracts from GDP. What else can China do to harm the US? China did issue an alert warning its citizens of the potential risk of traveling to the US and attending schools there. Although there were approximately 1.6 million Chinese tourists that visited the US in 2024 and more than 250,000 students enrolled in schools, I don't see this advisory as too problematic especially considering there was an estimated 77.7 million people from other countries that visited the US in 2024. The big concern people have is China selling our debt to drive up borrowing costs. I was disappointed by an article that said China could crush our housing market by selling mortgage-backed securities. Seemed a little dramatic to me considering foreign countries only owned 15% of the total outstanding mortgage-backed securities. Top owners did include China, Japan, Taiwan, and Canada, but I don't see those other players selling at this point in time to harm US markets. It appears China holds just around 2-3% of these mortgage-backed securities and has been selling them over time with holdings down 8.7% year over year in the month of September and down 20% by the start of December. Even looking more broadly at U.S. treasury securities, China owned just $760.8 billion as of January 2025, which would represent about 2.2% of the total U.S. federal debt. Be careful falling for click bait, as I don't believe China has the ability to “crush” our housing market. It would likely cause interest rates to increase slightly, but an outright crash would be extremely unlikely. Overall, while this trade war may hurt us, I still firmly believe it will have a far larger negative impact on the Chinese economy!   Why You Should Never Buy a Certificate of Deposit (CD) Again For decades, certificates of deposit (CDs) have been a go-to option for savers looking to earn a little extra interest while keeping their money safe. However, in today's financial landscape, CDs have become nearly obsolete, offering little to no advantages over more flexible and higher-yielding alternatives. One of the biggest drawbacks of CDs is their lack of liquidity. When you lock your money into a CD, you typically agree to keep it there for months or years. Withdrawing early results in penalties, often forfeiting several months' worth of interest. High-yield savings accounts, on the other hand, offer similar or even better interest rates while allowing you to withdraw funds at any time. Many online banks now offer savings accounts with yields that rival or exceed CD rates, giving you the best of both worlds: competitive returns and unrestricted access to your money. Another option is U.S. Treasury Bills (T-Bills) which are one of the best alternatives to CDs, offering higher returns with even greater security. Backed by the U.S. government, they are virtually risk-free and often yield more than CDs of similar durations. Additionally, T-Bills offer tax advantages, as the interest earned is exempt from state and local income taxes—something CDs cannot provide.  Money market accounts provide another strong alternative to CDs. They often have rates similar to or higher than CDs but come with added flexibility and liquidity. Additionally, money market funds that hold federal or municipal debt come with some tax-exempt income as well.  CDs may seem like a safe, simple choice, but in reality, they are an outdated savings vehicle that rarely makes financial sense anymore. Whether you choose a high-yield savings account, T-Bills, or money market funds, there's always a better alternative that offers higher returns, more liquidity, or better tax advantages.   Companies Discussed: RH (RH), Caterpillar Inc. (CAT), Harley-Davidson, Inc (HOG) & Warner Bros. Discovery, Inc (WBD)

Tariff announcements cause market chaos           In an effort to balance trade relationships across the globe, several new tariff announcements were made on April 2nd. This caused the markets to decline sharply in Thursday's session with the Nasdaq closing down nearly 6% and the S&P 500 closing down nearly 5%. I must say I was not necessarily surprised by that decline, but was more surprised by the run up in the market in the days leading up to the announcement. The administration has been talking about these tariffs for months and I for one was not necessarily surprised by the actions they plan on taking. The U.S. will be implementing a baseline tariff rate of 10% on all countries and that goes into effect on April 5th. After research into trade practices from other countries including tariffs, currency manipulation, and trade barriers the U.S. will also be implementing higher duties on several countries. This includes an additional 34% on China, which comes on top of the previous tariffs for a new effective rate of 54%. According to the administration, this compares to a calculated tariff rate of 67% from China. Other tariffs included a 20% rate on the European Union vs a 39% calculated rate on our goods, a 46% rate on Vietnam vs a 90% calculated rate on our goods, a 32% rate on Taiwan vs a 64% calculated rate on our goods, and a 24% rate on Japan vs a calculated rate of 46% on our goods. This is just a small sample as more than 180 countries and territories will be facing these reciprocal tariffs. The problem here is the bottom for stocks might not be in as there will likely be continued announcements from other countries with their response. Some countries like China, France, Canada, and Germany have responded with a combative tone and a promise to fight back. I continue to believe this trade war will not be solved overnight, but I must say with the pullback there definitely appears to be some opportunities surfacing. I'd be careful waiting for the all clear on this as by the time that comes, you may have missed some great opportunities.     Trade barriers increase around the world It is not just the US that is increasing tariffs, many countries around the world are also increasing their tariffs. There are some economists predicting that we could be headed to the biggest increase in protectionism since the 1930s, when the Smoot-Harley tariff act was in place. Back then the average tariff rate in the US was nearly 30%. Today it is around 8.4%. When it comes to the group of 20 leading economies in the world, there are roughly 4650 import restrictions, of which the US has roughly 1000. The EU, China, Canada, Mexico account for roughly 700 restrictions with the other 15 countries accounting for 3000 restrictions. Some people feel the United States is being aggressive by adding all these tariffs to products coming in to our country, but when you look at the numbers and the facts, it appears we are just playing catch-up and we are way behind the rest of the world as they have been putting tariffs on our products going into their countries. I don't understand why we are singled out as being such a bad country and unfriendly to other countries just because we want free trade in the world. I'm sure if they dropped their tariffs, we would do the same.   Jobs Report shows some positive news on a difficult day for the market With all the news around tariffs and trade, it's almost like everyone forgot that a jobs report was released on Friday. Job growth remained very healthy with nonfarm payrolls increasing by 228,000 in the month of March. This easily topped the estimate of 140,000 and was a nice increase compared to February's reading of 117,000. The previous two months did see negative revisions of 34,000 in the month of February and 14,000 in the month of January. The unemployment rate did tick higher to 4.2% from last month's reading of 4.1%, but this was largely due to an increase in the labor force participation rate. A major positive on the inflation front was wage inflation came in at annual rate of 3.8%, which was down from last month's reading of 4.0% and was more in line with a healthy level that creates growing wages but puts less pressure on inflationary forces. I was surprised to federal government positions declined by just 4,000 in the month, but yet a report Thursday from Challenger, Gray & Christmas indicated Doge-related layoffs have totaled more than 275,000 so far. Apparently, the BLS noted that workers on severance or paid leave are still counted as employed, which would have a large impact on the employment numbers. It will be interesting to see how the employment situation shakes out in this category and if the private sector can absorb those lost jobs. It's hard for some to look through the noise of all the trade announcements, but I still believe the economy is in alright spot and the growing concerns for recession may be overblown.     What is a Solo 401(k)? A Solo 401(k) is a retirement savings plan designed for self-employed individuals or business owners with no employees. Also known as an individual 401(k), this plan offers significant tax advantages and higher contribution limits compared to other retirement accounts, such as SEP-IRAs.  One major advantage of a Solo 401(k) is the ability to contribute as both the employer and the employee. For 2024, the contribution limit as an employee is $23,000 (or $30,500 if age 50 or older), which can be made on a pre-tax or Roth basis. For employer contributions, the limit is up to 25% of compensation, bringing the total maximum contribution to $69,000 (or $76,500 for those 50+). Many plans now allow employer contributions to be made on a Roth basis as well. To be eligible, you must be a business owner with no full-time employees, which includes sole proprietors, independent contractors, freelancers, and small business owners. However, spouses of business owners may also participate, effectively doubling the possible contribution. Another key benefit is that a Solo 401(k) can be paired with backdoor Roth contributions, making it an attractive option for high-income earners looking for additional tax-advantaged savings. This offers a distinct advantage over Traditional IRAs and SEP-IRAs, which can trigger taxes on backdoor Roth conversions. A Solo 401(k) is an excellent retirement savings tool for self-employed individuals due to its high contribution limits and tax benefits. Additionally, some business owners may still be eligible to make a 2024 employer contribution if completed before the tax filing deadline.   Companies Discussed: LPL Financial Holdings Inc. (LPLA), Deckers Outdoor Corporation (DECK), Apple, Inc. (AAPL) & Delta Air Lines Inc. (DAL)

US retailers push back against tariffs I believe it is good news retailers are not pushing back against the US, but against countries where they buy products from. Companies like Home Depot, Walmart and Target are pushing back against production coming out of China. If a tariff is 10% the companies are pushing for the country to pick up the total cost and when tariffs jumped to 20%, they are getting push back on reducing costs by that amount but still having China producers pick up at least half. The companies are also looking at their profit margins and what they are doing is not increasing prices across the board, but perhaps raising prices on other items that are in higher demand and only raising the price slightly on products with less demand. The companies are also absorbing some of the cost themselves as opposed to passing the entire cost onto the consumer. In the end, the producer, the company, and the consumer will all absorb part of these tariffs and there may not be that much of an increase in price for many of these products. Unfortunately, I'm sure the regular media will find some products that went up dramatically and only discuss those. The big companies are also pushing for alternative places to produce products if China will not negotiate any reduction at all. Some companies are looking at producing the products here in the United States, which would be a win all the way around and I believe it would be the best thing for the United States.   Are 401(k) investors starting to panic? A 401(k) is designed to be held for many years and should not be traded based on short term news. Unfortunately, the past month has seen the most trading activity in almost 5 years for 401(k)s. Individual investors added over $30 billion to money market funds in the first week of March alone. That type of activity in money markets has not been seen in the past year. In the first couple weeks of March, trading in 401(k)s was 400% above the normal level as people watched the market decline and they let their emotions take over as they headed to money markets. This is a huge mistake! Decision making seems to be politically driven. If people like the current administration, investors are seeing it as a buying opportunity. On the other hand, if they hate the new administration investors are either looking at going to cash or maybe shifting their investments internationally. Your retirement account is for the rest of your life and an investor should not be making decisions based on the current administration's actions considering it's such a small blip in the timeline of 30, 40 maybe 50 years of investing. Investors should go back to the basics and realize they are investing into American companies based on their earnings and what they are paying for those earnings. The country and the economy will always ebb and flow, but to try and figure out the best time to sell and buy has always been a losing game in the long term. If you have in your 401(k) good quality investments that are not overpriced, don't worry about the short-term movements on a month-to-month basis. You should think about your investment plan not just year to year, but 5, 10, 15 years down the road, maybe even longer.   Inflation readings and consumer expectations are telling two different stories The Fed's preferred measure of inflation known as the core PCE showed an increase of 2.8% in the month of February, which was above the expectation of 2.7% and last month's reading of 2.7%. Headline PCE includes the volatile categories of food and energy and showed an increase of 2.5%, which was in line with expectations and matched January's reading. While the core PCE was a little hot, I don't believe that rate of inflation is overly problematic. It would likely not be enough to get the Federal Reserve to lower rates, but it also would not be concerning enough for them to even consider increasing rates. Their wait and see approach is likely still in place and I'm optimistic, even with upcoming tariffs, there should be room to lower rates as we procced through the rest of 2025. Many consumers on the other hand seem very concerned about inflation with the final reading of the University of Michigan's consumer sentiment survey showing expectations for inflation at a 5% rate one year from now and over a five-year horizon, the outlook now is for 4.1%. This marked the first time since February 1993 the reading was above 4%. I do believe these respondents are way off on their forecast and would be shocked if it came to fruition as that would be more than double the Fed's 2% target. We talked about why we don't like this survey in the past, but in case you missed it, the survey is tiny. It appears the survey typically interviews around 600 households each month for the preliminary report and around 800 for the final report. Considering there are over 130 million households in the US, I just don't see the survey as a strong indicator.   US retailers push back against tariffs I believe it is good news retailers are not pushing back against the US, but against countries where they buy products from. Companies like Home Depot, Walmart and Target are pushing back against production coming out of China. If a tariff is 10% the companies are pushing for the country to pick up the total cost and when tariffs jumped to 20%, they are getting push back on reducing costs by that amount but still having China producers pick up at least half. The companies are also looking at their profit margins and what they are doing is not increasing prices across the board, but perhaps raising prices on other items that are in higher demand and only raising the price slightly on products with less demand. The companies are also absorbing some of the cost themselves as opposed to passing the entire cost onto the consumer. In the end, the producer, the company, and the consumer will all absorb part of these tariffs and there may not be that much of an increase in price for many of these products. Unfortunately, I'm sure the regular media will find some products that went up dramatically and only discuss those. The big companies are also pushing for alternative places to produce products if China will not negotiate any reduction at all. Some companies are looking at producing the products here in the United States, which would be a win all the way around and I believe it would be the best thing for the United States.   Are 401(k) investors starting to panic? A 401(k) is designed to be held for many years and should not be traded based on short term news. Unfortunately, the past month has seen the most trading activity in almost 5 years for 401(k)s. Individual investors added over $30 billion to money market funds in the first week of March alone. That type of activity in money markets has not been seen in the past year. In the first couple weeks of March, trading in 401(k)s was 400% above the normal level as people watched the market decline and they let their emotions take over as they headed to money markets. This is a huge mistake! Decision making seems to be politically driven. If people like the current administration, investors are seeing it as a buying opportunity. On the other hand, if they hate the new administration investors are either looking at going to cash or maybe shifting their investments internationally. Your retirement account is for the rest of your life and an investor should not be making decisions based on the current administration's actions considering it's such a small blip in the timeline of 30, 40 maybe 50 years of investing. Investors should go back to the basics and realize they are investing into American companies based on their earnings and what they are paying for those earnings. The country and the economy will always ebb and flow, but to try and figure out the best time to sell and buy has always been a losing game in the long term. If you have in your 401(k) good quality investments that are not overpriced, don't worry about the short-term movements on a month-to-month basis. You should think about your investment plan not just year to year, but 5, 10, 15 years down the road, maybe even longer.   Inflation readings and consumer expectations are telling two different stories The Fed's preferred measure of inflation known as the core PCE showed an increase of 2.8% in the month of February, which was above the expectation of 2.7% and last month's reading of 2.7%. Headline PCE includes the volatile categories of food and energy and showed an increase of 2.5%, which was in line with expectations and matched January's reading. While the core PCE was a little hot, I don't believe that rate of inflation is overly problematic. It would likely not be enough to get the Federal Reserve to lower rates, but it also would not be concerning enough for them to even consider increasing rates. Their wait and see approach is likely still in place and I'm optimistic, even with upcoming tariffs, there should be room to lower rates as we procced through the rest of 2025. Many consumers on the other hand seem very concerned about inflation with the final reading of the University of Michigan's consumer sentiment survey showing expectations for inflation at a 5% rate one year from now and over a five-year horizon, the outlook now is for 4.1%. This marked the first time since February 1993 the reading was above 4%. I do believe these respondents are way off on their forecast and would be shocked if it came to fruition as that would be more than double the Fed's 2% target. We talked about why we don't like this survey in the past, but in case you missed it, the survey is tiny. It appears the survey typically interviews around 600 households each month for the preliminary report and around 800 for the final report. Considering there are over 130 million households in the US, I just don't see the survey as a strong indicator.   Companies Discussed: Nike (NKE), Stanley Black and Decker (SWK), Wingstop (WING) & Viasat (VSAT)

Is there more pain coming for the stock market? Both the NASDAQ and the S&P 500 have now hit correction territory and people are hoping that the worst is behind us. I would tell people to be prepared for more pain. The tariffs are still a big concern and the uncertainty around them has not cleared. Also, even with the pullback valuations for stocks are still high. We base our concerns on the fact that many valuation ratios are elevated compared to historical levels, but one that really stands out is the CAPE ratio, which stands for cyclically adjusted price-to-earnings. This was developed by professor Robert Shiller many years ago and the ratio uses a 10-year average of inflation adjusted earnings to value stocks. In January, it was at 37.74, which was the third highest level in the past 100 years. Not only was it the third highest level, but it was higher than what it was in 1929. After the ratio hit these high levels in the past, stocks declined dramatically. I believe with the headwinds ahead, we could be in for some stormy waters over the next 3 to 6 months.   How much more do top consumers spend? When looking at consumer spending it is obvious that is not a constant level straight across the board and people making more money would obviously be spending more money in the economy. But just how much more is the high-end consumer spending than the average consumer? The top 10% of consumers account for 49.7% of consumer spending. If you're thinking that sounds high, you are correct. You would have to go back to 1989 to match that type of imbalance for consumer spending. Is it a bad thing? Not really. The high-end consumer is what is keeping the economy going overall as it creates jobs and allows for the continued movement of money.   Holding stocks long-term doesn't always pay off You probably have heard that you should hold stocks for the long-term and you'll be fine. I generally I agree with this statement, but there are always exceptions to the rule and that holds true here. If you look at different 10-year holding periods, you will see more losing periods than you probably expected. As an example, the 10-year period ending February 2009 had a loss of 37.4%. There are other 10-year holding periods such as the ones ending September 1974, August 1939, June 1921, October 1857 and April 1842 that all had losses ranging from 23 to 37.3 percent. Those losses are in real terms adjusted for inflation. One reason these periods had great losses is they were generally periods when there was high speculation that then caused prices to rise to elevated levels just to see them fall back to reality. This is why it is important for investors to not just buy into a story of a stock, but to understand what they are paying for the earnings, sales, book value, and cash flow of the business. If you don't keep your eye on these valuation ratios, you would not realize when the stock becomes overpriced and you could end up with a big loss and then be left wondering what happened. I've been managing money for over 40 years and have continued to keep my eye on the ball as far as what we pay for any investment whether it is stock, real estate or bonds. If you invest blindly just based on the stock going up and the hype around the story, you could end up with a period of 10 years where you made no gains and then think stocks are risky or a bad investment. In a situation like that, it is similar to driving down the street with a bag over your head not seeing what is around you.   Financial Planning: What is Form 5498? When funds are distributed from a retirement account, a 1099-r is generated and used to file your taxes to report what kind of distribution it was.  This is true whether the distribution is taxable or not.  For example, if you rolled money from a 401(k) to an IRA, it is a non-taxable rollover, but a 1099-r is still created since funds left the 401(k) which needs to be reported.  A Form 5498 is generated when funds are received by any type of IRA for any reason.  So, if you made contributions, conversions, or recharacterizations with a traditional, Roth, SEP, or Simple IRA, you will receive a 5498 stating what happened.  Depending on what you did, you will likely need to report the activity on your taxes.  The problem is, in many cases the Form 5498 is not ready until May of the following year, even though taxes are due the previous month, on April 15th.  Here are some examples where this can create problems. If you did an indirect rollover where you withdrew retirement funds and replaced them within 60 days, the withdrawal should not be taxable.  However, if only the 1099-r from the distribution is reported because there is no 5498 that shows money was replaced, it may be reported as a taxable distribution rather than a rollover.  If you are doing backdoor Roth contributions, a 1099-r is generated when the funds are converted from the traditional IRA to the Roth.  If it is not also reported that a non-deductible contribution was first made to the traditional IRA, the conversion may be treated as a taxable conversion.  Lastly, if you have been making deductible traditional IRA contributions, but there is no 5498 showing the contributions, you may not receive the tax deduction.  I don't know why this form comes later than other tax forms, but this is necessary to be aware of to correctly report tax information and avoid unnecessary tax.   Companies Discussed: Tesla, Inc (TSLA), Lockheed Martin Corporation (LMT), Lear Corporation (LEAR) & Gilead Sciences, Inc.

Should private equity be allowed in your 401(k)? 70 million Americans have roughly $12 trillion in retirement accounts and the high fee private equity firms want a piece of that. Private equity comes with higher risk than traditional stocks and bonds that are found in retirement accounts. The big difference with private equity is they are generally illiquid investments in companies that are too small or risky to issue publicly traded shares. The businesses they invest in don't issue quarterly reports on earnings and the valuations can at best be called questionable. It should be noted that private funds can tie up investors' money for years and may give you some type of loose valuation of what your investment is worth. The fees that these funds charge is around 2 1/2%, which is well above the average fund of a half percent or so in current 401(k)s. Private equity tries to claim their investments far outperform the stock and bond markets, but a study from Boston College in 2024 found that long-term returns for pension funds, which allow alternatives, generated about the same investment return as a 60/40 split of stocks and bonds. Wall Street and the owners of these private equity funds just want to generate more fees even if it means putting your 401(k) in danger with high-risk investments with little to no liquidity. I'm in hopes that private equity's pursuit of trying to get their hands on your retirement accounts hits a brick wall and the regulators protect your retirement plan.    A bitcoin strategic reserve is a terrible idea Last week there was an executive order signed to create a strategic bitcoin reserve for the United States. Crypto enthusiasts were pleased by the action, but disappointed that the order did not specify a buying schedule or clear strategy to buy more bitcoin. In the current fashion, the reserve will include coins that are already owned by the government that it seized from past law enforcement actions. The US currently owns more than 198,000 bitcoins that are worth about $17 billion. Given our large debt and the current deficit, I think it is just silly to borrow money and buy a volatile asset like bitcoin. The government is not here to make investment profits with our taxpayer dollars, if that were the case why wouldn't they also buy individual stocks? Something like the Strategic Petroleum Reserve makes sense as that commodity plays such an important part in our day to day lives. Bitcoin has no impact on our day to day lives and I just can't see what the strategic benefit would be outside of shooting for investment gains. We should be focused on paying down debt and reducing deficits rather than trying to generate investment returns with taxpayer money. I think even the action of keeping seized bitcoin is a mistake as that could be used to reduce debt. As for the price of bitcoin, I believe it could keep falling. There seems to have been a lot of catalysts that took place last year including the launch of ETFs and a more crypto friendly administration taking office. I don't see many new catalysts in the near future, which could lead to steeper declines. For me, I don't want my own dollars or my tax dollars in bitcoin or any other cryptocurrency for that matter.   Inflation report puts stagflation risks at ease The headline Consumer Price Index (CPI) for February came in at 2.8%, which was below the estimate of 2.9% and less than January's reading of 3%. Core CPI, which excludes food and energy came in at 3.1%, which was also below the estimate of 3.2%. This reading was less than January's reading of 3.3% and it marked the lowest increase since April of 2021 when we saw inflation rise 3%. That was really the beginning of the inflation problems as the March 2021 core CPI rate was 1.6%. I've said it before, but with inflation at these levels I really don't see it as a problem. There are some areas like eggs that increased 59% compared to last year, but outside of that most categories are quite tame. Shelter also continues to lift the inflation numbers as the index rose 4.2% in the month of February. This was the smallest increase for the shelter index since December 2021, but it still remains above both the headline and core numbers, which means it is putting upwards pressure on those reports. This report would have shown limited impact from the recent tariffs, so it will be interesting to see in the coming months what the numbers look like as the tariffs work their way through supply chains. I still believe inflation will not be a problem in 2025 and that the Fed will be able to cut rates a few times this year.   Another win on the inflation front The February Producer Price Index (PPI) showed no change in the pricing level when compared to January. For the 12-month period it rose 3.2%, which was much better than last month's reading of 3.7%. Core PPI, which excludes food and energy actually fell 0.1% from January and the annual increase of 3.4% was down from last month's reading of 3.8%. This report helps us breathe a sigh of relief as December and January produced hotter readings. As we've been saying, inflation will not go down in a straight line and month to month the readings will be bumpy, but the general trend should be lower. As we said with CPI, it will be interesting to see how the tariffs impact these inflation reports in the coming months. One thing that does not get much coverage is that we had tariffs back in 2018 and inflation did not see a major spike. Hopefully that will be the case again and we can move on from this battle against inflation that has lasted a few years now.   Who Benefits from Repealing the “SALT” limit? One of the more controversial changes in the Tax Cuts and Jobs Act of 2017 was the $10,000 limit placed on the State and Local Tax (SALT) itemized deduction.  Prior to 2018, those who itemized could deduct the full amount of state income taxes and property taxes on their federal tax returns.  Under current law through the end of this year, only the first cumulative $10,000 of these taxes is deductible.  This obviously hurts high earners in states like California.  Someone making half a million dollars per year and paying $40,000 in California income taxes only receives a deduction on the first $10,000 and receives no additional deduction for any property taxes they pay. While there isn't as much public sympathy for high-income earners paying more tax, this limit also impacted California homeowners, especially first-time homebuyers.  When buying a home in California, property taxes are about 1.2% of the purchase price of that home. Thanks to Prop 13, property taxes increase minimally after purchase and generally much less than the property value increases. This means the longer you own a home, the lower your property taxes are relative to the fair market value of the property.  This also means that property taxes are most expensive when first buying a home.  In California, home values are high, mortgage rates are high, insurance costs are high, utilities are high, and because of the high value of homes, property taxes are also high. Virtually everything about homeownership in California is expensive, so it's no wonder people are struggling to afford a house. This phenomenon has gotten worse in recent years, but it's not new.  Regarding the SALT deduction, it is common for homeowners to have state income taxes and property taxes that exceed the $10,000 limit even if they're not really “high-earners” because of the income needed to simply afford a home and its corresponding property taxes.  A young family could easily be looking at $20,000 to $25,000 just in state and local taxes, most of which would not be deductible due to the SALT limit.  While the SALT deduction is mainly thought of as a high-earner issue, a lot of normal people in California would benefit from its repeal, especially if federal tax rates do not increase back to their pre-2018 levels.   Companies Discussed: DoorDash, Inc (DASH), Rocket Companies, Inc. (RKT) & Verizon Communications Inc. (VZ)

Church pension plans may be at risk I hate to say this because we all want to believe that one of the safest places to go is church. Unfortunately, there are church pension plans like Saint Claire's Hospital in Schenectady, New York and Saint Joseph Hospital in Rhode Island that had no or very little money left for retirees when it was time for their retirement. You may be wondering how can that be? Pension plans should be safe especially under federal law where there are protections from the Employee Retirement Income Security Act of 1974, which is commonly known as ERISA. You may also think if you know something about pension plans that employers must pay into the pension benefit guarantee corporation or what is also known as the PBGC. Unfortunately, when the government came up with the federal law on pension plans to protect retirees, there was concern about the constitutional separation of church and state and they did not want to cross that line. So they exempted churches and employers related to the church, which would include schools, hospitals and publishers. Church pension plans are allowed to contribute to the pension benefit guarantee corporation, but they're not required to and unfortunately most do not. It is sad that we cannot trust some of our religious leaders to protect our financial future. If you or someone you know works for a type of association related to a church and they have a pension plan they may want to dig deep into it to make sure it's really there. Unfortunately, there have been church pension plans that have exaggerated the returns on their investments in their pension plan and ultimately collapsed when people began retiring. It may be unfortunate but it could be wise to have a secondary retirement plan if you work for a church just to be on the safe side so you have something there in your golden years!    Structured products are back from 2008 Structured products that destroyed the economy in 2008 are back once again. In 2008 there was nearly $1.8 trillion of structured products issued. For 2025, the experts are forecasting structured product issuance of $2 trillion. If you don't understand what a structure product is, it is nothing fancy other than Wall Street creating loans that hide their true value. In 2008 these were mainly mortgage-backed loans that Wall Street sold and told people there's no way that these borrowers would default on their real estate loans. Today, they are even riskier with the loans backed by weak assets such as credit card debt, lease payments on cars, airplanes, golf carts and even plastic surgery loans. Recently in Las Vegas there was a convention for four days that was packed with bankers from Wall Street and around the country that were all in the buzz about the hype of the profits they can make off of these structured products. So far investors have been safe and have not had any losses, but that will change in the years to come especially if the economy weakens. With higher demand, prices for these products are now higher and I believe overpriced. The higher demand also creates riskier investments that look similar to products with less risk but make no mistake, they have far greater risk. It appears to me that the greed on Wall Street is back and the bankers are trying to tell you that stock investing is out. They tell you that you should be putting your money into these structured products for diversification to avoid market fluctuations, but the real reason for this is the fees they make are so much higher than if you just invested in good quality equities that pay dividends and grow over the long-term. Wall Street makes nothing off of that!   Jobs report seems uneventful, which is a good thing February nonfarm payrolls increased by 151k in the month, which was less than the estimate of 170k. While I wouldn't say that's a positive, it was better than last month's reading of 125k and it still shows the labor market remained healthy. Revisions to th

Home sales are starting to look weak Last week we saw the release of existing home sales in the month of January and the decline was far bigger than expected. The number of units sold on an annual basis was 4.08 million, which was a decline 4.9% compared to the prior month. Analysts were expecting a smaller decline of 2.6%. While inventory remains tight at a 3.5-month supply, it is improving. Month over month inventory increased 3.5% and when compared to last January, we saw an increase of 17%. For now, it appears that housing prices are stable with the median price of a home sold in January at $396,900, an increase of 4.8% over last January. The number of cash buyers slipped from 32% one year ago to now only 29%. What is more disturbing is the numbers on first time homebuyers. Over history, first time homebuyers have generally made up around 40% of home sales, but January data shows that has slipped to only 28%. I don't see a crash in the housing market coming, but I do believe people buying a house thinking they will make 10 to 20% on their investment over the next year or so is a mistake as I'm pretty confident those days are gone. If you're going to buy a home, buy it as a place to live and raise your family, do not try to make a quick investment return on the short term.   Some home sellers are giving up As a whole, the US home selling market has had some cracks, which we have talked about in the past. The rising interest rates have kept buyers on the sidelines and people selling their homes still think they're worth more than what they can get in today's market. Also, sellers have been spoiled over the past few years thinking you put your house on the market and you should be able to sell it in less than a month. Over a longer period of time, which looks out further than just the last few years, it used to maybe take 3 to 6 months to sell a home. Home sellers really became discouraged in December as delistings soared 64% in the month compared to last year after not finding an interested buyer to purchase the home. At 73,000 delistings, this was the highest level since 2015. We could see that change if interest rates come back down, but at this point in time there's no indications that that will happen in a major way. I'm still looking for a low growth environment for the price of real estate in the coming years.   Another comparison showing AI is overpriced Many people have used the comparison of the tech boom and bust when looking at the high prices for a lot of these AI stocks, which I believe has a lot of relevance. But if you go back 100 years, there's another comparison with Radio Corp. of America, which was a booming technology back then. If your company put radio in the name somewhere, you got to ride along on the upward trend. Sound familiar? RCA stock rose 200 times its value during the 1920s, but then by 1932 it fell 98%. What is even more amazing is in 1986 General Electric acquired RCA for about 72% higher than the price peak back in 1929. It has never been a wise investment strategy to overpay for any investment, which seems to mostly happens in technology. Over the years this hype cycle has happened with cannabis, electric vehicles, and 3-D printers just to name a few. No one knows where the top will be for AI, but one thing I know for certain is many people will lose far more than they could even imagine, which unfortunately will destroy their retirement portfolios.   Berkshire Hathaway historically high cash balance It is no secret that Warren Buffett's company, Berkshire Hathaway, is sitting on over $300 billion in cash, which is invested mostly in T-bills. As a percent of assets, it is now just over 25%, which has never been seen before. The excess cash is caused by two things, first reducing ownership of Apple and some other stocks. Last year alone Berkshire sold 605 million shares or about 70% of its holdings in the stock. It now has a market value of only $75 billion. The second reason for all the cash is likely because of his philosophy to invest when others are fearful and sell when they are greedy. We are definitely in the greedy stage, which we have been talking about at our firm for probably over a year now. No one knows when this will change, but it will. With the expensive nature of many companies and the markets, Warren Buffett likely cannot find anything on sale that he believes is worth buying. I don't see a major crash coming in the near future, but I also don't see any big gains coming either. I do continue to believe we will likely see a correction that leads to a short-term pullback of 10 to 20%. I hope you're prepared for a few months of volatility, as I believe it is coming.   What's so Special about your “Full Retirement Age”? The Social Security Administration references your “full retirement age” quite often, so it is important to understand why that matters, and why it doesn't. The main reasons this age is important is because at that point you are no longer subject to the earnings limit, and your benefit amount at that age is used to calculate spousal benefits. If you begin collecting Social Security before your full retirement age, you are subject to an earnings limit of $23,400.  For every $2 of wage or self-employment income you have above that limit, $1 of your Social Security benefit will be withheld from you.  Other income sources do not count and this rule no longer applies after reaching you full retirement age, meaning you can work and earn as much as you want.  If you do have Social Security withheld due to the earnings limit, you will receive a credit for that when you reach your full retirement age. As a spouse if you had a limited earnings history, you may collect a spousal benefit from the record of your higher earning spouse.  The spousal benefit is ½ of the higher earning spouse's full retirement age benefit amount.  The age that the higher earning spouse actually collects does not change the spousal benefit.  In order to receive the full spousal benefit, the lower earning spouse needs to collect at their own full retirement age.  Waiting beyond that does not increase the spousal benefit, but collecting before full retirement age will reduce the spousal benefit. For those reasons full retirement age matters, but there are plenty of situations where it doesn't. If you stop working before your full retirement age, then the earnings limit is irrelevant, and if you and your spouse both have an earnings history, then spousal benefits are irrelevant. Many retirees have the belief that something special happens to their benefit amount at their full retirement age, but the truth is, your Social Security window is from age 62 to 70.  Every month you wait to start, your benefit amount increases slightly.  There is no additional increase upon reaching a specific calendar year, birthday, or even your full retirement age.  For some it may be best to collect at their full retirement age, but for the majority of retirees it is more beneficial to collect at an age other than their full retirement age based on their individual income, asset, and tax situation.   Companies Discussed: Freeport-McMoRan Inc. (FCX), Qualcomm Incorporated (QCOM), Super Micro Computer, Inc. (SMCI) & Eli Lilly and Company (LLY)

Will the senior housing market boom continue going forward? Investors may think with the population getting older that investing in senior housing could be a great investment going forward. They could be right as the oldest boomers turn 80 at the end of this year. What's even more amazing is that the US population of 80-year-olds and older will hit 18.8 million in the next five years, that is a 27% increase from today. Senior housing hit a brick wall when the pandemic hit in 2020 and with the high infection rates, loss of life, and social distancing restrictions the demand fell drastically for senior housing. Both the high cost of labor and the shortage of it did not help either. It is estimated in five years they will need 560,000 new units to meet the expected demand. However, due to the high cost of development and the concern that about half of the seniors won't be able to afford private senior housing costs, it's estimated that only about 191,000 units will be added. The good news is more than 40% of seniors could afford senior housing on their income alone, which increased from 30% eight years ago. Unfortunately, those who can afford senior housing would rather not use it and prefer to age at home. Developers are willing to risk their capital on the higher end of the wealthiest seniors building luxury senior housing with fine dining, spas and movie theaters. One high end luxury senior housing project is expected to break ground this year at Rancho Santa Fe in San Diego with 172 units available. I think this sector for investing at this point is worth watching, but I don't think I'd want to commit any capital at this time given there seem to be some substantial risks.   Are young investors taking too much risk? A comparison of Gen Z, who were born between 1997 through 2012, versus baby boomers, who born from 1946 to 1964, show that Gen Z is taking on much more risk compared to when baby boomers were their age. In a study from the FINRA Investor Education Foundation, 36% of respondents between the ages of 18 to 34 had traded options. This compares to 8% of investors who were 55 years and older. Also revealed in the survey was younger and new investors were more likely to use margin when investing. This came at a surprisingly high rate with 23% of investors between the ages of 18 and 34 saying they had used margin when investing. This compares to just 3% of respondents age 55 and older. What was also interesting and informative is the lack of investing experience as 19% of investors with less than two years of investing experience stated they had used margin. However, just 6% of investors with experience of 10 years or more have used margin. I think many of these older investors are more cautious because they had learned their lesson. There's no doubt that the younger investor today is taking on more risk than the more experienced investors. I believe this is for two reasons. First off, the access to trade and invest is so easy and it can be done on the phone in your hand at essentially any point in time. Compare that to 25-35 years ago when investors had to go through a broker to trade. The second reason I see is the Great Recession in 2008 was 17 years ago and the young investors today were only 5 to 15 years old and had no interest or care about the economy and the crash of the stock market. Investing successfully long-term involves many years of experience and research and unfortunately, I believe the younger investors will learn by experience that the risk they are taking today will not end well.   Weak consumer sentiment brings down stocks Stocks fell on Friday after the headline consumer sentiment index came in at 64.7, which was down 9.8% from January and below the estimate for 67.8. This reading was also down 15.9% compared to this time last year. I was surprised to see the one-year expectation for inflation came in at 4.3%, which was the highest level since November 2023. The five-year outlook increased substantially to 3.5%, which would be the highest reading since April 1995. It was not a major surprise to see sentiment fall for Democrats and stay unchanged for Republicans, but it did fall for Independents. While I think it is important to look at various economic data, I wouldn't say this survey is overly troubling. This survey comes from the University of Michigan and when I was researching how many people it encompasses, I found it includes at least 600 households and is conducted by phone each month. It is designed to be representative of all US households, excluding Alaska and Hawaii, but with such a small data set compared to total US households as of 2023 at 131.43 million, I must say I question how indicative of all US households it truly is. As I said, I don't want to completely disregard this data point, but given the limited insight I would not be overly concerned. I do believe this shows how fickle the market is at this point and even an inkling of bad news could send stocks lower given the high valuations.     Beware the tax trap of renting out your house If you're moving out of your current house, you may be considering converting your home into a rental property.  This may seem like an attractive way to generate additional income. However, before making this move, it's important to be aware of the tax implications, especially the potential loss of the Section 121 capital gain exclusion.  When you sell a primary residence, you may exclude up to $250,000, or $500,000 for married couples, of capital gains if you owned and used the home as your primary residence for at least two out of the previous five years.  When renting out your home, you still own it, but it is no longer considered your primary residence.  If you decide to sell the property more than three years after beginning to rent it, it no longer qualifies for any capital gain exclusion, resulting in a potentially large tax bill, exceeding $185,000 in some cases.  Not only that, but while renting a property you claim depreciation each year.  This reduces your taxable income while owning a rental, but that accumulated depreciation must be “recaptured”, which means taxed, at ordinary income rates when the property is sold.  This recaptured depreciation tax also cannot be offset by the Section 121 exclusion regardless of the timing of the sale. If you want to rent out your home, make sure you either sell it before losing the exclusion, or be committed to being a real estate investor for the long haul.   Companies Discussed: Intel Corporation(INTC), Illumina Inc.(ILMN), The Kraft Heinz Company(KHC) & Him & Hers Health, Inc. (HIMS)

How much electricity will AI need? To train AI models companies use graphics processing units, also known as GPUs. They are now starting to build larger clusters of GPUs, which requires even more electricity. How much electricity you may ask? AI data centers use about 30 Megawatts of electricity at a time. If you don't understand megawatts, let's just say it's a lot of power. Picture 30 Walmart stores and how much electricity they use at any given time, that is estimated at 30 megawatts. Fast forward five years into the future when there will be more data centers and larger AI models. It is estimated they will require 5 gigawatts of electricity. 5 gigawatts is a huge amount of energy, it is about the same amount of energy needed to power a city like Manhattan in New York. Also, a big concern is within the next five years these massive data centers could consume up to 17% of US electricity. You may be thinking just build more power plants. The problem is data centers can be completed within 18 to 24 months, but to build a power plant can take over three years and that's provided all permits and regulations are met on time. There's also the concern of how do you get that energy to the data centers, you're going to need more transmission lines, but that can take 10 years or longer to get that task completed. Wind and solar are not the answer because data centers need power 24 hours seven days a week and when the sun goes down or the wind stops, there's no power. I see some roadblocks ahead with fast moving AI, maybe we need to slow down a little bit?   Mag Seven capital expenditures could be a big problem! The Mag Seven, which includes Apple, Alphabet, Amazon, Microsoft, Meta, Nvidia, and Tesla has been a group that has dominated the stock market the last couple of years. Much of the excitement around the stocks have been tied to advancements in AI, but there has still been little evidence these companies (outside of Nvidia) have been able to profit from the trend. A major concern I have is these companies are investing tons of money and the big question is how profitable will these investments be? It is estimated Alphabet, Microsoft, and Meta will spend $200 billion on artificial intelligence this year alone and their budgets have continued to grow. If we look at total capital expenditures, also known as capex, the budgets have grown immensely for many of these companies. Amazon is projected to spend around $105 billion on capital expenditures in 2025, up 27% from 2024, which came after a 57% increase over 2023. Microsoft has guided to $80 billion in capex for its fiscal 2025, up 80% from 2024, which was up 58% from the year before. Alphabet estimated capex of $75 billion in 2025, up 43% from 2023, which was up 63% from 2022. Meta has a forecast of $60 billion to $65 billion of capex in 2025, up 68% at the midpoint from 2024, which was up by 37% from the year before. The big problem with major capex is investors won't see much of a difference in earnings, but there will be major hits to free cashflow. Capex is generally expensed or depreciated over time, which means it won't hit earnings in a major way initially, but it could weigh on earnings growth over time as that expense remains for years to come and potentially grows if capex budgets continue to climb. As an example, Meta is projected to see $68 billion of net income this year, but free cash flow could slide 25% to $40 billion. Investments of this magnitude need to pay off, especially considering the high valuations for these stocks. Time will tell if these investments work out for all these companies, but I must say I'm skeptical they will all be winners from this movement 5-10 years from now. Investors need to look at the full picture and understand all the moving parts, which includes how all the financial statements work together. At our firm we don't just look at earnings, we also want to see good cash flow and a strong balance sheet.   Producer Prices come in hotter than expected    The Producer Price Index, also known as the PPI, showed prices in January climbed 0.4% compared to last month. This topped the expectation of 0.3% and led to an annual increase of 3.5%. Core PPI, which excludes food and energy, produced an annual gain of 3.4%, which was lower than last month's reading of 3.5%. While these data points were a little hotter than expected, economists now have inputs to estimate the closely followed PCE report. It is interesting that after the release of the CPI and PPI, which were both higher than expected, estimates for core PCE actually look quite favorable. On a monthly basis core PCE is expected to show a 0.22% increase, which would be a nice deceleration from December's reading of 0.45% and on annual basis estimates are looking for a reasonable 2.5% increase. We will have to see what the actual results look like for the PCE later this month, but with these reports now in hand I continue to believe that while inflation is not at the Fed target, I still don't see it as a major problem.   The True Cost of Credit Card Interest Everyone knows that paying credit card interest is a bad thing, but it's less well known how that interest is accrued.  Interest is calculated using an average daily balance method, which means every single purchase begins accruing interest immediately.  Purchases made on a credit card throughout a monthly statement period increase the outstanding balance.  After a month of spending, if the full statement balance is paid by the due date, which is generally 20 to 25 days after the statement period ends, no interest will be due, even though it was accruing during that time.  This is known as the grace period which is essentially an interest-free loan on those purchases. For example, if you spend a total of $5,000 through a statement period during January, you will not need to make a $5,000 payment until the end of February to avoid any interest. However, if you do not make that full payment by the due date in February, your grace period is void and you will owe accrued interest from the date those purchases were made in January, not from the due date in February.  Also, any additional purchases made in February and afterward begin accruing interest immediately without a grace period, even though those statement periods have not ended yet.  Since interest is calculated using the average daily balance method, the unpaid balance and interest compounds on itself making it more and more difficult to pay off. Credit cards have a monthly minimum payment, which is usually $25 to $50 dollars, which paying prevents a mark on your credit report, but it does not stop interest from accruing.  Credit cards can be a great tool as they can give you points and fraud protection, but those benefits are greatly outweighed when a balance is being carried.   Companies Discussed: Dollar Tree, Inc. (DLTR), Grand Canyon Education, Inc. (LOPE), Mondelez International, Inc. (MDLZ) & Phillips 66 (PSX)

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

What bank earnings reveal for 2025 Most big bank earnings are out now and the news and the guidance did lean on the positive side. A concern was revealed, which was no surprise to us that loan growth was only up 1.1% from a year ago. It is expected to see loan growth for 2025 of around 2.6%. Bank of America was the big winner here reporting loan demand grew 5 % from last year, but regional bank KeyCorp disappointed investors with their guidance as they are estimating loan balances would drop 2 to 5% in 2025. A positive in their report was net interest income would rise 20%. That was not good enough for the analyst community as the stock sold off following the report. Net interest income, also known as NII is the difference of what a bank pays for money and what they loaned it out at. This is a big factor when one is investing in banks considering it is such a large part of their profits. We have talked before that we do expect to see more mergers and acquisitions, also known as M&A going forward. This could help banks like KeyCorp and other smaller banks that go on sale as their stock drops, as there may be a floor to the fall with bigger banks potentially having some interest in scooping up the smaller banks as they go on sale. There are over 4500 banks in the United States, that is a lot of potential for bank M&A. Expected reductions in regulations for banking would also be a great benefit to Wells Fargo and some other banks as well. I do believe in having a strong balanced portfolio and if you don't have some type of financial bank or financial institution in your portfolio, I believe you are missing out.   DeepSeek news sends US AI stocks into freefall! DeepSeek AI is a Chinese artificial intelligence start up that rivals US companies like ChatGPT, Anthropic, and several others. DeepSeek has seen it's popularity surge after releasing its reasoning model known as R1. This model apparently tops or is in line with the US competition and on Monday the DeepSeek app took over OpenAI's spot for the most downloaded free app in the US. Many of you can probably guess my thoughts on this after my concerns with TikTok, but I do feel this is extremely dangerous and users must be careful in understanding what type of data they are giving to China. The main reason this news sparked panic in the markets was DeepSeek was apparently able to launch its free, open-source large language model in just two months at a cost of under $6 million. That is million with an M and that is important considering all these US businesses that are spending billions and billions of dollars on AI. The first big question here is was all that money a waste and is there a more efficient way to achieve AI success like DeepSeek? Also, there have been curbs to insure China didn't receive the best chips. Did they steal trade secrets, find a way to get their hands on the chips, or most troubling would be, did they create their own technology that would rival a company like Nvidia? Personally, I was not too troubled by the decline on Monday considering we have no exposure to the AI space. I continue to believe it is just way too early to invest in this space and there could be other future competition that comes in that we don't even know of yet. I do also believe this points to how fickle the market can be and with a news story like this being able to take down some of the most beloved winners from 2024, the extremely high valuations for the market should concern investors in the broad-based S&P 500 or Nasdaq. I am still looking for value stocks to do well in 2025, but could this be the beginning of a decline for these overpriced tech names?   Custodians are not Fiduciaries, why that's important to you? Your financial advisor may be a fiduciary, but their custodian might not be and it could cost you money. Being a fiduciary registered with the SEC for around 20 years now, we take seriously our obligation to always do what's best for our clients. That also includes choosing a custodian to hold our clients' assets. We spent a lot of time looking for the right fit to make sure our custodian doesn't charge any unnecessary fees. This may come as a surprise to you, but not all custodians are the same. There are custodians that advisors use that may charge little fees like trading fees or maintenance fees that are passed on to you the client, that the advisor should make you aware of. Something recently came to light called an asset shift where some custodians encourage investment advisors to switch out of certain funds so that the custodian will make more money off of the assets they recommend. Unfortunately, this may not be best for the client and they may receive a lower yield. Keep in mind this is not illegal because the custodian does not have a fiduciary responsibility to do what is best for the client. Also, if the custodian forces the investment advisor to switch some funds into funds where the custodian will make more fees off of the new recommended fund, it could also cause a taxable situation for the client. This may be more prevalent in your smaller advisory firms with maybe fifty to hundred million dollars in assets under management. The custodian could tell the advisor either you need to increase your assets with us or begin paying an annual custody fee of anywhere from $200-$400 a year. That fee could really hurt the advisor, as an example if the advisor had 100 clients and they were charged $400 a year per client that would cost them $40,000 a year. More than likely, the advisor would probably have to raise their management fee to their clients to help offset the expense. Investors should ask their financial advisor, even if they are fiduciary if any of their recommendations are being forced by their custodian, which would cost you the client more money. I'm happy to report at our firm the custodian that we have chosen and have used now for ten years puts no pressure on us at all. This could be perhaps because we do have nearly $700 million in assets under management.   GDP growth shows the consumer was still strong in Q4 Gross Domestic Product or GDP missed expectations for 2.5% growth in the fourth quarter, but the growth rate of 2.3% was still ok. For the full year we did see a small deceleration in growth as GDP growth fell from 2.9% in 2023 to 2.8% in 2024. While none of this sounds overly optimistic, the consumer really carried the GDP growth in Q4, which I see as positive. Personal consumption expenditures saw growth of 4.2% in Q4 thanks to growth of 6.6% for goods and 3.1% for services. It was surprising to see durable goods really saw nice growth of 12.1% in the quarter, which compared to nondurable goods growth of 3.8%. The miss compared to the expectations can largely be attributed to the change in private inventories as that subtracted 0.93% from the headline GDP number. This category is quite volatile and considering it subtracted 0.22% from the headline number in Q3, I would not be surprised to see it actually benefit the headline number in the first quarter of this year. Considering the strength of the consumer, I was actually quite pleased with this report and I believe it is a good sign for our economy as we look forward. I do believe we will see some bumps in the road this year, but I still think we should see GDP growth in the 2-3% range for the full year.   Get Organized for Tax Time Tax season is upon us which means you are probably starting to receive tax documents that will be used to file your taxes.  Whether you file taxes yourself, or work with a tax preparer, make sure you gather all the information needed and have at least some understanding of what it means.  The tax documents alone do not always provide the information required to complete a tax return.  For example, contributions to a traditional IRA can either be tax deductible or non-deductible, such as when making a backdoor Roth contribution.  However, no tax form is generated to tell the tax preparer that a contribution was made at all which means the tax deduction would be missed, or your basis in the IRA would not be reported. In both cases you would be paying more tax than necessary.  With tax-deferred retirement accounts anytime money is distributed, a 1099-r is generated, but it is not always clear whether the distribution is taxable or not.  If the tax preparer is not aware that the 1099-r is from a direct or indirect rollover, a qualified charitable distribution, or the conversion from a non-deductible IRA, they may incorrectly report the distribution as taxable income.  When you are gathering your documents, make sure you are gathering everything.  If you have a taxable brokerage account, even if you didn't withdraw any money, you will still receive a 1099 because any interest, dividends, or realized capital gains are reportable.    If you have a mortgage, you will receive at least one 1098 and you may receive multiple.  If you refinanced during the year or even if your mortgage was sold from one lender to another, which is quite common, you will receive a 1098 from each lender.  If you don't include all of them, you won't receive your full interest deduction. Most people don't like dealing with taxes and everyone hates paying them, but take the time to understand your situation enough so you don't pay more than you need to.    Companies Discussed: Electronic Arts Inc. (EA), CSX Corporation (CSX), Dole PLC (DOLE), Juniper Networks, Inc. (JNPR)

Businesses should do well with reduced regulations going forward Reducing regulations saves companies both time and money and time is always money. Starting in 2025, it is expected that for every new regulation that goes on the books, 10 regulations must be eliminated. I was unaware of what is known as the congressional review where a new President along with Congress can undo certain rules that the previous administration put on the books in the last few months. At this time, we're not sure which ones will be eligible for elimination, but you will likely see some rules that perhaps made no sense to many people could be reversed in 2025. There could be a fight brewing between California and the federal government over some of these changes in regulations and California could lose their waiver and authority to ban the sale of new gasoline powered cars by 2035. The federal government wants control back over the auto industry, and does not want to allow states to come up with separate rules. That could ease pressure on both the auto companies and consumers as well. One that I'm not sure on is eliminating bank watchdogs like the FDIC. I like the idea of pulling back on the regulations, but maybe this is one that should be controlled not eliminated? Be prepared in 2025 for many changes in business, I believe most will be helpful.    History has proven in the recent past that tariffs can cause problems in the economy and the markets as well. We have talked for the past month or so that we have been lightening up on our investments, which does not mean we went to 100% cash but a more reasonable level of around 20% in cash and 80% invested. A big reason for this is I believe currently the markets are incorrectly ignoring what the potential tariffs will do in the short term. It was only about six years ago when we had tariffs and that caused disruption in supply chains and rising manufacturing costs along with declining profits for some corporations. Our trading partners did not simply give in to the demands. Looking at China in particular, in September 2019, an additional $113 billion of tariffs were imposed on top of roughly $50 billion of tariffs that were already in effect. Each time the tariffs were raised, there was retaliation from China. This began to cause wild swings in the stock and bond markets. It is important as well for investors to understand when tariffs were imposed in 2018, the economy was doing well. That was because of recent tax cuts that reduced the corporate income tax from 35% down to 21%, which was a 40% decline. Now in 2025 there are no big tax cuts that the economy and businesses are benefitting from, which could hurt corporate profits in the short term. There is a potential tax relief bill that must go through Congress, but that would not be felt by anyone until the summer or late fall of this year. No one knows for certain how long it takes tariffs to benefit the economy because last time the world and trade fell apart as Covid changed everything. So for now, we will just have to wait and see how long it will take before the United States sees a benefit to tariffs, which I do believe long-term they are a good thing. With some potential short-term headwinds from these trade conversations, I think it's important to not be overly aggressive with your portfolio and to make sure you're holding strong businesses with low valuations that do not rely heavily on overseas trade.   Liquor sales are declining and the bourbon boom seems to have passed It used to be investing in alcohol companies like Brown-Forman, who is famous for Jack Daniels, and other alcohol companies was a relatively safe investment over the long-term. But it appears that peoples liquor cabinets are still full from the Covid years when they over bought many types of booze for drinking at home and they still have a good amount of that alcohol left. No help to the industry is the anti- obesity drugs, the legal use of cannabis and some people switching to non-alcoholic drinks. The recent warning from the US Surgeon General recommending alcohol bottles should have a warning label on them about cancer could also hurt sales temporarily. We can't forget about the tariffs that are coming as this will likely be another heavy weight on alcohol and bourbon sales and profits. While writing about the decline in bourbon sales, I thought I would go to my bar to see if I had any bourbon to try. I took a shot of it and it burned all the way down. I personally don't know why Bourbon is so popular in the first place. With that said I guess maybe others are agreeing with me, US whiskey sales declined 1.2% in 2023, which was the first decline in 21 years. In the first nine months of 2024 there was additional drop of 4%. Your bigger distillers have the balance sheets to whether the storm, but your smaller craft distillery companies are beginning to close. I do believe this will probably change course maybe not in 2025, but perhaps come 2026 more distillers could quit the business, which will leave room for the big companies to pick up that slack and see their sales and profits increase.   What Really Matters when Getting a Mortgage When getting a mortgage, everyone's top priority is to get the best rate. However, it is equally as important to understand what it took to get that rate.  When you get a mortgage, there are origination costs called points that you can buy to reduce your mortgage rate.  In other words, you can buy down that rate for a cost, and this typically doesn't get analyzed correctly.  Let's consider an example using current market rates. For a well-qualified buyer, the par rate is about 6.75%, meaning there are no added point costs.  If the borrower wanted, they could pay a point, which costs 1% of the mortgage balance, in exchange for a lower rate of 6.375%.  On a $600k loan, this point would cost $6,000.  The question is, how long would it take for the interest savings from the lower rate to recoup the additional $6,000 point cost?  In this example assuming a 30-year mortgage, it would take almost 3 years.  That may not seem like a long time, but in the current interest rate environment, most experts agree that mortgage rates will be coming down at least slightly, especially within 3 years.  This means if you forgo paying the point and accept the higher rate and higher accompanying monthly payment, as long as you are able to refinancing into a lower rate within 3 years, you will come out ahead.  On the contrary by paying a point, you believe that right now mortgage rates are at their lowest point for the next 3 years, which is a strong stance to take.  I believe there will be opportunities to refinance into lower rates, meaning the overall cheapest way to structure a mortgage now is with a higher interest rate.  You can even take this a step further by accepting a rate above the par rate in exchange for credits from the lender that can be used to pay closing costs and some of the mortgage interest.  In our $600k mortgage example, taking a rate of 7.125% would come with approximately $7,500 of credits.  A rate of 7.125% might look expensive, but as long as you can refinance within 3 years, that rate option gives you the lowest overall cost of borrowing.   Companies Discussed: Costco Wholesale Corporation (COST), Oracle Corporation (ORCL), The Walt Disney Company (DIS) & General Dynamics Corporation (GD)

Millennials are a little gun shy on buying a home, but they have good reason to be concerned Looking back 30 to 40 years ago when families purchased a home, they did it as a place to raise a family and they weren't so focused on how much money the house would be worth in the short term. Millennials who were born between 1981 to 1996 and are now between the ages of 29 and 44 years old are old enough to remember the 2008 Great Recession. In 2008 there were 2,330,483 foreclosures, roughly 3 times 2006 when it was 717,522. If at the time the young millennials who were between the ages of 12 and 27 were not affected personally by a foreclosure, it was likely they knew somebody who was. Fast forward 12 to 13 years and millennials have experienced a rapid increase in housing prices that is essentially unprecedented. Experiencing such a wide swing in boom-and-bust cycles is etched in some of these millennial's minds. By the time baby boomers hit age 30 52% were homeowners versus 30-year-olds today at only 43%. Surveys show almost 50% of millennials have stated that owning a home is more trouble than it's worth, which is nearly double the feelings of Gen X and baby boomers on homeownership. If millennial home ownership continues to decline, we could see an oversupply in future years, which would probably mean a fall in housing prices.   Better than expected inflation fuels the market higher The Consumer Price Index, also known as CPI showed inflation was up 2.9% compared to last year. While this was in line with expectations, it was the core CPI annual rate of 3.2% that beat the expectation of 3.3% and likely excited the market. This report followed the Producer Price Index which was largely in line to slightly better than expectations. The annual rate for both headline and core PPI rose 3.3%. Looking closer at the CPI, shelter continued to be a heavyweight considering it makes up about one-third of the CPI. While it registered the smallest one-year gain since January 2022, it was still at a high rate of 4.6%. It's important to point out that if shelter was excluded from the core CPI, the annual inflation rate was 2.1%, which is right in line with the Fed's 2% target. I believe there will be a lot of movement in various price groups this year, especially with new government policies in place. With that said, I do believe it is much more likely we continue to move towards the 2% target rather than seeing a sustained reacceleration in inflation. This leads me to believe we will not see the Fed hike rates this year and I think it is still possible to see a couple rate cuts come December 31st, 2025.   The Supreme Court ruled against TikTok, why you should agree with them! TikTok is very popular in America with 170 million people in the United States using the app. Many people love TikTok, but they don't understand what the Supreme Court is seeing and why it unanimously confirmed the blocking of the app. It's important to understand the communist party of China ultimately has control of TikTok and that could be very dangerous as it believes in what was driven by Marxist Leninist ideology. The party believes that the CCP should silence dissent and restrict the rights and freedoms of Chinese citizens. This includes population control, arbitrary detention, censorship, forced labor, and very important pervasive media and Internet censorship. Do you really believe that China is our friend and they should be able to obtain data which they do on all the people using TikTok in the United States? Keep in mind that China does not allow Facebook or Instagram in their country. We would not let China own any of our major broadcasters because of the influence media can play and now social media also has that power. Think about this, China on a very low level begins to convince people in the US that it would be a good thing for China to take over Taiwan. Then, when they invade Taiwan, there'd be a backlash in the US of people who are siding with China against our government trying to keep Taiwan out of China's hands. Taking over Taiwan would give China much more control and leverage over the United States. Think also about younger people today who post stuff that is there forever and when they are older it could be used against them as leverage. This could include future military leaders, perhaps members of our government or anyone else that when they became a more mature adult, they would not want those old posts to be released. I for one hope that TikTok is banned here in the United States or that it is purchased in full by a US company. At this point, China does not want that to happen because they do want to control the data and have access to it. What are your thoughts and why would you disagree with banning TikTok?   Navigating Capital Gains and IRMAA If you are on Medicare or will be within the next two years, you will want to keep a close eye on your income because not only do you have to pay federal and state taxes on it, but you could also be forced to pay higher Medicare premiums because of it.  This is called IRMAA which stands for Income-Related Monthly Adjustment Amount, and your Modified Adjusted Gross Income, or total income, determines if you will be subject IRMAA and how much you have to pay.  This is basically an extra tax, but there are circumstances where it makes sense to pay it. Consider a situation where a married couple has income of $200,000 which means they are not yet triggering any extra Medicare premiums.  If they happen to hold some stock that was purchased for $450,000 and has a current market value of $500,000, selling would realize a $50,000 capital gain, push them into the next IRMAA tier, and cause them to pay about $1,800 in extra Medicare premiums.  Obviously, no one would want to pay an extra $1,800 if it is avoidable, but it may not be worth continuing to hold a $500,000 investment, especially if it's an overconcentrated position or particularly risky.  An extra cost of $1,800 is less than half a percent of $500,000, so any market volatility has the chance to wipe out much more than $1,800.  We see people who are so concerned with IRMAA or paying other taxes that they never want to sell anything which causes them to lose more in the long run. Sometimes the best overall decision is to take profits and move on.   Companies Discussed: Moderna, Inc. (MRNA), Signet Jewelers Limited (SIG), Teladoc Health, Inc. (TDOC) & Qorvo, Inc.(QRVO)

The job report was good, but why is that bad? Before we go into why the good report was bad, let's talk about some of the data. The expected number of payrolls was 155,000, which came in well above that at 256,000 jobs for the month of December and also increased from November when it was 212,000 jobs. This high increase in payrolls caused unemployment to drop to 4.1% and came along with an increase in average hourly earnings of 0.3% for December. Over the last 12 months average hourly earnings have increased 3.9%, which is a decent number, but just under the expected growth in average hourly earnings. Job Growth was seen in healthcare with an increase of 46,0000 jobs. That was followed by leisure and hospitality which saw an increase of 43,000 jobs and government jobs, which includes Federal, state and local jobs were up 33,000. Because it was a holiday season there was an increase in retail jobs of 43,000 after the loss of 29,000 jobs in November. There are always revisions to the previous two months, but there was not much change here as October saw an increase of 7000 jobs and the November report was actually cut by 15,000 jobs which produced a total decline of only 8000 jobs for the past two months. Because the job report was so good compared to expectations, this put fear in the stock market and bond market that there may not be any interest rate cuts until the fall of this year. This also led to concerns that we could maybe see more inflation going forward. Maybe that makes sense for traders to sell, but investors should want a strong economy. That means your businesses will sell more goods and services and increase their profits. Interest sensitive equities like real estate were hit pretty hard with a good job report and banks also had a little trouble digesting the good report and declined as well. For investors I think this is a good report because it shows strength in the economy and based on the recent job openings from the JOLTS report, I think 2025 will be a good investment year for investors in fairly valued equities, but you will see a lot of scary volatility, which smart investors should use as a buying opportunity.   Job openings report sends the market lower! The JOLTs report, which stands for Job Openings and Labor Turnover Survey showed an impressive increase in job openings in the month of November to 8.096 million. This easily topped the estimate of 7.65 million and October's reading of 7.839 million, which was revised upward from the initial number of 7.744 million. While this points to a labor market that has continued to remain strong, there were some indications of softening. On a year-over-year basis, job openings fell by 833,000 and the quits rate moved from 2.1% in October to 1.9% in November. This indicates workers are less confident in finding another job if they quit their current one, which should put less pressure on wage inflation. The resiliency in the labor market is concerning for those that are looking for more rate cuts as a strong labor market allows the Fed to be patient and wait for inflation to cool further. The news paired with a December US services sector report that showed faster-than-expected growth and higher prices paid caused the ten-year Treasury to climb to around 4.7%. This spooked many speculative areas of the market including technology and cryptocurrencies.   Apple Intelligence, maybe not so intelligent? Apple's AI system, also known as Apple Intelligence, has been having some issues and has been spreading fake news. One of the AI features for iPhones summarizes users' notifications, but some of the news stories it has been summarizing has been completely inaccurate. It recently attempted to summarize a BBC News notification that falsely claimed British darts player Luke Littler had won the championship. Unfortunately, this came a day before the actual tournament's final, which Littler did end up winning. Maybe Apple Intelligence is so good it can predict the future? This was not the only false story though as Apple Intelligence has now wrongly claimed that Tennis star Rafael Nadal had come out as gay, Luigi Mangione, the man arrested following the murder of UnitedHealthcare CEO Brian Thompson, had shot himself, and that Israeli Prime Minister Benjamin Netanyahu had been arrested. The BBC in particular has been trying for a month to get Apple to fix the problem. In response, Apple apparently told the BBC it's working on an update that would add clarification that shows when Apple Intelligence is responsible for the text displayed in the notifications. This compares to the current situation where generated news notifications show up as coming directly from the source. To me this doesn't sound like a good solution as it doesn't solve the problem and most people likely wouldn't read past the headline anyway. This could still make the news organizations look bad, which I'm sure they are trying to avoid. Personally, I'm still not seeing the need to upgrade to the new iPhone, especially if these new AI features don't provide any value. From an investment standpoint, as you likely know we still believe Apple is extremely expensive trading at nearly 30x future earnings and would not recommend the stock at this time.   The tariffs are coming, who could get hurt? The retail industry will take a big hit on profits. It is estimated that about 23% of durable consumer goods like refrigerators, washers and dryers are connected to imported goods. About 19% of non-durable goods such as diapers, clothing, shoes and towels have some sort of dependency on imported products. These could be slightly higher because the only data available was from the Federal Reserve Bank of San Francisco that came out in a 2019 study. You may think that technology and the Mag Seven will be immune from the hit to profits, but even they could face problems. Nvidia has a 76% gross margin so they should be able to absorb most, if not all of any tariffs that come their way. Apple has half the gross profit margin of Nvidia at 37% and most of their products are built in China, which could be a huge dilemma for Apple. It is no guarantee but last time around the CEO of Apple, Tim Cook, was able to get an exemption on their products. Will that happen in 2025? That's the big question. If they don't get the exemption, their stock could take a massive hit that could be more than Apple investors have seen in a while. If you're an Apple investor, you may want to use the sophisticated investing technique of crossing your fingers and anything else you're able to cross as well and hope for the best. With the other Mag Seven such as Microsoft, Alphabet, Amazon and Meta, their products are safe but keep in mind that combined they spent roughly $200 billion in capital expenditures in the most recent quarter and about 60% was on imported equipment. The other industry that could take a big hit would be carmakers, such as Ford, General Motors and Stellantis and we could see hits to the operating profits anywhere from 20 to 30%. The big fear here is the estimate is between 50 to 70% of parts for the popular cars sold in the U.S. come from Canada or Mexico. Experts estimate that the consumers will see about a 6% increase in the price of new cars sold here in the US. I can't even imagine what the increase on the price of a car will be if it's a full import like a Porsche, Maserati or Ferrari. The good news is that the economy in the US is far stronger than Europe, China and Mexico, so we can weather the storm and be in a better negotiating position than those countries. With that said, I do believe we will go through some pain before things get better. I also believe if you have equities with high valuations in your portfolio that are affected by the tariffs, they could take a much larger hit than your low valuation companies that pay dividends.   Changes to Catch-Up Contributions Every year the contribution limits for retirement accounts increase.  This year is a little different because one of the provisions from the Secure Act 2.0 is now active.  If you are under the age of 50, your contribution limit for an employer sponsored retirement plan like a 401(k) is now $23,500, an increase of $500 from 2024.  If you will be 50 or older by the end of the year, you may make an additional catch-up contribution of $7,500 which means your total contribution limit is now $31,000.  However, starting in 2025 thanks to the Secure Act 2.0, if you are between the ages of 60 and 63, you may make a catch-up contribution of $11,250 rather than $7,500, meaning your total contribution limit is $34,750.  This age range is based on how old you will be at the end of the year, so if you are turning 60 this year, you are eligible to contribute the entire $34,750.  However, if you are currently 63 but will be turning 64 this year, you may only contribute $31,000.  If you are wanting to max out your retirement plan, make any necessary adjustments to your payroll contributions now so you don't have to scramble at the end of the year.  This addition catch-up contribution was implemented to help older workers prepare for retirement, but I don't see how this will make much of a difference for anyone.  It increases the contribution limit by $3,750 for 4 years, which is a total of $15,000.  An extra $15,000 is not going to make or break anyone's retirement, especially considering we already the option of funding non-retirement investment accounts after maxing out retirement accounts.   Companies Discussed: Expand Energy Corporation (EXE), Paychex, Inc. (PAYX), Cintas Corporation (CTAS) & United States Steel Corporation (X)

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

We could see a huge increase in oil demand in 2025! With oil trading under $70 a barrel, gas prices have continued to fall. But unless the world starts producing more oil in 2025, we could see a big reversal in the price of oil. I base that on an estimate from the International Energy Agency as they expect a huge increase in the demand of oil. They are estimating oil consumption of 1.1 million barrels per day, which would be a 31% increase from the 840,000 barrels in 2024. I know from recent reports that there is concern that if we pump more oil, the price could drop dramatically causing difficulties and lower profits for oil companies. However, if the International Energy Agency is correct on their 31% increase in oil demand, that could actually cause shortages at certain times throughout the year. Also, it is somewhat amazing with how long electric vehicles have been out that they still don't seem to be having at this time much of an impact. I do know that car manufacturers are having some difficulty selling their inventory of electric vehicles. I believe part of this is because of the abundance of oil on the market and low gas prices. Is it possible that we got too aggressive trying to build and force consumers into electric vehicles? What happens if in 2025 the federal tax incentives for electric vehicles go away?   Understanding compounding is why you should be cautious about the overvalued market! Investing is great when everything is going up and the emotions tell you to stay the course because that will continue to happen. For two years now the S&P 500 has posted really strong gains because of a heavy concentration in the Mag Seven. There are now investors who say the market could be up another 20% in 2025. In our portfolio we will continue to remain cautious next year as we understand that compounding can work for you, but also against you. What do we mean by that? Let's say that for three years the S&P 500 is up 20% per year, your $100,000 investment would grow to $172,800 because of compounding. You probably would feel pretty good about that and think it will to continue to increase. While it is possible it's like riding a roller coaster. What I mean by that is if you've ridden a roller coaster you know as it gets to the very top, it slows down and it feels like it's almost going to stop, then you go over that peak and you hit that big decline. That happened in 1935 and 1936 as big gains were followed by a 39% decline in 1937. I did not want to use 2002 when the S&P 500 had lost almost 50% of its value. I thought I would use something else from history that was not the worst-case scenario. Back to the three-years of 20% gains and a portfolio value of $172,800. If we saw a 39% loss again like 1937, your account value will drop all the way down to $108,864. You might be questioning how can that be? It's because as your account grew in value the percent decline is now on a bigger amount than the initial $100,000 you started with. So in other words after four years of investing, you're $100,000 investment was only up 8.9%. This is why for long-term investors I can continue to stay the course on a more conservative investment style and not try to figure out what the top is for many of these expensive companies. The other problem as well is once people lost 37% of the money on their investment, they would probably leave the stock market for years missing future gains. I can tell you many people think they know where the top is and they'll get out in time, but unfortunately many people stay at the party too long. I can tell you managing money through the tech boom and bust many people thought the party would continue in the early 2000's and they did not foresee the major declines that we saw during the tech bust.   AI stocks performed well in 2024, there are problems in 2025 that could cause a reversal It is estimated that for every dollar invested on the AI infrastructure, revenue of four dollars needs to be produced. The AI leader so far has been Microsoft with their Copilot product that has a cost of $360 per user each year. At first glance that doesn't sound too bad until you realize you still have to pay for the other software at a cost of anywhere from a low of $72 to over $650 per year. At $1000 is the AI expense worth the reward? Currently, there are places where you can get AI for free, will people be willing to pay for AI when they're used to getting it at no expense? In a combined survey on using AI, 32% of respondents had used it in the previous week. This is a fast adoption rate compared to the Internet or the introduction of the PC. However, when asked what services they were using, most were using free services like open AI's ChatGPT or Google's Gemini. If people won't pay directly for AI, then the companies will have to somehow monetize it through some means of advertising. Another big question is will AI really produce results in productivity? In the last couple of years, the US Bureau of Labor Statistics reported labor productivity has risen at an annual rate of 2.3%, which is 3/10 of a percent higher than the historical average. To make AI valuable we would have to see labor productivity increase to at least 2.5 to 2.6%. One question on many people's mind is will AI replace a lot jobs? The answer to that question is it will replace jobs, but the hope is new jobs and opportunities will be created that we have not even thought of yet. They will likely require creativity, judgment and decision-making. I still think AI will be used and it is not going anywhere, but I worry the hype has carried many stocks to excessive valuations. 2025 may be a prove it year for AI and if we don't see progress towards monetization those AI stocks could struggle!   Beware of Double and Triple Taxation At the end of the year, it is helpful to check where your income stands so any last-minute adjustments can be made.  These might be Roth conversions, IRA withdrawals, capital gain harvesting, capital loss harvesting, charitable donations, or retirement contributions to name a few. Before making any adjustments though, you need to fully understand the tax consequence of the transaction.  Income activity like IRA withdrawals or pensions are fairly straightforward as they are considered ordinary income on the federal and state level.  Income from Social Security or long-term capital gains and qualified dividends can be a little more complicated.  Of the Social Security you receive, some is taxable and some is tax free.  At most, 85% of Social Security benefits is reportable as income but it can be as low as 0%.  The more other income you have, the more your Social Security will be taxed.  Long-term capital gains and qualified dividends are subject to a different set of tax brackets and the tax is calculated after ordinary income sources are considered.  Depending on your level of income, capital gains and dividends fall into either a 0%, 15%, or 20% bracket.  What this means is by making one adjustment that increases your income, you could trigger more of your Social Security to be taxed and push capital gains into a higher tax bracket, resulting in a triple taxation event.  For example, Roth conversions are popular at the end of the year, especially when taxable income is in the 12% tax bracket, but this doesn't mean everyone should do it.  You might be making a conversion that is taxed at 12%, but that also results in thousands of additional dollars from Social Security that were tax free to become taxable, and the income from the conversion and Social Security push capital gains that were in the 0% bracket into the 15% bracket. When added up that conversion at 12% ended up being taxed at over 37% because of the chain reaction of taxes, not including any state income taxes.  In this situation it probably makes sense to find ways to reduce income instead.  Year-end tax adjustments can be very helpful, but you want to make the right adjustments based on your situation.   Companies Discussed: Macy's, Inc (M), Xerox Holdings Corporation (XRX), PepsiCo, Inc (PEP) & Mastercard Incorporated (MA)

Is investing just looking too good these days? When everything is going up including stocks, commodities and cryptocurrencies, one has to stop and think is this the top? In November US equity trading increased by 38% compared to November 2023. The last time we saw this type volume was in 2021 when meme stocks were the major craze. The CEO of Robinhood, Vlad Tenev, stated a few weeks ago that they're looking at expanding into sports betting. In my opinion that is not a far stretch from what they're doing now. Over the past year, their stock has climbed 235% and it trades under the symbol HOOD. Polling by the US conference board on the bullishness of investors revealed that consumers expectations for equities compared to their own income has never been higher. Funny thing when I was drafting this post and I tried to put in bullishness, the auto spellchecks corrected it with foolishness. I would have to agree with the spellcheck on that. Lastly, I can't help but comment on the most ridiculous thing in crypto I have seen yet. There is now a cryptocurrency and please excuse my language called Fartcoin that has a market value of over $900 million. Comparing that to something of value, that is greater than nearly 40% of all American publicly traded companies. Remember, if you are speculating, Wall Street will always have some type of crazy investment that they'll make a lot of money off of, but yet in the end, you the speculator investor will more than likely lose big if not all your investment. It may be exciting for a while, but eventually the emotional roller coaster will wear on you.   Are pharmacy benefit managers, known as PBMs, costing consumers? If you go back to the early 60s, PBMs were the heroes because they helped reduce and control spending on prescription drugs. Back then drug companies were charging high prices and the PBMs came in and negotiated contracts for large purchases of drugs so the drug companies would not have to fill an order of 20 pills. Instead, through a PBM the drug companies could fill an order of say maybe 20,000 pills and charge much less. The consumer received lower prices on drugs, the drug company made a good profit, and the PBM took a slice of the pie. The reason we receive such great prices at Costco on all items is because they buy large quantities of products and pass the savings on to the consumer. Obviously, Costco doesn't pass all the benefit to the consumer and they keep part of the cost savings as a profit. Not to mention they also charge a subscription fee to gain access to these savings. This is the same way PBMs operate, they keep part of the discount or the spread for themselves so they can make profits. What all the hoopla is about is that the PBMs don't show the discount or the spread that they are receiving. The FTC, also known as the Federal Trade Commission, already regulates PBMs to ensure compliance with antitrust and consumer protection laws. There's also concern that six PBMs control roughly 90% of the market. I personally think that is OK especially when you compare it to how many options you have for your cell phone or cell phone service. There are many other services or products where you ultimately have limited options.   Stock market falls after disappointing Fed comments It was widely anticipated the Federal Reserve would cut the Fed Funds Rate by a quarter of a point to a target range of 4.25%-4.5%. While the Fed followed through on those expectations and lowered the rate back to the level where it was in December 2022, it was the projection for 2025 that moved stocks lower. The Fed indicated it would probably only lower rates twice in 2025. This projection is based on the dot plot which is a matrix of individual members' future rate expectations. Personally, I'm not a fan of the dot plot as Fed expectations have been wildly off in the last few years and the latest dot plot cuts in half the committee's intention when the plot was last updated in September. I believe it is just too hard to predict out what inflation will be for the longer term, which then makes it difficult to get a gauge on where interest rates will be over the next few years. Given the current data I can see why the Fed wants to be patient, but the problem as we all know is data can change. If inflation does start to decelerate further next year it is absolutely possible the Fed cuts maybe four times instead of the current estimate of two cuts. The main takeaway I have from this meeting is the Fed is not on an aggressive rate cut cycle and they are going to be data dependent. Ultimately, the market did not like what Powell said and stocks fell greatly during his press conference. This led to another down day for the Dow Jones, which marked the 10th straight losing day. This is the longest losing streak since 1974 when the Dow fell 11 days straight. I do believe with the excessive valuations there will be continued volatility in the markets, but I do see this as an overreaction to the Fed comments and we still see great upside for several companies in next years market.   Should you Fund a Health Savings Account? A Health Savings Account (HSA) is an investment account that is primary used for medical expenses but also doubles as a retirement account.  Contributions to an HSA are tax deductible and can be invested.  Investment earnings in an HSA grow tax deferred and may be withdrawn tax free to cover medical expenses at any age, you do not need to wait until retirement.  You may also reimburse yourself for out-of-pocket medical expenses at any point for expenses that occurred while you had an HSA.  For example, if you paid for some medical expense in 2024 but chose not to withdraw from your HSA to cover it, you could keep those funds growing tax free and withdraw them in 2030 or any other future year.  Unlike Flexible Spending Accounts where funds must be used every year, balances in Health Savings Accounts rollover each year indefinitely, which is why they can be great retirement accounts. If you make a withdrawal that is not for medical expenses, it is taxable and comes with at 20% penalty.  At age 65 you may withdraw funds for any reason without penalty, but it is still taxable if not used for medical expenses, so you really just want to use these for medical expenses to avoid taxes and penalties.  In retirement there are typically plenty of medical expenses like Medicare premiums and elder care, so it is usually not a problem to withdraw all the funds tax free.   An HSA account must be paired with a high deductible health plan (HDHP) and in 2024 the annual maximum contribution is $4,150 for a self-only plan and $8,300 for family plans. If you are over 55 you can make an extra $1,000 catch-up contribution.  HSA accounts can be funded through payroll if your employer offers them or you can open your own account as long as you have a qualifying plan.  It is more tax advantageous to fund through payroll though because not only are contributions pre income tax, they are also pre–Social Security and Medicare tax which is an extra 7.65% savings.  Unfortunately, California does not recognize HSA accounts which means contributions are not deductible at the state level and earnings are taxable.  However, these are still extremely tax efficient and useful accounts and are not utilized enough.   Companies Discussed: Netflix, Inc. (NFLX), RH (RH), Broadcom Inc. (AVGO) & Occidental Petroleum Corporation (OXY)

You should be prepared for the upcoming stock market correction! At Wilsey Asset Management we are prepared for an upcoming correction in the stock market. That doesn't mean we or you should sell all your positions and go to cash. What it does mean is you should take a close look at your portfolio and see if you're over concentrated in certain positions, especially those that are trading at lofty valuations based on earnings, sales, book value, and cash flow. Many investors think that their stock or stocks will never decline and will just keep increasing forever. This is because they have no history or way of valuing what they hold in their portfolio. They are just happy because it keeps going up, which is obviously unsustainable. It is important for investors to realize that roughly every 19 months or so stocks go through a correction of 10% or more. If you look back in history, the last correction we had was roughly 20 months ago in March 2023 because of the regional banking crisis. What will cause the next correction? It could be concerns on tariffs, it could be due to global unrest, or perhaps it will be something that no one even thought of. The average correction lasts 3 to 4 months, but investors should be prepared for a longer period because an average is simply the average, and it will not be the same for every correction. Mentally, investors should be prepared for corrections, and they should understand it is not a matter of if it will it happen, but when it will happen, and you should not be emotionally disappointed when it does happen. As an investor, you have to realize it does happen, but if you have a strong diversified portfolio with investments that you understand you can weather the storm. If most of your stocks in the portfolio pay dividends that might make you feel better and also the income helps offset a potential decline in your portfolio. Also think like famed investor Warren Buffett that when a correction happens many equities go on sale and that is time to start buying. Don't, however, buy with the intention that you make money in the next month or two. Realize that you're buying a small piece of large company on sale that should do well for you in years to come.   Technology has changed and improved oil drilling Thanks to advancements in technology and artificial intelligence, the United States now out produces any other country in the world when it comes to oil. Much of the success has come from the Permian Basin which is 75,000 square miles located in Texas and New Mexico. The area produces almost 50% of US oil. There have been huge efficiency advantages in US oil production which have increased 60% or more a day while using 40% less workers. It used to take 18 months to find oil when drilling in the ocean with seismic imaging. Thanks to advances in technology, it now takes only 18 days. Companies like Chevron also claim they can drill 80% more feet in a day than they did five years ago. When you think of oil drilling, you may think of the new show Landman on Paramount+ and all the dirty oil. While that is still part of it, it is to a much smaller degree because now there are workstations with computers and 20 to 30 workers controlling thousands of pieces of equipment from many miles away. All this new efficiency will benefit the consumer as this will stabilize oil prices to some degree. I believe this will occur because the breakeven for oil in the Permian has dropped over 50% to $40 a barrel and could fall even further. What this means is more and stable profits for the oil companies. The consumer will benefit as well as oil companies cost decline and the price of gasoline at the pump could decline further.   Should we start to question the progress on inflation? The November Consumer Price Index (CPI) came in at 2.7%, which was in line with expectations but higher than October's reading of 2.6%. Core CPI, which excludes food and energy came in at 3.3%, which also matched expectations. The concern here is that this was the sixth month in a row that we have been at 3.3 or 3.2%. I have spent a lot of time talking about shelter costs, but those are finally starting to decelerate. The shelter index showed a gain of 4.7% compared to last year and while it still accounted for 40% of the monthly CPI increase, it was the smallest 12-month increase since February 2022. I continue to believe this index will continue to decelerate moving forward. The big question here is should we be concerned with this report? It looks like since it came in right along expectations the market is now with near certainty pricing in a cut at the Fed's meeting next week. I do have to say though it is somewhat concerning we are still a decent ways off from the Fed's target and it appears we have stalled out. We have come a long way from when the CPI was 9% in June 2022, but I believe if the Fed sticks to being “data dependent” they will want to see further progress before cutting rates much further next year. There are still some positives with areas like shelter and auto insurance that should be less burdensome next year, but other areas like energy will have a tough comparison considering the lower prices this year. Overall, I continue to believe the economy is in a good spot, but this report confirms my thoughts that those hoping for a lot of rate cuts next year may be getting too far ahead of themselves.   Make your Charitable Gifts Count this Season If you currently receive required minimum distributions (RMDs) from a retirement account and you make charitable donations, you should be using your required distributions to make those charitable gifts.  This is called a qualified charitable distribution (QCD) and it is a tax advantaged way to make the donations to charity that you were already doing.  After the tax changes in 2017, the number of tax filers who itemize dropped substantially.  Charitable donations are typically an itemized deduction, so for the majority of tax filers, charitable gifts do not provide any tax benefit.  When taking a required distribution from a retirement account, the distribution is reportable as income.  However, any required distribution that is instead sent to a charity does not need to be recognized as income, meaning the giver is guaranteed to receive both the federal and state income tax benefit, even if they don't itemize.  Not only that, but since the charitable distribution is not included in income, it results in a lower adjusted gross income which is the income level that determines the cost of Medicare premiums (IRMAA).  A normal itemized charitable donation only reduces taxable income, not adjusted gross income, so even people who itemize are still better off making qualified charitable distributions rather than itemized charitable donations. These QCDs are a great way to help a cause you believe in while getting the most tax benefits possible.   Companies Discussed: The Cigna Group (CI), The Kroger Co. (KR), The PNC Financial Services Group, Inc. (PNC) & The Hershey Company (HSY)

Job openings remain strong, what does that mean for our economy? The Job Openings and Labor Turnover Survey, also known as the JOLTs Report, showed job openings of 7.74 million in the month of October topped expectations of 7.5 million and increased from September's reading of 7.4 million. While it was nice to see the increase, I wouldn't be surprised to see job openings decline further from here. Openings peaked in March 2022 at over 12 million and have been on the decline since then. While that may sound problematic, these numbers were greatly distorted by the Covid shutdown and then the reopening that followed. We had never seen more than 8 million job openings pre Covid and at the peak there were more than two job openings for every available worker. We still have a very healthy labor market considering there are still 1.1 available positions for every unemployed worker. I would actually say the labor market is in an even healthier place at this point in time. With the excessive amount of openings, we saw a lot of employee turnover and quits which I believe led to elevated wage inflation. The labor market is much more balanced at this point in time, which should lead to less concerns over wage inflation. This should then be positive for the overall inflation rate which the Fed has been battling the last couple of years now.   The labor market continues to produce strong results! November payrolls showed a very nice increase of 227,000, which topped the estimate of 214,000. The two prior months also saw positive revisions with October now showing gains of 36,000 versus 12,000 and September showing an impressive growth of 255,000 versus 223,000. While the November gain may look quite strong, it's important to put this in perspective and pair it with the weak October report. October was challenged as it was held back by impacts from Hurricane Milton and the Boeing strike. This essentially reduced the jobs in the October report and added them to the November report. If we instead look at an average of October and November, we would then see growth of 131,500, which is still strong but not nearly as impressive as the November headline number. Areas of strength in the report included health care and social assistance which was up 72,300, leisure and hospitality which was up 53,000, and government which was up 33,000. While the government number includes state, local, and federal, I am curious to see what these numbers look like next year with Elon Musk and DOGE taking a closer look at government spending. Instead of consistent gains from this sector, we could potentially see a decline in payrolls. Utilities which saw a decline of 100 and retail trade which saw a decline of 28,000 were the only areas that produced a negative result in the month. I was surprised to see retail trade on the list considering the busy holiday season, but it is believed the later Thanksgiving holiday had a big impact. With the report largely in line, expectations for a Fed rate cut jumped to nearly 90% when they meet on December 17th and 18th. At this point, I would be very surprised if they didn't do a quarter point cut at that meeting. I do believe after that cut though, there could be a pause until we see further data.   Holiday spending is looking positive We have now been seeing predictions for what spending will look like for the holiday season. It's no surprise to me those numbers are looking pretty good with estimates for spending to increase somewhere between 3.8 and 4%. These estimates should be confirmed or may even be a little light with the success of the post-Thanksgiving deals. Data from Mastercard showed Black Friday retail sales, excluding automotive, increased 3.4% compared to last year. This came with a huge increase of 14.69% for online shopping compared to an increase of just 0.7% for in-store sales. According to Adobe Analytics, Cyber Monday then set a record with $13.3 billion of sales. This was an increase of 7.3% compared to last year. Overall, Adobe Analytics showed online spending for the Cyber Five rose 8.2% year over year to $41.1 billion. The spending looks good for a few different reasons. First, the election is finally over. Based on what I was reading, I believe people really stopped spending because of their uncertainty of what direction they thought our country would be heading. Now that the election is over, consumers are benefiting from and feeling good about a strong stock market that has done well this year and we still seem to be getting some price appreciation on our homes. According to the conference board, their recent report showed the strongest monthly gain in consumer confidence in over three years. We will continue to keep you informed and updated on holiday spending, but based on what I'm seeing I do expect consumer spending for the holiday season to have a strong increase from last year and perhaps when we see the real numbers in January, they could come in higher than those estimates!    Trading stocks 24 hours a day is coming soon! With technology today I believe it will definitely happen, but the question is when? I think a more important question is do we really want it? Currently the market trades from 9:30 in the morning until 4 o'clock in the afternoon Eastern standard time. There is also currently low volume in after-hours trading. Companies like Robinhood and even Charles Schwab allow for trading of some equities after hours in a lite market. I have been managing money now for over 40 years and I've seen the good and the bad. What worries me is this could become too much stress for some people to handle. I can see people waking up at 2 o'clock in the morning to check to see whether their stock is trading up or down and this could become a regular habit which could happen anytime at night. It would also allow people to make impulsive decisions since you have your phone with you 24 hours a day. Once that trade is made it's done in terms of its financial impact but will you then worry about it and not be able to sleep? Investing can cause a toll on your emotions and I think having that break from 4 PM until the next morning at 9:30 gives your body and mind an emotional break. If you're a trader and you're gambling you probably don't care much about reading the news or digesting the most recent earnings release before making any financial decisions, but if you are a true investor and you invest for the longer term you don't need 24 hours a day to trade. You will use the break to read and analyze your decisions because you want to do your research before buying or selling. Be careful what you wish for!   Tax Problems with Overconcentrated Portfolios We've seen many cases where someone has a lot of unrealized capital gains in a taxable investment account and they are afraid to sell anything because they don't want to pay taxes.  This is more common with older people because they might have bought something decades ago that has appreciated substantially.  Because of this appreciation, one position or a small number of positions may make up the majority of their entire portfolio resulting in a lack of diversification and a much higher level of risk. In turn they feel backed into a corner because selling results in taxes but holding continues the investment risk. There are many ways to deal with this such as charitable remainder trusts or collar strategies, but before any of that it is important to understand what that tax impact actually is, because in many cases it is not as bad as people think. Selling a long-term investment result in a capital gain which is reportable income, but long-term capital gains are taxed at lower rates than ordinary income like wages or IRA withdrawals.  In many cases, that tax rate can be as low as 0%.  For an elderly married couple who claims the standard deduction, if their total income, including long-term capital gains, is less than $126,350, those gains are taxed at 0%.  If their income exceeds that level, only the capital gains above the threshold are taxed at the higher rate of 15%. This is important to know because we've spoken with people who have some social security income, maybe some RMDs, and a little interest income, but their adjusted gross income is only $80,000 and they are worried about selling stock and paying taxes on gains.  What they don't realize is they can handle over $46,000 of additional capital gains without paying any federal income taxes on them.  They may be perpetually carrying an unnecessary level of risk in their overconcentrated investment portfolio because they are so worried about taxes when they have the ability to liquidate and diversify a portion of their portfolio every year tax free.  By better understanding their tax situation, they can be more informed about making investment decisions.   Companies Discussed: Intel Corporation (INTC), Target Corporation (TGT), The Gap, Inc. (GAP)

Changes in the SEC under Trump that you should know There will be many changes under Trump, but for investors the SEC, which is also known as the Securities and Exchange Commission could be a big one. The current head of the SEC, Gary Gensler, is likely gone for sure. He has been tough on Wall Street and even tougher on cryptocurrencies. It is likely Trump will appoint a new SEC chairperson who will want to have less control over Wall Street. One name on that list is Hester Pierce. She was appointed by Trump in his first term and is one of two current Republican commissioners. She also voted against most of Gary Gensler's initiatives and is much friendlier towards Wall Street. That doesn't mean everything will run wild and in particular, she still would like to see regulation for the cryptocurrency business. It seems she disagrees with both Gensler and Trump-appointed predecessor, Jay Clayton, who sued crypto startups that didn't register their products as securities. Instead, she would rather see new regulations for crypto's technology. Her approach would be different than Gensler, but it seems that she still wants to protect the investor by using stronger regulations. One rule in the works that may not make it into the books that had much controversy was forcing companies to disclose climate related risks. The SEC voluntarily put the rule on hold while it is litigated. Another one in litigation is for rules that hedge funds and brokers must report on short positions and stocks lent for short selling. Unless these two can pass before the new administration takes over in January, I don't believe they will have any chance of surviving. There are also other rules in litigation that are in limbo that will probably be dropped next year. Be sure to stay tuned to the Smart Investing Show for updates and changes in regulations by the SEC, as I'm quite confident it will look very different next year!   Is Michael Saylor, CEO of MicroStrategy, a genius or a crazy man? If you're not familiar with MicroStrategy, their symbol is MSTR. Their CEO is famous for not just buying bitcoin, but leveraging everything he can to invest all the assets into bitcoin. I listened to a podcast that Mr. Saylor did recently and I was shocked at many things he said. If you follow us on a regular basis, you know we're not advocates of investing in cryptocurrencies or bitcoin, but this CEO takes it to the extremes on the other side. The company's financial statements look like a disaster, I'm surprised they are still in business. Mr. Saylor stated they just borrowed billions of dollars to purchase $4.6 billion in bitcoin, which brings their bitcoin holdings up to about $40 billion. The company only has $60 million in cash. If you do the math, MicroStrategy currently owns about 1.6% of the market value of all the bitcoin. With all the rumors floating around about the US government being an advocate of bitcoin and perhaps even setting up a bitcoin reserve, the price of bitcoin is now around $100,000. Mr. Saylor was laughing as he spoke about the current value of bitcoin at $1.8 trillion and said he sees it going to $180 trillion in 20 years, at that level the price of one bitcoin would be $13 million. The host of the podcast did a quick analysis and said based on that projection, the market cap of your stock, which is currently $89 billion would be worth roughly $10.5 trillion in 20 years. The response was, yes that's what the math says. The only reason I could come up with why Mr. Saylor is so optimistic is he feels in 20 years 7% of all the world's money will be in bitcoin. I have read from many professors and experts on the global economy that have said this will never happen because governments will not be able to control their own economy. He also stated that bitcoin should be the world currency and in 20 years there should be $500 trillion in digital assets. I've been in the investment world now for over 40 years and none of this makes any sense to me. I do believe there will be a major storm someday in the future. As far as investing in the stock MSTR, the company has no earnings, no cash flow and nearly a 16% short holding betting on a stock decline. The stock has a 52 week low of about $44 a share vs a high of $505 a share and currently trades around $440 a share. I have to say this is not a company, but more of a management company of a non-diversified asset or a leveraged bet all in bitcoin.    The housing market has changed It used to be couples would get married and buy a house in their late 20s, but now because of a different lifestyle and higher prices for homes, first time buyers are now nearly 40 years old. I also found it interesting that there are now more single people buying homes. Single women are generally about six years older than single men when buying homes. However, roughly 20% of single women are first time home buyers, which is more than double their male counterparts. People in their early 60s have become the most active in the current housing market. This is the generation that scratched and saved and sacrificed to buy a home back in the 1980s. Even then houses were not that affordable, not to mention interest rates looked a whole lot different! But now those buyers, some of which have accumulated close to 40 years of equity have benefited handsomely and account for a big portion of the $35 trillion in home equity across the US. For those looking to buy, there are some signs of relief in home prices with some areas in Texas and Florida that were not too long ago very hot markets starting to see price declines. I feel it could take another couple years to get a more normal housing market, especially with about 25% of people having a mortgage on their home of 3% or less. With such a low rate, they would probably be more likely to remodel or do an addition rather than sell their house.     Beware of IRA Income Limits Saving money is obviously a great thing, but it is important to be aware of the income limits when making both Traditional IRA and Roth IRA contributions.  Contributions to IRAs can be made at any age, but you need W-2 or self-employment income to contribute.  However, if your total income from all sources is too large, this may prevent you from making contributions as well. With Traditional IRAs, you can make contributions at any income level, but your ability to deduct those contributions is phased out if your income is too high, assuming you have access to an employer retirement plan like a 401(k).  Since getting a tax deduction is one of the main benefits of a traditional contribution, high-income earners would likely want to fund a different account instead. For a single filer this phase out begins at $77,000, and for married filers this begins at $123,000. If your spouse has access to a workplace retirement plan but you do not, your phase out for traditional IRA contributions begins at $230,000. Roth IRAs are subject to different limits.  For single filers the ability to contribute begins to be phased out when income reaches $146,000 and for married filers at $230,000.  So with traditional IRAs, your income determines if the contribution is deductible, with Roth IRAs your income determines if you can make the contribution at all.  Unfortunately, I see people making Roth IRA contributions when they aren't eligible to all the time.  This can happen if you are used to making a Roth contribution every year and eventually through raises or bonuses or whatever your income exceeds the limit without you knowing. Now with Roth IRAs, there is a workaround called a Backdoor Roth contribution that can be used to make Roth contributions when income is over the limit.  To do this effectively, the contributor cannot have any Traditional IRA money.  If they do, they would need to roll it into a workplace plan like a 401(k) before implementing the Backdoor Roth contribution.  The Backdoor Roth involves making a non-deductible contribution to a Traditional IRA, which again can be done at any income level, followed by a conversion into a Roth IRA.  Conversions do not have income limits and because the initial contribution to the Traditional IRA was not deductible, it is not taxable when converted to the Roth IRA.    Companies Discussed: Comcast Corporation (CMCSA), Delta Air Lines, Inc. (DAL) & Alphabet Inc. (GOOG)

Are you spending like other consumers? Retail sales in the month of October showed an impressive gain of 2.8% compared to last year. With lower gasoline prices, gas stations were a major negative as they declined 7.1% compared to last year. If this group was excluded from the headline number, retail sales would have been up an even more impressive 3.7%. There were several areas of strength as gains were quite broad across various industries, but nonstore retailers, which was up 7.0% and food services and drinking places, which was up 4.3% continued to lead the charge. Interestingly, both furniture and home furnishing stores, which was up 1.5% and building material and garden equipment and supplies dealers, which was up 2.8% showed annual gains for the first time in many months. I wouldn't necessarily say these categories are particularly strong, but it appears they may have finally bottomed. With that said, I do believe they could be areas of strength in 2025 considering they have both been depressed areas for a couple of years now and I believe people will look towards home improvement next year. Overall, this is further evidence that the consumer remains healthy and willing to spend in this economy.    How the tariffs with China could play out over the next few months I'm beginning to get questions from people who have concerns about the tariffs on China products such as when will they start? How much will they be and should I buy products such as appliances now before the tariffs on China begin? These are all great questions. It's important to understand the tariffs cannot be placed until after the inauguration of the Mr. Trump. It is possible on is his first day that could be one of the many things he will do when he is the official president. It is, however, possible that he may hold off on the tariffs because the purpose of tariffs is to force equal trade or free trade with China, and Mr. Trump may want to use tariffs as a negotiation tool. In 2023 the trade deficit with China was $279 billion. Mr. Trump wants China to import more goods from our economy, which was only $148 billion in 2023. This could come from such things as agricultural products and based on the amount of oil we could be pumping in 2025, we may have more oil than we can use here and maybe China will purchase some. There are also other products as well that will be on the table. It should also be noted last time Mr. Trump was in office, China's economy was very strong, and they were not as willing to negotiate. Fast forward to today and the Chinese economy has weakened. This could mean they would be more open to talk on trade to help their economy. No one knows exactly what the new president will do or how much the tariffs will be, but if you need to buy goods that are made in China, your window of opportunity may be running out!   Is inflation continuing to cool? The October Consumer Price Index (CPI) showed price gains came in line with expectations. Headline CPI increased 2.6% compared to last year and core CPI, which excludes food and energy climbed 3.3%. The headline CPI was above September's reading of 2.4% and core CPI matched September's reading of 3.3%. According to economists, the monthly inflation rate in October 2023 was unusually low, which made the October 2024 reading look relatively high. Hopefully, this means we will see further progress in the months ahead as core CPI has not shown much progress as of last as it has been stuck at 3.2% or 3.3% since May's 3.4% reading. While much of this sounds problematic, there are not many areas of concern when looking at the inflation report. The major issue continues to be shelter which rose 4.9% compared to last year and accounted for over 65% of the annual increase in core CPI. I continue to believe shelter inflation will eventually resolve itself, which would then bring the major inflation measures more in line with the Fed's desired level. Powell even said during a press conference, “Market rents, newly signed leases, are experiencing very low inflation." He also mentioned the current shelter inflation readings are due to a catch-up problem and "It's not really reflecting current inflationary pressures." I do believe with this report a December cut looks more likely, but that would not leave room for as many cuts in 2025. Based on the current data, I believe a Fed Funds Rate around 3.5% would be a fair level and that compares to a current Fed Funds Rate of 4.5-4.75%. That means if there is a cut in December, we could be looking at maybe just 3 or 4 rate cuts next year.    Work Income vs Retirement Income When planning for retirement, it's important to understand the difference between your work income and your retirement income. If you get paid $200k/year, close to $17k/month, after taxes and savings, your net paycheck might be closer to $120k/year or $10k/month. If you go into retirement with the idea that you need to replace that entire $200k of income to continue your lifestyle, that's just not true. In retirement you are not paying payroll taxes, which in California is a flat rate of 8.75%, you're typically not saving much anymore, and if planned properly, you're paying less federal and state taxes as well. In this scenario, Social Security alone might be between $5,000 and $6,000 per month for a married couple which means any retirement savings just need to cover the remaining living expense need which a nest egg of about $1 million should be able to do if invested appropriately, even after taxes are considered. We see retirees all the time where their income potential, or the maximum amount they can spend without running out of money, is much larger than they are currently living on, and they have no idea. If you're planning for retirement, know how much you actually need so you can either retire earlier or at least have the peace of mind that you are financial independent if you'd rather keep working.     Companies Discussed: Honeywell International Inc. (HON), Dominos Pizza, Inc. (DPZ) & Bristol-Myers Squibb Company (BMY)

Major changes to the Dow Jones you should know about! The Dow Jones has changed again as Nvidia (NVDA) replaced Intel (INTC) and Sherwin-Williams (SHW) replaced Dow Inc. (DOW). The most recent change in the Dow Jones came on February 26th when Amazon (AMZN) replaced Walgreens (WBA). With the addition of Nvidia, much of the Mag Seven will now be present in the Dow Jones. As I mentioned Amazon was recently added, but Apple and Microsoft have been components for many years. It seems the Dow has really lost relevance as it has trailed the S&P 500 and Nasdaq in popularity and performance. I worry adding NVDA at this point in time could be buying high and at times the committee has had poorly timed decisions. Back in August 2020 the committee ended up doing a three-company swap as they eliminated Exxon, Pfizer, and Raytheon and added Amgen, Honeywell, and Salesforce. The interesting swap was Exxon (XOM) for Salesforce (CRM) considering XOM is up close to 200% not including dividends during that time period while CRM is up just around 10% during the same timeframe. Another poor decision came back in June 2018 when the committee swapped General Electric (GE) for Walgreens (WBA). Since the switch GE is up over 180% and I don't believe that return even includes the benefit of the spinoffs GE Vernova and GE Healthcare, which would make the return even more attractive. During the same timeframe, Walgreens has had a rough time and the stock has actually fallen over 80%. While some maybe excited about the move, I wouldn't be surprised if Intel actually outperformed Nvidia over the next 5 years.    The election is over, what investors should do now! My belief is that your plan should not have a drastic change after the Trump win, but there may be small changes to keep an eye on. The first thing I would tell people is to be careful chasing proposed winners or selling potential losers this early in the game. Ultimately, we don't know exactly what policy changes he will be able to implement and we don't even know at this point who will fill his cabinet. I was bullish on financials before the Trump win, but now that he will be entering office the group will likely benefit from a more relaxed regulatory environment compared to the current administration. Regional banks in particular look like they could be big beneficiaries, but be careful as many already had a big first day move after the election results. I was somewhat surprised to see big tech as a big winner as well, but it seems in today's world everything is good for big tech. If you have been following us, you know we are skeptical of many of these big tech companies due to excessive valuations and frankly I just don't see how a Trump presidency would be overly positive for the group. Especially considering both Trump and VP elect JD Vance have been critical of the group in the past. I would not be surprised to see continued regulatory pressure for some of these companies even after the change in the White House. Health care is also an interesting sector with Robert F. Kennedy Jr. being a large part of the Trump campaign considering his criticisms of vaccines and the food system. While this is something to keep your eye on, I don't believe the group is completely doomed and in fact you could find some opportunities if stock prices continue to be pressured. Green energy is also in the cross hairs and many of these companies saw large declines after the results. While this may be an area of concern if the Inflation Reduction Act is repealed, I believe investors may be able to find some good opportunities if these businesses can maintain profits especially considering our need for more energy. At this point in time, I would wait for more clarity on that space as changes to tax credits could totally disrupt the current earnings picture for many of these businesses. Overall, you may be excited or disappointed with the results, but ultimately the strategy of investing in good quality companies at fair prices over the long term should not change!   Do you think you will be able to retire when the time comes? At Wilsey Asset Management we continue to work very hard to encourage people to invest for retirement and also to invest wisely so they can retire at a reasonable age. What is a reasonable age? Most would say 65 but in recent surveys the average age is 62, that's a surprise to me. What is also a surprise is that in 2002 the average age of retirement was 59, and in 1991 it was 57. Could it be because people are living longer and are getting bored in retirement for 20 years or longer? I'm not sure of the reason why but it seems like we have to work a little bit harder based on a survey from New York Life that says 22% of retirees think they may never be able to retire. I have often said getting old is not that great but getting old and not having a good investment portfolio, well that can be devastating. Be sure you are taking advantage of workplace retirement plans, IRAs, or even investing in a tax advantaged brokerage account.   Is Your Social Security Taxable? Social Security benefits are taxable, but they are not treated like any other source of income. Currently there are only 9 states that tax Social Security: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. The remaining states do not tax it so the majority of Americans do not need to report it on their state returns. Since this income does not take up any room in state tax brackets, it is much easier to keep taxable income lower in retirement at the state level. On the federal level, between 0% and 85% of Social Security benefits is reportable as income, so at least 15% is tax free. The lower someone's income is in retirement, the greater chance that a larger portion of their Social Security will be tax free. The ratio of taxable to non-taxable benefits is based on “combined” income which is a Social Security Administration term that includes ½ of Social Security benefits plus all remaining income sources. If a married couple's combined income is less than $32,000, none of their benefits are taxable. If combined income is between $32,000 and $44,000, up to 50% of benefits are taxable, and if combined income is greater than $44,000 then up to 85% of benefits are taxable. If these parameters seem low, that is because they were created in 1983 and have not been indexed for inflation. In the 80's, $32,000 and $44,000 was a relatively high level of retirement income so most people did not have to pay taxes on it. Over the last 4 decades as income levels have naturally risen due to inflation, more and more recipients are forced to pay taxes on their benefits. It is unfortunate that Social Security is taxable at all because it used to be tax free prior to 1983. Now we are taxed in retirement when we receive it, and we are taxed on the income we earn that is used to pay into Social Security while we are working resulting in double taxation. It is possible to structure retirement income in a way that reduces the taxation on Social Security, but it is getting increasingly harder to do so.   Companies Discussed: First Solar, Inc. (FSLR), Five Below, Inc. (FIVE) & Sherwin-Williams Company (SHW)

Don't let the presidential election be your investment indicator Presidential elections, especially this one, make people become very emotional, but don't let that sway you away from investing. Looking back to 1950, the S&P 500 index gained 12.1% per year under Democrats and 7.1% under Republicans. So based on that tad bit of information, you would think that Democrats are better for the stock market than Republicans. If we dig deeper, we will see that Nixon had a major negative impact as he left office in August 1974. This was at the end of the 73-74 market crash when the S&P 500 was down 48%. The other Republican who had bad timing was George W. Bush, who was in office from 2001 to 2009. The S&P 500 dropped 38% in 2008 during the Great Recession and wiped out all the previous gains in the stock market while George W. Bush was in office. Looking more recently, there were investors who hated Trump as President and when he got into office, they sold their stocks missing an average annual return of 13.8% per year while he was President. The same thing happened in 2020 when Joe Biden became president, many Republicans thought the world was coming to an end and sold their stocks. The gain in the stock market under Joe Biden so far has been an 11.9% average annual return. The best advice I can give you is do not look at the President for any type of analysis on stocks, there are so many other factors at play rather than just who is in the White House. Instead, I recommend you look at the equities you are investing in and ask yourself how will they do going forward. Ultimately, businesses will find ways to succeed regardless who the President of the United States is.   Job openings continue to decline, is that a problem? In the September Job Openings and Labor Turnover Survey (JOLTs), job openings declined to 7.44 million. This was below both the expectation of 8.0 million and the prior month's reading of 7.9 million, which was revised lower by 179,000. This also marked the lowest level of job openings since January 2021. While this all sounds negative, there are still around 1.1 job openings per available worker. Also, this should be positive for inflationary concerns as the labor market is now more balanced when looking at the relationship between employers and employees. When employees have way more power like we saw over the last few years, it can have a big impact on wage inflation, which generally feeds through to overall inflation. While this isn't an overly exciting report, I believe it still shows the labor market is in a good place. I think we could see job openings even fall a little further before it would become a concern.   Based on Friday's job report, it looks like the economy is in trouble, but it's not! We have not seen numbers like these in the jobs report since 2020 with nonfarm payrolls only increasing by 12,000 for the month. The expectation was job creation of 100,000 jobs. Why the big miss? Right off the bat the strike of Boeing was a loss of an estimated 44,000 jobs and who can forget the two hurricanes we had in the south. It's currently unclear how many jobs were lost during that timeframe due to those natural disasters. On the positive side, average hourly earnings did increase 0.4% for the month, which was above the estimate and the 12 month gain of 4% held steady. Revisions to August and September took out 112,000 jobs bringing the August number to only 78,000 and September's gain declined down to 223,000 jobs. Temporary jobs are sometimes seen as underlying strength of a job market, but they have declined by 577,000 jobs since March 2022. We don't feel this is the indicator that it used to be and we expect to see some reversal of temporary jobs for the holiday hiring season. This should start being reflected in the next month or two. The hurricanes in the south were a hit to leisure and hospitality as I'm sure many bars and restaurants were closed and the category saw drop of 4000 jobs in the month. Only two sectors in the job market saw increases which was healthcare as it added 52,000 jobs and government experienced an increase of 40,000 jobs. On the surface, the job report looks frightening, but we are out of hurricane season and heading into the holiday season. I think you'll see a reversal in the job market in the next 2 to 3 jobs reports, which should be rather positive. Not as positive as it was during the expansion when we were recovering from Covid, but definitely better than a 12,000 job increase! There are two meetings left for the Federal Reserve and I think this job's report would allow them to cut rates by a quarter point at the next meeting. For the last meeting of the year, we will wait for more economic data before predicting another rate.   Is the US economy still growing? The GDP shows it is. While Q3 GDP, which stands for Gross Domestic Product, growth of 2.8% came in below the expectation of 3.1% and Q2's reading of 3.0%, it is nowhere near signs of a recession. It also points to a US economy that remains in a good spot, even though it may be slowing. Remember slowing and declining are very different! The consumer continued to remain a bright spot in the economy as personal consumption expenditures added 2.46% to the headline number. This was thanks to growth of 3.7% as service spending growth was 2.6% and goods spending growth was 6.0%. Durable goods in particular were quite strong as they grew 8.1% in the quarter. Gross private investment had little impact on the headline number as it added just 0.07% to the headline number. The change in private inventories subtracted 0.17% and residential investment continued to be a problem as it fell 5.1% and subtracted 0.21% from the headline number. This was largely offset by growth in equipment spending of 11.1%. Government spending also was a large factor in the quarter as it added 0.85% to the headline number in large part due to growth of 14.9% for national defense spending. The only major category that subtracted from the headline number was trade as it had a negative impact of 0.56%. While exports were up 8.9% in the quarter, imports were up even more at 11.2%. Overall, I'd say this was a good report. I would warn people that I would not be surprised to see growth slow in the quarters ahead, but I'm still not looking for a recession in the near term.   Retirement Plan Allocations The majority of working people have some type of retirement plan through their employer like a 401(k) or 403(b), but many of those people don't pay enough attention to how those funds are invested.  Employer retirement plans are great because they automate your savings so every paycheck you have a portion that gets invested.  Over time this can build to a lot of money.  There are also no income limits you have to worry about like with IRA accounts and you get the tax benefit from making tax-deferred or Roth contributions.  However, in order to get the most out of the plan, you need to make sure you're choosing the best investment options within that plan.  Every plan has a list of options called a fund lineup.  These may include stock funds, bonds funds, balanced funds, asset allocation funds, real estate funds, and cash funds, all of which will have different expected growth rates.  In many cases we see people choosing a random fund that they don't understand or the default option which is usually a target date fund or stable value fund.  Target date funds generally have higher fees and an overconcentration of bonds which results in lower performance over time and a stable value fund is essentially cash which doesn't grow.  It only takes a few minutes to update the investment options but taking the time to do it can result in thousands of extra dollars per month in retirement without actually contributing any more.  Once you choose your investments, you typically don't need to adjust them too often, and in many cases, you can set up automatic rebalancing if you would like.  Making sure your retirement plan is set up correctly is a simple thing everyone can do which will have a huge impact on your financial future.    Companies Discussed: Chewy, Inc. (CHWY), Genuine Parts Company (CPG) & ASML Holding (ASML)

T-bills could be your worst investment Right off the bat you're thinking what how could they say such a thing? Warren Buffett has hundreds of billions of dollars in T-bills! Why do we think it's the worst investment? First off, Warren Buffett spends all day long reading, researching, analyzing and when he sees a good value investment, he will likely sell what he needs from T-bills to buy those good long-term investments. If you are someone that needs the money in 2 to 3 years, then this belief does not apply to you as T-bills are a great place to have your short-term money. But if you're a longer-term investor, and you want your money to grow for you, I worry that T-bills are not a great place for you. What will likely happen is that you will feel safe for a while, especially when the correction comes. You'll be glad you have money in T-bills, but you probably won't pull the trigger when lower equity prices arrive because you will feel comfortable with the safety and no volatility of your T-bills. Unfortunately, what will then happen down the road is you will eventually get tired of getting a lower return as interest rates drop and your T-bill is only earning you 2 to 3%. You will then likely want to move to something else and maybe do something silly like look at the past performance of equities and buy after stocks go back up after the correction. When it comes to investing, be sure to use the right tool for the right job. A T-bill is not the right tool for long term investors unless you really are a skilled investor and know how to navigate the volatility in equities.   One forgotten component of Tesla's business has a huge impact on profits! Tesla reported numbers that were ahead of analyst expectations, but I wouldn't say I was overly impressed. Sales increased 8% compared to last year and earnings per share of 72 cents did top expectations of 58 cents. This was a growth of 9.1% for EPS when compared to Q3 2023 EPS of 66 cents. The interesting component that people forget about is revenue from automotive regulatory tax credits. To comply with emissions regulations that are set by authorities including the United States and European Union, other automakers purchase credits from Tesla. In the most recent quarter, this added $739 million worth of revenue. While this is just under 3% of total revenue, this is essentially pure profit for the company, which means it likely accounted for close to 34% of the company's $2.17 B worth of net income. As other companies continue to ramp up their own EV and hybrid plans, a big question I would have is will they need as many credits from Tesla? Also, if there is a change in leadership after this election, will there be a reduction in regulatory requirements that could decrease the need for other automakers to purchase these credits? This could cause problems for Tesla as it would lose a very high margin component of its business. It is hard to bet against Elon considering his successes, but I have a hard time recommending this stock since it still trades at around 70x 2025 expected earnings. With that type of multiple we need to see much higher growth for sales and earnings than what we saw this quarter. Elon did mention his “best guess” for vehicle growth next year is 20% to 30%, which is one reason the stock shot higher. This seems quite ambitious and I'd be curious where that growth is expected to come from. I would say Tesla bulls continue to point towards autonomy as a potential reason to buy the stock, but at this point I would say that is a huge gamble given the elevated level of uncertainty in that space. Elon did say on the earnings call that Tesla has developed a ride-hailing app that some employees in California have been able to use this year and he expects the service to roll out for public use next year in California and Texas. The company intends to use it for a robotaxi network in the future. With that said, according to a list of permits issued on the California Public Utilities Commission's website, Tesla isn't currently licensed to operate a commercial, transportation network company or ride-hailing service in California. From a regulatory standpoint, I would say Tesla is behind both Waymo and Cruise.    Luxury brands lose excitement as thriftiness takes over in this slowing economy Luxury brands like Gucci, Louis Vuitton and Chanel have seen a big decline in their sales growth. These luxury brands have increased their prices so much to try and keep their products exclusive. The push back towards exclusivity came after the Covid giveaway years where many consumers became short term purchasers. Unfortunately, this has turned off their normal elite customers who saw how ridiculous it was to see prices climb from 2019 to 2024 by 50 to 100 percent. They may be rich, but they are not stupid. As things have slowed, on social media and YouTube frugality has become cool once again. This includes talking about the deals you got or even buying knockoffs, which have a new name called dupes. On many of the posts on social media and other places it is now cool to show off your dupe that you purchased and how much you saved. I remember a couple years ago I talked about how the hype for expensive purses and brand names would not continue to rise. I think we have now hit the turning point where many people who pay those higher prices for purses or shoes will not be able to sell them for anything close to what they paid for them. The reason for that is you're no longer competing on price with the brand names but now many consumers buying secondhand will compare that price to the dupe and want to get a discount compared to the dupe price. I would not recommend investing any money into these ultra-luxury stocks, even though some are down between 40 and 50%. Many of them still trade at lofty valuations and sales growth has been cut from 20 to 30% down to 2%.   Inheritance Issues with Annuities Annuities can be purchased with qualified (tax-deferred) funds or non-qualified (after-tax) funds. Because qualified money is tax-deferred all withdrawals or income taken is taxable at ordinary income rates to the owner or the beneficiaries. With non-qualified annuities, any gain in addition to the purchase amount will be taxable at ordinary income rates to the owner or beneficiaries.  There is no step-up in basis at death and they do not receive the preferential lower tax rate treatment that capital gains and dividends do. The growth is tax-deferred, but it is deferred to a higher tax rate than other investment income.  When a spouse inherits either a qualified or a non-qualified annuity, they may treat it as their own and retain all the options that their deceased spouse had.  When someone other than a spouse inherits a qualified annuity, they have the ability to rollover those funds into an inherited IRA and will be subject to the 10-year rule like any other IRA.  The most complicated situation is when you leave a non-qualified annuity to a non-spouse beneficiary.  In this case the beneficiary is typically children of the owner and they have 2 options. They can either stretch the withdrawals from the annuity over their life expectancy, which is typically better for their tax situation as they can spread out the income over many years, or they can deplete the annuity in any way they want within 5 years.  With the stretch option, they must take their first distribution within 12 months of the date of death of the owner or they will default to the 5-year option.  This requirement often causes a problem for beneficiaries because if they forget to take that first withdrawal, they are forced to realize a potentially large amount of ordinary income in a short period of time.  Owners of annuities need to understand their options so they can not only plan their own retirement income, but also have a plan for their estate.   Companies Discussed: Capri Holdings Limited (CPRI), Expedia Group, Inc. (EXPE) & Highwood Properties, Inc. (HIW)

Where does private equity invest the money, you give them? Private equity invests money in many different areas, but the problem that they are having is that both them and venture-capital are sitting on $2.6 trillion, which is a record high. Ultimately, they are having a hard time finding where to invest. A private equity firm generally has to earn between 12 and 14% on their investments to cover their management fee and pay investors a worthwhile return. One area they have been attracted to is HVAC, also known as heating, ventilation, and air conditioning. Other areas of interest have included plumbing and electrical companies. Over the last two years, private equity has purchased nearly 800 big HVAC, plumbing and electrical companies. It is also estimated there are plenty of smaller deals that just don't show on the radar. I do believe somewhere down the road someone whether it's the consumer, the employee, the business owner or the investors is going to lose. Basically, private equity is trying to streamline these smaller businesses into bigger businesses to cut costs. Many times, this changes the way they do business and it could place a larger emphasis on making more new sales rather than doing repairs, which leads to bigger profits. I do worry about the business owners who are told they can still run their business the way they want and keep a 20 to 25% stake. If things get difficult, the private equity firm with a 75% ownership will override the small business owners' decisions.   Are gas prices going up or down in the future? A big factor in the price of gas is the price of oil. If you live in a state like California, then you can add other factors like taxes and regulations. Oil has remained somewhat reasonable falling under $70 a barrel in the last few weeks, it then recently crossed $80 a barrel on concerns in the Middle East. We know there is potential for a major disruption with tensions between Israel and Iran showing signs of escalation. The war in Ukraine continues to linger on, but so far it has not deterred Russia from selling their oil to countries like China and India. We also have a change in our president quickly approaching and everyone has to ask themselves, who would be more likely to tame the violence in the Middle East? If the next president cannot reduce or stop the fighting, we could see Israel start sending missiles towards Iran's energy infrastructure. This could then lead Iran to try and restrict or block oil tankers flowing through the Strait of Hormuz. These actions would likely cause oil to skyrocket to over $100 per barrel, which could mean a 20 to 25% increase in the price of gas at the pump. What has kept oil and gasoline prices low so far has been slowing demand from a weak economy in China and talks of OPEC exporting more oil come December. It's also important to know that there is less oil in storage than the historical average, which could mean there is pent up demand to refill that storage. If you're an investor, I think it makes sense to have at least 5% of your portfolio in oil and natural gas companies because I believe the upside in the price of oil unfortunately is much greater than the downside.   Are you still spending money in this economy? Retail sales have continued to prove resilient as in the month of September we saw growth of 1.7% when compared to last year. With the decline in the price of gasoline, gas stations saw a decline of 10.7% compared to last year and if this component was excluded from the headline number, retail sales would have grown at a stronger rate of 2.8% in the month. Areas of weakness included furniture and home furnishing stores (-2.3%) and electronics and appliance stores (-4.6%). One area that showed positive growth for the first time in a while was building material & garden equipment & supplies dealers. It was a very small annual gain of 0.5%, but could this finally be the turning point for a group that has struggled tremendously over the last couple years? Areas of strength in the report included nonstore retailers (+7.1%), health and personal care stores (+4.6%), and food services and drinking places (+3.7%). While the growth in retail sales isn't setting the world on fire, I believe this report provides further evidence that this economy is in alright shape.     Income Tax vs Property Tax on Inherited Property There are many factors to consider when inheriting real estate, especially in California, and the tax impact is one of the largest.  When receiving an inheritance of property there is an income tax consideration and a property tax consideration.  When capital assets, such as real estate, are sold for more than they were purchased for, the increase in value is considered a capital gain which is a type of income.  When property is inherited, it generally receives a step-up in basis which means the original purchase price is no longer relevant and the new income tax basis is the value of the property as of the date of death of the owner.  This means a parent who purchased a property for $200k and passes away when it is worth $1 million can leave it to their children who will not be responsible for the tax on the $800k gain. If they do sell, they will only need to report income on the appreciation after the date of death, or the amount over $1 million.  This is obviously a benefit and applies to other assets as well such as stocks and bonds.  However due to Prop 19, there may be a counteracting property tax implication when inheriting real estate.  In California the property tax assessed value can only increase by a maximum of 2% per year, even if the fair market value of the property increases much more than that.  Because of this people who have owned properties for many years are paying relatively little in property taxes compared to the actual value of their real estate.  However, when the property is inherited, the property tax assessed value increases to match its fair market value, resulting in a much higher property tax bill every year going forward.  As a result, vacation homes and rental properties that were great investments become unaffordable when the heirs receive them.  This often causes the sale of the property, which fortunately can be done income tax free due to the step-up received at death. There is an exception to this property tax increase where if children inherit the primary residence of their parents and begin treating that property as their own primary residence, they may add up to $1 million to the property tax assessed value before being required to pay additional property taxes.  Understanding these tax issues can help you determine when property should be held or sold before or after an inheritance.    Companies Discussed: Sirius XM Holdings, Inc. (SIRI), Vistra Corp. (VST) & Etsy, Inc. (ETSY)

Inflation comes in hotter than expected, is that a problem? The Consumer Price Index (CPI) showed September headline inflation was up 2.4% compared to last year, which was a little higher than the estimate of 2.3%. Core CPI, which excludes food and energy was up 3.3% compared to last year and it also came in a little higher than the expectation of 3.2%. While the numbers were a little hotter than expected, headline CPI was down from last month's reading of 2.5% and it registered the smallest increase since February 2021. It's come a long way from the high that was reached in June 2022 when headline inflation grew 9%. The major discrepancy between the headline and core number was energy. The energy index was down 6.8% compared to last year and gasoline prices had a major impact as they were down 15.3% over the same time frame. Shelter costs continued to have an outsized impact on the report as the index was up 4.9% over last year and accounted for over 65% of the 12-month increase in core CPI. The decline in inflation has continued to moderate, but overall, it has continued to trend in the right direction. While this report was somewhat disappointing, I don't think there is anything of major concern in this report. With the Fed's next meeting coming in November, it will be interesting to see how they interpret all the data as there are several factors that will have hopefully just a short-term impact on inflation and the labor market. These factors include both Hurricane Helene and Hurricane Milton as well as a Boeing strike that has had roughly 33,000 union workers on strike since September 13th. Given all this my estimate at this point in time would be that the Fed will do a quarter point cut at that November meeting.   What is PPI and how it can affect you as a consumer PPI stands for Producer price index. It's important to understand these monthly numbers because it will eventually have an effect on consumers. If the cost of producing something increases, that cost will generally be passed to the retail level where consumers purchase. While September headline PPI of 1.8% was higher than the expectation of a 1.6% increase, it is still a low level that shows no major concern on the inflation front. When excluding food and energy, PPI increased 2.8%. This was higher than the estimate of 2.7% and last month's reading of 2.6%. It was somewhat disappointing to see a small increase over last month's reading, but overall, it has continued to head in the right direction and at 2.8% I believe inflation at that rate is still manageable. It is worth keeping an eye on this data as the months progress, but it seems to have less impact on the markets now that inflation has become more manageable.   Gold is up about 28% year to date, here are a few important points to help you decide to buy, sell, or hold. I hear the thoughts out there that as interest rates decline, gold should rise and so far, that has held true. But if you go back in history, in the early 80s as interest rates fell so did gold. Let's say that correlation does hold true though, I'm not overly optimistic that we will see a large decline in the 10-year treasury as historically it yields about one and a half percent more than inflation. I believe inflation should be around 2-3% going forward. My other major concern for why I don't see long term rates falling much further is the United States continues to struggle with a huge debt load. Looking at gold purchasing, central banks from around the world including countries like China, India, and Poland bought more than 1,000 metric tons of gold in both 2022 and 2023, but in 2024 we have seen those purchases slow down. The countries have become a little bit more concerned given the large gain this year. Some of these countries could even consider locking in some profits and sell some of the gold they own. If you still insist on buying gold, you can buy the gold bars at Costco, which has been a huge hit for them, but if you notice they don't have a program to buy back gold. So when you want to sell those one ounce bars from Costco, you will have to go to a dealer who will charge a markup somewhere between five and 10%, which can eat into your gain more than you think. If you paid $2000 for gold and sold at $2700 you have a paper profit of 35%, but if you pay a 10% commission on that $2700, your gain drops to $430 which gives you an after commission gain of only 21.5%. Another option if you are looking to benefit from the price of gold is mutual funds and gold mining stocks, but because of the trading the returns don't track the performance of gold very well. If you really insist on adding gold to your portfolio, then I would suggest the best way to do it is an ETF like GLD, which has low fees and tracks closely the price of gold. Full disclosure, we do not hold any gold in our portfolio now nor do we plan on buying it in the near future!   US consumers love their chicken! In 2023 the average American consumed more than 100 pounds of chicken wings, legs, breasts and thighs, which was an all-time high. American farmers are cranking out about 10 million chickens per year. This includes various forms from organic, free range, antibiotic free, and the list goes on. Compared to beef and pork, chicken is a better value. Unfortunately, the price of chicken has increased dramatically over the last five years. Back in 2019, the average chicken was going for $3.11 per pound and today that average cost comes in at $4.08 per pound, which is $.97 more or a 31.1% increase. I personally consume a fair amount of chicken as I think it tastes good and it's also easy on your digestive system. I know the cost of chicken is up, but are you consuming the same amount of chicken you were five years ago?   Prioritize the Right Retirement Goals The most common goal when planning for retirement is to not run out of money. This is obviously important, but it should not be the only goal and in many cases, it should not even be the priority.  If you get to the point where your assets and income greatly exceed what is needed for your lifestyle, the chances of outliving your money decline and the priority should shift to income tax minimization.   For example, if you have a $2 million portfolio but only need $3,000 per month to supplement your social security or pension income, you probably won't ever run out of money.  However, if you don't implement the right tax strategies, you will end up paying way more than you need to and the longer you wait the worse it gets.  If your portfolio is $5 million to $10 million or more, you likely aren't too concerned with running out of money and you hopefully are implementing income tax reduction strategies.  However, at this point you should also be thinking about estate taxes.  This has been largely disregarded because the currently exemption amount for a married couple is so large at about $27 million.  In 2026 though this number is expected to be cut in half to around $14 million, and the tax rate on estates that exceed that will potentially increase from 40% to 45%. An estate worth $14 million is still quite large, but compounding interest is a powerful thing.  A portfolio of $5 million can easily exceed $20 million after 20 years of growth, and waiting to address this until your estate reaches the exemption limit makes tax planning more difficult and more expensive because the value of assets will only grow faster over time.  It is too common for people to fixate on not running out of money and end up neglecting their income and estate tax planning which ultimately just results in more taxes.   Companies Discussed: Roblox Corporation (RBLX), Tesla Inc. (TSLA) & Pinterest, Inc. (PINS)

More jobs data points to a healthy economy The Job Openings and Labor Turnover Survey (JOLTs) showed a surprise increase in the month of August. Openings totaled 8.04 million, which topped the estimate of 7.64 million and July's reading of 7.71 million. While this is still well off the highs from just a couple of years ago, there are still 1.1 available jobs for every person looking for one. On the inflation front, I believe it was positive to see the quits rate decline to 1.9%, its lowest level since June 2020. This indicates that the labor market has softened as employees are seeing less opportunity to quit their job in favor of another one. This should help put less pressure on wage inflation. The Fed will have to continue to walk the fine line of keeping the economy moving in a positive direction without stoking a rise in inflation. It's a tough task, but the labor market has continued to hold up much stronger than many believed was possible.    Employment report surprises to the upside      I was surprised to see the continued strength in the labor market as the growth of headline nonfarm payrolls of 254k in the month of September easily topped the estimate of 150k. Strength came from leisure and hospitality, which saw payrolls grow 78k thanks to a nice spike of 69k jobs from food services and drinking places. Other positive sectors included health care and social assistance (+71.7k), government (+31k), and construction (+25k). Only two sectors saw declines in the month with manufacturing losing 7k jobs and transportation and warehousing down 8.6k jobs. Both July and August saw upward revisions to their reports for a combined total increase of 72k. Wage inflation was also stronger in the month as average hourly earnings grew 4% compared to last year. This is up from last month's reading of 3.8%, but still remains substantially below last year's high of 5.92%. Precovid, wage growth was in the low to mid 3% range. Overall, this report didn't have many problems. The only concern is, did the Fed move to soon and could inflation still be the larger concern rather than a weakening labor market? This report did increase expectations for a November rate cut to be 0.25% rather than 0.5%. I would have been shocked if the Fed would have opted for another 0.5% cut even if the jobs report wasn't this strong.    ILA Dockworkers strike Good news for those that were concerned about the International Longshoremen's Association's (ILA) strike as the union and the United States Maritime Alliance reached a tentative agreement on wages and agreed to extend the Master Contract until January 15th, 2025. Wages will increase 61.5% over six years under the tentative deal, but the major point of conflict that still needs to be negotiated is port automation. With the increase in wages, it will be interesting to see how much the Maritime Alliance is willing to budge on automation as they will likely need to look for ways to improve efficiency to offset the higher wages. Efficiency is already a concern for US ports as a study from just a couple of years ago ranked the LA and Long Beach ports as the least efficient trade hubs for handling containers in the world. Other US ports including Savannah, Georgia, New York, and New Jersey also ranked in the bottom half of the list. Of the 370-member Container Port Performance Index, we did not have a single port in the top 10. While this resolution is positive, the problems could be delayed until early next year if the two sides still cannot come to an agreement. During my research on this strike, I learned some surprising things about the union leader, Harold Daggett. You may be shocked to learn that his combined income as president of two unions is around $900,000 per year with $728,000 coming from the ILA. He currently drives a Bentley, which is a high-end luxury vehicle with a price of $210,000 for a new one. He also recently sold his 76-foot yacht and based on the US boat group market index, the average price of a yacht in that range is $1.5 million and costs around 10 to 15% of the value to operate yearly. I was also surprised to see this is a “family business” as his son is employed by the same two unions as his dad and was paid a total of more than $700,000 last year. As for the workers, on the East Coast the union workers have an average pay around $81,000 per year. However, the waterfront commission of New York estimates 1/3 of the longshoreman made $200,000 or more last year with overtime.    Investors are still adding money to money market funds Even with the recent rate cut by the Federal Reserve, investors still put nearly $130 billion into money market funds. This brought total assets in money markets to $6.8 trillion. I don't believe this money will stay there very long as probably within 3 to 6 months investors will start seeing the interest rates decline and once, they fall below 4%, we could see a large drop in the assets held in money market funds. The big question for investors is where to go. If you need liquidity, you're probably best off staying in the money market funds, but if you won't need the money for the next 3 to 5 years, you should be looking at building a strong investment portfolio using patience and a lot of research to make sure you have the right investments.    A Lesser-Known Spousal Social Security Strategy After 2015 many of the spousal strategies such as the file and suspend or restricted application options are no longer possible. This is because a “deemed filing” rule applies which means when someone files for Social Security benefits, they are deemed to be filing for all benefits they are eligible for such as spousal and their own benefits.  When they apply, they will receive whichever benefit is larger, but not both.  However, there is still a way to switch between benefits. In order to receive a spousal benefit, the spouse you are collecting from must also be collecting. If they are not, you would only be eligible for your own benefit until they begin collecting.  Consider a wife who is no longer working and whose full retirement age 67 amount is $1,000 and who has a working husband with a full retirement age amount of $3,500.  Because of the husband's larger benefit, the wife is also eligible for a spousal benefit of half that amount, $1,750, if she collects it at her full retirement age.  In this situation the wife may collect from her own record as early as age 62.  Since she would be collecting 5 years early, her own benefit would be reduced from $1,000 to $700.  Later on though, when her husband retires and starts his own social security, she could begin her spousal benefit at age 67 and boost her benefit by $750 up from $700 to $1,450. This $750 boost is because her spousal benefit of $1,750 is $750 larger than her own full retirement age amount of $1,000, even though she began collecting at 62.  If she had waited to apply for anything until age 67, she would receive the full spousal benefit of $1,750, but she would have waited 5 years of collecting nothing just for an extra $300.  From a Net Present Value perspective, it is better for the wife to collect her own benefit at 62 and later receive the spousal boost rather than wait completely until 67.  Also, there are many spouses who collect early without knowing they are also eligible for a larger spousal benefit when their spouse retires.  If they do not alert the Social Security Administration, they may not ever receive their increased benefit.   Companies Discussed: Costco Wholesale Corporation (COST), Humana Inc. (HUM) & LyondellBasell Industries (LYB)

We do have a housing problem in this country, but it may not be the one you're thinking. The price of homes has continued to rise and it has left some people out of the housing market, but that may not be a bad thing. I say that because people are doing anything they can to buy a home at these high prices. This includes risky endeavors like cashing in their retirement savings or borrowing from friends and family. The Atlanta Fed's affordability index was recently at 68.5, which would mark its lowest levels since 2006. I worry people are getting in over their heads as ownership costs, which include mortgage, taxes, and insurance are now occupying nearly 44% of median household income. Generally the 30% level is considered a threshold for affordability and that was last seen in 2021. I worry when the economy slows down, you could see people selling their houses because they can't afford them. I think it's rather silly that some campaign promises have talked about giving $25,000 for down payments or expanded tax credits for developers to build affordable rental housing. These sound good as soundbites, but I think they're terrible ideas because all they will do is pushup demand and that will continue to put more pressure on prices. People don't realize that builders say roughly 25% of the cost of new homes is from regulatory costs like building codes and zoning issues. If we could get the local government to back off, you could see a nice reduction in prices. The problem is we have the federal government trying to give you money to buy a higher priced home and local governments are raking in the dough collecting fees on those higher priced homes. Throughout history, it has never been great to invest or buy into any type of asset when there is a buying frenzy going on. Look at the history books if you don't believe me and then think ahead what will happen in the next 5 to 10 years. I know my opinion goes against many experts, but in our over 40 years in asset management, we have seen how things can change unexpectedly.   Is the new iPhone 16 going to move the stock price up? Last weekend an article in Barron's written by Alex Eule tried to convince people that Apple stock will increase based on looking back to the original iPhone and every iPhone release after that. Based on the research, Apple stock has returned an average of 11.7% six months after iPhone releases. But before you run out and buy the stock, one thing I noticed was there was no discussion around price/earnings ratios during those launces. I believe it is very important to not over pay for any company and I am curious what the PE ratios were during those last 24 iPhone launches. Holding Apple several years ago I know the multiple was not where it is now in many of those cases. Don't get me wrong, I think Apple is a great company and has great products, but I worry with the stock trading at 31 times next year ‘s earnings it is more than fully valued. I also believe some of that data was skewed considering the first iPhone launch led to 63.7% return six months after the release and there are several instances where the stock did nothing or actually fell like the iPhone 12 (-3.4%), the iPhone 13 (-1.3%), or the iPhone 15 (-1.0%). I was surprised to see that analysts are more negative than I expected on the stock as currently nearly 1/3 of them have either a hold or a sell rating. Mr. Eule does correctly point out that if Apple beats expectations, the price earnings ratio will come down. However, that assumption would also mean that the stock price did not climb to offset the earnings beat. We have avoided investing in Apple for quite some time now, but I will still not break my discipline and I will not overpay for any company because history has proven eventually everything comes back to the norm.    ETFs have proven not to be as effective as mutual funds When Jack Bogle, the founder of Vanguard, was CEO back in the 90s, he refused to add indexed ETFs (exchange traded funds) to their lineup. His concern was it was too easy for people to jump in out of the products and not be long-term investors. There are now long-term studies proving that he was right. A report from Morningstar shows there is a 0.9% per year gap over the study's 10-year period favoring investors who used indexed mutual funds over investors who used indexed ETFs. While it might not sound like a lot, the compounding takes hold in the long-term and I believe it further illustrates why people should not trade. Unfortunately, even financial advisors who control about 2/3 of the ETF assets appear to be just as jumpy and emotional as their clients. Maybe they're just trying to prove their worth due to the management fees that they charge on top of the ETF fees.   Is our tax code too complicated? I know many people hate paying taxes, but have you ever thought about how much time you spend compiling all those documents? According to the Tax Foundation, it is estimated that the time and money individuals and businesses are spending on complying with the federal tax code this year could reach 7.9 billion hours and $133 billion in out-of-pocket expenses—or $546 billion when also accounting for lost productivity. I believe a major problem is that we keep adding more and more complications to the tax code and between 1994 and 2021 it grew in length by 40% to about four million words and has expanded steadily since. Regulations keep climbing and according to the National Taxpayers Union Foundation, from 2000 to 2022 the Department of Treasury's annual volume of regulations grew 35% to 17,631 pages from 13,070. With all the complications, it's no wonder most people don't understand how taxes work and what they actually pay in taxes!   The Third Type of Retirement Account When it comes to retirement accounts, most people are familiar with 401(k)s, Rollover IRAs, and Roth IRAs.  These accounts have tax benefits when contributing and withdrawing money and allow either tax-deferred or tax-free growth.  However, there are also restrictions such as annual contribution limits and age requirements to make qualified withdrawals.  In addition to these pre-tax or Roth accounts, it can also be helpful to supplement retirement income with a third type of retirement account, which isn't a retirement account at all – the taxable brokerage account. There are no limits when making contributions or withdrawals and technically withdrawals from this account are not taxable.  This account produces income in the form of capital gains, dividends, and interest which must be reported every year whether withdrawals are taken or not, which is why the withdrawals are not a taxable event.  However capital gains and dividends are taxed at a lower rate than other types of income and in retirement it is more common to be in lower tax brackets which means the tax rate on those gains and dividends can be as low as 0%.   Retirees may have gross income of $125k or higher in some cases while still falling in that 0% tax rate.  It is great and typically preferred to fund retirement accounts but if those are being maxed out, it can make sense to put addition savings into a taxable account.  These types of accounts aren't utilized as often as they should and they are more commonly used when receiving a large sum of money such as an inheritance or proceeds from selling a property; but combining them with other “retirement” accounts adds flexibility and tax diversification when structuring withdrawals in retirement.   Companies Discussed: Uber Technologies (UBER), Lennar Corporation (LEN) & Alibaba Group Holding Limited (BABA)

Retail sales shows the consumer is still spending August retail sales were expected to decline 0.2% in the month, but the consumer was more resilient than anticipated as they actually grew 0.1% compared to the month of July. Compared to last August, retail sales were up 2.1%. Gas stations were the biggest negative in the report as lower prices for oil and gasoline lead to a 6.8% decline compared to the prior year. If this volatile category was excluded from the headline number, retail sales would have climbed by a more impressive 2.9%. Areas of strength included nonstore retailers (+7.8%), healthcare & personal care stores (+3.5%), food services & drinking places (+2.7%), and electronics & appliance stores (+1.9%). Two areas that continued to bring down retail sales were furniture & home furnishing stores (-0.7%) and building material & garden equipment & supplies dealers (-0.1%). While this report doesn't point to a booming consumer, it definitely doesn't show an economy that is in recession.    What should investors do after the Fed's rate cut? What should investors expect going forward when interest rates decline? Going back 50 years, when the Fed begins its interest rate cuts, 16 out of 23 times 6 months after the first cut the stock market was higher. Could this be like one of those seven times it is not higher six months from now? Investors have to realize that valuations for the market are very high and this could lead investors holding those high valuation equities to sell the news. I do believe if you were a strong investor and have watched what you have paid for the earnings and cash flow of what you have invested in, you should be OK. But if you do hold in your portfolio equities trading at 25 to 35 times forward earnings, this could be a buy the rumor, sell the news situation. At our firm, Wilsey Asset Management, I know our portfolio has an average forward P/E ratio of around 12. I believe this is a very comfortable place to be in this crazy time. I would advise you to analyze your portfolio to be sure it is not overvalued.   Why you should be careful investing in the S&P 500! People continue to shift towards index investing and have a desire to invest in the S&P 500 index fund because they believe it is a good diversified investment. I continue to worry that people do not realize how risky this index has become with the overconcentration in just a few expensive stocks. The S&P 500 currently has a forward P/E of around 22-23x, which is well above the historical average of around 16-17x. The reason for this elevated figure is the outsized weight of the expensive growth stocks. If you look at the 10 largest stocks, which are Apple, Microsoft, Nvidia, Amazon, Alphabet (Google), Meta (Facebook), Berkshire Hathaway, Eli Lilly, Broadcom, and Tesla they now occupy over 35% of the entire index and their average forward P/E is lofty at nearly 40x. People believe they are getting a diversified portfolio, but Apple (6.86%), Microsoft (6.72%), and Nvidia (6.24%) all have larger weights than the entire sectors of real estate (2%), materials (2%), utilities (2%), energy (4%), and consumer staples (6%). Communication services has a weighting of 9%, but Meta and Alphabet make up a combined 43% of the Communication Services SPDR ETF. Consumer discretionary has a weighting of 10%, but Amazon and Tesla make up over 38% of the Consumer Discretionary SPDR ETF. While the performance of the S&P 500 has been great over the last decade, if the performance of these mega cap stocks turn so will the index. With these expensive valuations, I just don't see exciting returns over the next decade. I definitely don't believe they will even be close to what we saw over the last 10 years. Just for reference, the remaining sectors of the S&P 500 are industrials (8%), healthcare (12%), financials (13%), and technology (31%).    How will dividends impact the stock market's return? People may not realize that stock dividends historically have accounted for around 40% of the total return in the stock market. However, because of the unbalanced market over the last 10 years, dividends have accounted for just 16% of the total return. I believe over the next decade as markets adjust to more normalcy, dividends should once again play a larger role in the total return and I wouldn't be surprised to see it return to a similar rate of around 40%. Places you can look for dividends would include real estate investment trusts, utilities, energy, along with financial stocks and healthcare. But as always, when investing, be sure to make sure the investment is not overpriced and is fundamentally strong based on the financial statements.    How Much of a Rate Reduction is Needed to Refinance? With interest rates coming down, more people are starting to wonder if refinancing makes sense, but how much of an interest rate reduction do you need to be worth it? Half a percent, one percent, more? A lot of people get hung up on the interest rate alone, but you must also factor in the costs associated with getting the loan. When you get a new mortgage there are three types of costs- fees paid to originate the loan like points and underwriting fees, prepaid expenses like interest and homeowner's insurance, and other 3rd party fees like title and recording fees. When deciding on a refinance, the prepaid fees are irrelevant because they will still be paid whether you refinance or not. That leaves the origination and 3rd party fees as the actual cost it takes to get a new loan. It is important to differentiate the two because mortgage companies often advertise no point or no cost refinances, but they are generally referring to the origination fees. As the borrower you still have to pay the other miscellaneous fees, you just aren't paying them to the lender. Most people are familiar with points which are upfront fees in exchange for a lower interest rate. Over time the interest savings makes up for the points but only if you keep the same loan. You would not want to pay points if you expect to refinance again or sell in the foreseeable future. Since most people agree that interest rates are at least slightly coming down, most borrowers should not be paying points as there will likely be an opportunity to refinance at a lower rate. Instead of paying points, you can do the opposite and accept a higher interest rate in exchange for “lender credits”. These credits can then be used to pay the fees which results in a true “no-cost” refinance. Consider a situation where you have a mortgage at 7% and the ability to refinance into a 6% loan but at a cost of $15,000 in fees. Instead, it would likely make sense to refinance into a higher 6.5% loan using credits to cover the cost and then refinance again in 6 months assuming rates will be lower. In other words, you wouldn't want to spend an extra $15,000 to save $1,500 in interest over the next 6 months. With this logic, even the smallest rate reduction at no cost would still make sense.   Companies Discussed:  Nike Inc. (NKE), Snap Inc. (SNAP) & Lululemon Athletica Inc (LULU)

Another lesson on why investors should stay away from derivatives  The well-known mutual fund company, Franklin Templeton, has a division known as Western Asset Management, WAM. Please do not confuse that with our investment firm, Wilsey Asset Management, also referred to as WAM. Western Asset Management received a Wells Notice from the Securities and Exchange Commission (SEC), which informed them that the agency was planning on enforcing some action against them. From the spring of 2021 through the autumn of 2022, the manager Ken Leech, who by the way has now taken a leave of absence, did 17,000 treasury derivative trades. The fund performance was horrendous and the three funds he managed lost as much as half of their assets as investors sold their shares. There is nothing proven yet, but if you hold these funds or other Franklin funds, I would definitely be selling my shares and looking elsewhere. I have known the Franklin funds for nearly 30 years and it is disappointing to see this type of news for that company. Full disclosure, we stopped using their funds well over 20 years ago and have zero dollars invested with them at this time    Boring inflation report likely secures a 0.25% interest rate cut next week August headline CPI rose 2.5% compared to last year, which was below the estimate of 2.6% and marked the lowest reading since February 2021. The headline number benefitted from energy prices that were 4.0% lower than last year, largely thanks to a 10.3% decline in gasoline prices. The other normally volatile category, food, was also quite subdued as it showed an increase of just 2.1% compared to last August. Food at home showed a small increase of just 0.9%, while food away from home was up 4.0%. Core CPI, which excludes food and energy was up 3.2% compared to last year, which matched the reading in July. The lack of progress on core CPI is the main reason I believe a 0.25% cut will be preferred over a 0.50% cut at next week's Federal Reserve meeting. Shelter really remains the key hurdle for core CPI as it increased 5.2% compared to last year and accounted for about 70% of the increase in core CPI. The shelter number is still puzzling to me considering the BLS New Tenant Rent Index actually fell 1% in the second quarter. At some point these shelter costs in the CPI will come down, I'm just shocked at how long that process is taking. Auto insurance continues to steal the show in terms of large gains as the category was up 16.5% compared to last year. A positive for the category as we move forward is both used cars & trucks (-10.4%) and new vehicles (-1.2%) saw declines compared to last year. While high, motor vehicle and maintenance (+5.1%) has cooled from earlier levels. This should all lead to more subdued auto insurance inflation next year.    Diet drugs could cause health insurance premiums to skyrocket Weight loss drugs have become very popular as an easy way to lose weight, but who is going to pay for this more expensive option? Some of the drugs cost about $13,000 a year and there are now some discount versions that were recently announced that will still be around $6,000 to $7,000 a year if you're willing to get a separate needle and vile to inject yourself, rather than using the autoinjector version. It is estimated that in 2024, Zepbound and Mounjaro combined sales will reach $18.3 billion. In 2025, it is estimated that the sales for these two drugs will hit $28.7 billion. What people do not realize is the strain this is beginning to put on the US healthcare system. Insurance companies make money by collecting insurance premiums from many people and calculating out what they will likely have to pay out in claims. It is obvious that if claims will be rising because of the high cost of these diet drugs paired with many people using them, the only solution is to increase insurance premiums. Some insurance plans and even Medicare won't pay for the weight loss drugs to help with weight loss but ways around it include saying they reduce the risk of heart failure, sleep apnea, and stroke. I believe to help correct the situation, these drugs need more competition to bring more supply to the market and reduce prices. I know of a couple of other companies like Pfizer and Viking Therapeutics that are very close to releasing their own weight loss drugs. Hopefully these additions will dramatically reduce the cost of these drugs so that people can pay for them out of pocket and leave the insurance companies to cover the big expenses our healthcare system incurs.    Tax benefit of owning a house Everyone likes to talk about the tax benefits of owning a home, but it's important to understand what the true benefit is before deciding to purchase. When buying a home, the property taxes and mortgage interest are itemized deductions that can reduce taxable income for federal and state taxes. However, you need enough itemized deductions to exceed the standard deduction in order to receive any tax benefit. For married couples, the federal standard deduction is $29,200 and the California standard deduction is about $11,000. If you own a home but your total federal itemized deductions after paying your mortgage and property taxes are only $25,000, you won't receive any federal tax benefit even though those expenses are technically deductible because you will still end up claiming the higher standard deduction. This situation is more common for people who have owned their home for a while because their property taxes are generally lower due to Prop 13 and they likely would have refinanced their mortgage when rates were lower which reduces the amount of interest they can claim. For people buying new homes, there are typically more expenses which can result in tax savings. On the federal side, the most common itemized deductions are mortgage interest on loans up to $750,000, state income and property taxes capped at $10,000, and charitable giving. In California mortgage interest is deductible on loans up to $1,000,000, property taxes but not state income taxes are deductible, and charitable gifts are deductible. If you are buying a $500k home, your tax savings will likely be between $4,000 and $6,000 per year; with a $1 million home, it's likely between $10,000 and $12,000 per year; and with a $2 million home, it's likely between $15,000 and $20,000 per year. The actual tax savings will vary based on the value of the home, the loan balance, the interest rate, and your tax bracket. It's always great to reduce taxes, but this means you are paying anywhere from $40,000 to upwards of $100,000 in interest and taxes to get those levels of tax savings. Also keep in mind that taxes are likely to change in 2026 which will largely increase the tax benefit of owning a home. As with any financial decision, it is important to understand the whole picture when buying a home, not just the potential tax benefits.   Companies Discussed:  Topgolf Callaway Brands (MODG), United States Steel(X), McDonald's (MCD)

The labor market continues to soften The Job Openings and Labor Turnover Survey (JOLTs) showed job openings continued to fall across the country in the month of July. It was reported that available positions fell to 7.67 million in the month, which 237,000 lower than June's downwardly revised number and well below the estimate of 8.1 million. While this marked the lowest level since January 2021, there were still close to 1.1 job openings per available worker. I do believe we still have some room left for normalization before these declines in job openings becomes problematic. This news also caused the relationship between the 10- and 2-year Treasury yield to uninvert for the first time since June 2022. Generally long-term rates are higher than short term rates and I believe we will see the yield curve continue to steepen as the Fed cuts rates. While the curve usually reverts before a recession hits, I still believe we aren't heading towards a problematic recession in the coming months. The labor market is definitely slowing Nonfarm payrolls increased by 142,000 in the month of August, which was up from 89,000 in July, but below the estimate of 161,000. Both June and July also saw downward revisions, which totaled a substantial 86,000. Leisure and hospitality (+46K), healthcare and social assistance (+44.1K), construction (+34K), and government (+24K) led the way for job gains in the month. Manufacturing (-24K), retail trade (-11.1K), information (-7K), and utilities (-200) all subtracted jobs from the headline number. I was also surprised to see professional and business services only create 8K jobs in the month and I believe that is a good indicator that the economy is definitely in a slowdown. While the numbers don't look great, I still believe there is no cause for major concern at this point. With an unemployment rate of 4.2% and the major gains we saw coming out of Covid, it was unlikely we'd see that type of labor market continue. I still believe it's possible we see a soft landing, but in that scenario, you wouldn't see major payroll gains every month and the prints would likely be more muted and even softer than the readings we have seen the last few months. My expectation is for the Fed to cut rates by 0.25% at the September meeting followed by cuts of 0.25% at both the November and December meetings. The economy is getting back to normal It may feel like the economy is weak, but I believe that is because we are comparing it to an excessive economy that had too much money floating around and people spending it pretty much on anything they wanted while not caring about how much they paid. Now that extra cash is gone and we're back to normal. That might feel uncomfortable for some people as they now can't spend so easily on things like luxury items. Proof of this can be seen in the used luxury watch market which was very hot, but has now seen prices fall over the last 9 quarters because the demand is gone. I don't care if you're buying stocks, homes, or luxury items, if you overpay during the hype, you'll probably end up losing money down the road. I believe it's always best to buy things on sale, even if that means being patient for a few years. There's a lot of talk about company's price gouging, but the numbers tell a different story! There is no doubt that with inflation, prices for many items have increased over the last five years. But are businesses taking advantage of these higher prices to increase their profit margins? Looking at just the companies in the S&P 500, the average price markup between the selling price and the cost is 54%. That compares to 51% five years ago. According to research from financial company Bloomberg, they say the grocery business markup is actually down from five years ago and when looking at the average profit margins for grocery stores, it is now 0.3% lower than five years ago. You may not like the information because we want to blame somebody for paying higher prices, but based on these numbers companies are not price gouging. We do believe every business has a right to make a decent profit for being in business, but the free market and competition should eliminate price gauging and keep the market balanced. How the Time Value of Money Impacts Roth Conversions When you do a Roth conversion, the amount you convert into a Roth account is taxable when you do it. First, this means you are paying taxes now that you didn't need to.  Second, the question people have is, “If I don't pay that tax now and instead got to keep those dollars invested, what would that grow to and does that offset the benefit of doing the conversion?”  In other words, is having extra tax-free money in the future worth paying taxes now when considering the time value of money? Time value of money is the concept that dollars today are more valuable than dollars in the future because dollars today may be invested and grow over time while dollars in the future are worth less due to inflation.  This is an extremely important concept and needs to be considered when making almost all financial decisions from Social Security to paying debt to investing in general. However, when it comes to Roth conversions this should not be considered.  For example, let's consider someone making a $50,000 Roth conversion who is in the 20% bracket and will be for the rest of their life.  On that conversion they will owe $10,000 in taxes (20%) meaning the remaining $40,000 makes it into the Roth account.  Money in a pre-tax account and a Roth may be invested exactly the same so we'll assume an 8% compounded return.  After 10 years, the $40,000 in the Roth grows to $86,357, which is all tax free.  The question though is what would that $10,000 have grown to if it didn't have to be paid 10 years prior?  Well, if no conversion was done, all $50,000 would have remained in a pre-tax account growing at the same 8%, so after 10 years it would be worth $107,946.25, obviously more than the $86,357 in a Roth.  However, that $107k has not yet been taxed so if accessing it still costs the same 20% tax that would be $21,589.25, meaning the after-tax amount is… $86,357 or the exact same as we would have in the Roth.  What this means from a time value of money perspective is, since pre-tax and Roth accounts may have identical investments and returns, the present value of the tax on the conversion is the same as the future value of the tax if there is no conversion, assuming the tax rate is the same. In our example the future value of $10,000 is $21,589.25 assuming an 8% return over 10 years, which is true. Therefore, when considering a Roth conversion, it is not the time value of money that is relevant, but the tax rate during the conversion compared to the tax rate in the future.  In our example we assumed a consistent 20% tax rate which is not realistic.  Over time income levels and sources change as well as the tax rates themselves.  If Roth conversions are performed when the individual tax rate is lower than it will be when pre-tax retirement withdrawals are being taken, the conversion is helpful. For instance, if we think our retirement tax rate will be more than 20%, a conversion should be done now if it is 20%.   Companies Discussed: DraftKings Inc. (DKNG), Dollar General Corporation (DG) & Dell Technologies (DELL)

Inflation report pretty much solidifies a rate cut in September Personal consumption expenditures prices (PCE) were right in line with expectations as they increased just 2.5% in the month of July. Core PCE, which is the Fed's preferred measure came in at 2.6% and was slightly below the estimate of 2.7%. While both readings matched the June inflation report, I would say inflation at around 2.6% is still extremely manageable and I believe we will continue to see it trend towards the 2% target as we exit the year. With these numbers I believe we will see the Fed cut rates by 0.25% at the September meeting and then we could see one or two more cuts before the end of 2024.    Will oil and natural gas disappear over the next few years? You may think that in a few years oil and natural gas will be a thing of the past, but Exxon believes the consumption of oil will be the same in 2050 as it is today and they don't see carbon emissions dropping until the year 2030. In the report they do see the world demand for natural gas increasing by 21% by the year 2050 while they expect the demand for oil to increase by just 2%. They do point out most of the growth for these energy sources will come from the industrial sectors to fuel manufacturing and also from chemical feed stock. Exxon does believe consumption of biofuels, solar, and wind will continue to rise, but clearly, they believe natural gas and oil are still needed to help fuel our world's energy needs. The big loser they believe is coal as they see that energy source dropping off 39% by 2050. To help with emissions, Exxon is largely turning towards carbon capture and hydrogen-based fuels.    Rent concessions are climbing at apartment complexes! We are now well into the second half of 2024 and as we have been saying for the past couple years we believe the overbuilding of apartment buildings will eventually put downward pressure on rents. According to Moody's, rents are up 22% since 2019 across the country and the average rent is $1750, but due to the overbuilding of apartment buildings, landlords are having a hard time maintaining the higher rents and are now starting to offer concessions such as a month or two of free rent or a discount on utilities. Some of the more creative apartment companies have come up with cash rewards or gift cards to Amazon, CVS, Target or Walmart if you pay your rent on time. Don't get too excited about the concessions. They may sound good, but be sure you do the math to find out how much you're really saving. One large rental company says by offering a rewards program, about 97% of the renters renewed their lease in 2024. That is well above the national average renewal rate of 65%. I do believe over the next couple of years we should see rents decline somewhat as vacancies climb and these big rental companies have to pay the loans on all the construction costs, they incurred to build these apartments. Simply put, they will need the cash flow to make their debt payments.   Business failures have climbed this year! Over the past year, starting a business has not been that easy. The number of failed new businesses increased by 60% as the new business owners ran out of money. Could this be because of a slowing economy? Bad business management? Or not having enough cash to start a business? Or perhaps it could be all three?   Growth vs Income Investing The fundamental goal of investing is to make money, but for most people this is broken into two phases, growth and income. During working years everyone is saving and investing money, building their nest egg so during retirement, they can stop working and begin relying on income from their assets to support them. However, it is one thing to add money every paycheck to a 401(k) for 30 years, it's another thing entirely to withdraw money from an investment portfolio every month for 30 years without running out. During the growth phase, the swings in the market aren't as emotionally tolling because there's a paycheck coming in every few weeks. When that paycheck stops and you're selling positions to withdrawing money from an account during a market decline, things can go bad quickly. Not to mention nest eggs are largest in retirement, so a small percentage change is still a large dollar swing. The average retirement lasts over 20 years, but bear markets occur about every 4 years so retirees have to endure these periods multiple times. During a bear market if positions are sold at the wrong time, if the bear market lasts too long, if too much is withdrawn, or if the investments aren't sound, the portfolio will not have enough remaining funds to recover. Again this is not a risk during the growth phase when funds are begin added, not withdraw. To prevent against volatility risk in retirement, a lot of people shift their investments to something overly conservative, which short term feels safe, but long term will not produce the growth necessary to keep up with inflation and prevent outliving money. Before actually retiring, it is necessary to get comfortable with an investment philosophy that will continue to provide growth but will also allow sustainable withdrawals through the ups and downs of the market. Mistakes made early in retirement can result in the need to return to work or heavily reduce your lifestyle which no one wants to do after spending decades looking forward to retirement.   Companies Discussed: Super Micro Computer, Inc.(SMCI), Sprouts Farmers Market (SFM), Advance Auto Parts(AAP) 

History shows robo-advisors failed to live up to the hype! When robo-advisors first came out years ago, people asked if I was worried about my career. I said no because I do believe that investing can be very complicated and a good advisor is worth it. I'm happy to report that has been the case. Robo advisors have only accumulated one trillion dollars in assets, that is only 2% of the entire $50 trillion advisory market. JPMorgan Chase and Goldman Sachs both dropped their robo-advisor programs because their clients didn't feel the low cost provided what they needed. Low costs were the initial selling point for robo-advisors but today most have added some human interaction. With that costs have increased and these hybrid services can now cost around 0.65%. In my opinion, that is still not a great option because you won't get a personal advisor and instead you will be left with a team of people who really don't know your situation. The biggest problem I have seen with the robo-advisors has been when things get difficult, investors have no one to talk to and they end up selling at the wrong time. When it comes to performance, I think most investors have found that the lower fees did not produce the results they had hoped for. Over the last five years, the best performing robo-advisor based on a 60/40 portfolio was Sofi Automated Investing with a 7.8% annualized return. Schwab pulled up the rear with their Schwab Intelligent Portfolios showing a five-year annualized return of only 5.8%. It's important to point out these numbers are only if the investor stayed in the program for five years straight. Sometimes automation can be great, but there are just certain areas of life such as your health and financial well-being that you need a good professional on your side to talk to when you need.    A look into the history of inflation data  Whether we're talking about the CPI or the PCE, it seems no one is happy with how inflation is reported. I tell people your personal inflation is the most important inflation to understand as it is based on what you're spending habits are rather than looking at someone else's. A good example is a college student has far different expenditures than a retired senior. The Bureau of Labor Statistics released its first CPI number in February 1921 and that report included data going back to 1913. Time has changed consumer inflation as spending and prices have changed overtime. From 1935 through 1939, food represented 33.9% of a household's expenses, today it is only 13%. During the depression, apparel was hard to come by and it was 11% of a paycheck. Today it only represents 2.6%. Many items are not comparable as time and style has changed. For example, cars and radios weren't common enough to be included in the earliest years and now radios have become a dying product. There are some items though that we can look back over history and come. In 1913 round steak was 22.3 cents a pound which is equal to about $7 today. This would be below the price of $8.25 in the month of May. Butter was hard to come by and cost 38.3 cents a pound. That would be around $12 a pound in today's dollars versus the May average of around $4.60. I will agree the CPI and even the PCE are not the best or should I say an exact measurement that people may want, but keep in mind the Bureau of Labor Statistics surveys metro area businesses and households collecting 94,000 prices and 8,000 rental housing unit quotes per month. So while it is a difficult task to take on, it is not just one person throwing out numbers but an accumulation of a lot of data that has been compiled for over 100 years. There will never be a perfect system for measuring inflation, but as of now they have not been able to find a better way to calculate it.   The Strategic Petroleum Reserve has remained at low levels Oil currently trades around $75-$78 a barrel but the uneasiness in the Middle East should cause concern about the level of our Strategic Petroleum Reserve (SPR). The government used part of that reserve back when oil was $100 a barrel to try and keep the price of oil low, but they have never tried to replace it. We are currently sitting at a 41 year low on the SPR and I have to ask excuse the language, What the hell are we doing? Yes, the United States is currently pumping a lot of oil, but if there were a worldwide supply disruption that would then increase the price of oil around the world. The current administration should've been taken advantage of the low prices. We have had oil low for quite a while now and should have been buying a little bit at a time. For some reason the administration has chosen not to do that. I think this is a mistake and I do believe that if we don't do something soon, we have the potential for some major problems with our energy security here in the US.    The US government is issuing too much short term debt over long-term debt We have said many times that we're not that concerned with the overall debt of the US government because a true balance sheet shows we will be OK. However, that doesn't mean that the current way we are financing that debt is correct. What concerns me is we are issuing too much short term debt versus long-term debt and that in the future the country will be at the mercy of short term interest rates to finance our large debt of $36 trillion. What should be happening is the government should be issuing more longer-term debt to lock in lower rates, just like you would on a mortgage. The concern is if they were to do that, it could cause long-term rates for consumers to increase. What appears to be happening is that the Federal Reserve will cut interest rates and short term rates will fall, but there should be a spread of around 2% from a short term rate to a 10 year treasury. If short term rates fell to a reasonable 3% that would put the 10 year treasury around 5%. It could cause some short term pain, but that's far better than having a big portion of our $36 trillion debt in short term maturities. If short term rates were to skyrocket so would the interest cost and that would create more problems.     Why is gold hitting new highs? Last week gold surpassed $2500 per ounce, which is an all-time high for the precious metal. Many people thought with high inflation in 2021, 2022, and 2023 gold would have appreciated then, but it actually did very little as the ETF GLD was up just around 10% from the beginning of 2021 through the end of 2023. Something else that moves gold is the strength of the US dollar, which is starting to decline. The reason for the decline in the US dollar is because it does appear that interest rates are coming down. This generally leads the world to buy more gold. 2024 has been a great year for gold as it is up over 20% and while it may have some more appreciation going forward, you will still not find it in our portfolio. I still think there are some good value companies out there that are paying good dividends and that will outperform gold.   Can Starbucks (SBUX) hold on to the recent 25% jump in their stock price? After the news that Starbucks hired Brian Niccol, the CEO from Chipotle, was released, the stock climbed 25%. The question is… can that higher stock price last? Under Brian‘s management at Chipotle, the stock climbed over 700%. Prior to being the CEO of Chipotle, he was the CEO for Taco Bell. They say being at the right place at the right time can help. When he first took over Chipotle, the company was having reputation problems, customer traffic issues, and their stock was struggling from the E. coli and norovirus outbreaks. He came in when the stock was trading at extreme lows and while I believe he did a great job, there was a lot of negativity priced into Chipotle's stock. It's important to understand how much larger Starbucks is and what a different business than Chipotle it is. It operates with 10 times as many stores, a large international business, and it has a packaged food business. I do believe that Brian Niccol has taken on a large order with his new role at Starbucks!   Tesla may be further ahead in self driving then I was aware of On October 10th of this year, Tesla will be holding a robotaxi event for investors. I have said before that the Cruise division from General Motors and the Waymo division from Alphabet are far ahead on public testing for their driverless cars compared to Tesla. I recently saw an article in Barron's that showed data from Tesla that their software has accumulated over 1,500,000,000 miles. The question is will the government accept this software data or not. The government has come down very hard on both General Motors and Alphabet, let's see how they handle Tesla.    The million-dollar home is just not as special as it used to be  Living in San Diego many “normal homes” have surpassed the $1 million mark, but nationwide that trend has also been increasing. In 2023, 7.6% of US homes had a value of $1 million or more. In 2024, that number has now climbed to 8.5% of US homes. That is nearly a 12% increase for $1 million or higher homes. I just don't see how the price of homes can keep increasing at such a pace when incomes are not keeping up and affordability continues to remain a major problem.     Could a potential overbuild of apartments help with housing prices? We have talked many times about the potential overbuild of apartment complexes and now as more projects are finishing, it appears we are finally seeing an impact on pricing. In the month of June, more multifamily units were completed than in any month in nearly 50 years. This is leading to more recent concessions as 33.2% of U.S. landlords offered at least one rent concession. This was up from 25.4% last year. The increased supply also led to a decline in the median asking price for apartments in one- to three- bedroom units in the month of July. This marked the first decline since 2020. According to Redfin data, the median asking rent price for a studio or one-bedroom apartment fell 0.1% to $1,498 a month; two-bedroom apartments decreased 0.3% to $1,730; and units with three bedrooms or more, were down 2.4% to $2,010. I believe this is a major positive as it could help control home prices if renting is a more cost competitive option. It should also be a huge benefit to inflation as CPI has continued to see a major negative impact from high shelter costs.   Can Annuities Lose Money? Annuities are often associated with high fees and limited growth, but in exchange they come with guarantees like lifetime income and downside protection. This begs the question “can they lose money?”, and the answer is “absolutely”! There any many types of annuities and depending on how they are structured and the underlying investments, they can and do lose money despite being conservative. We met with someone this week who purchased an annuity three years ago for about $580,000. Now, even though the market has gone up during that time period, the annuity is worth less than $560,000, not including any surrender charges. How could this product lose $20,000 when most of the market overall is positive? Well, this was a variable annuity which means the account value is invested in a variety of mutual funds. When the annuity was purchased, the agent selected some funds that didn't do too well. On top of that this annuity came with an income rider that includes an additional fee that is deducted from the account balance, further hurting performance. This rider comes with a separate income base that grows at a non-compounded 5% per year, and at annuitization will pay out 3.5% of the income base for life. Basically, this means even if the account balance itself doesn't grow, guaranteed income can still be available from this income base. However, when you look at what this translates too, it does not seem attractive at all. This guy purchased the annuity when he was 58. If he starts collecting lifetime income at 65, he will be over 86 years old before he gets back the money he put in when he was 58. Technically this income is guaranteed for life, but with the fact that a low-interest checking account would have better performance over 30 years, the “guaranteed” benefit loses most of its appeal.   Companies Discussed: Brinker International (EAT), Intuitive Surgical (ISRG), Cisco Systems (CSCO)

Declining CPI opens door to lower interest rates Inflation concerns are falling as the July Consumer Price Index (CPI) showed an increase of 2.9% compared to last year, this would mark the lowest reading since March 2021. Core CPI, which excludes food and energy was also positive as it came in at 3.2% which would mark the lowest reading since April 2021. Areas that continued to put upward pressure on inflation included food away from home (+4.1%), electricity (+4.9%), and motor vehicle insurance (+18.6%). Other areas that used to be problematic have now reversed course and are benefitting the inflation report. This includes used cars and trucks (-10.9%) and new vehicles (-1.0%). Shelter continues to be the heavyweight in the report as the category increased 5.1% compared to last year and accounted for over 70% of the increase in core CPI. If shelter was stripped out, CPI would have increased just 1.7% compared to last year. I believe we'll continue to see further progress on inflation as we end the year.   Retail sales data shows people are still spending money Data points continued to come in favorably for the Fed this week as retail sales increased 1.0% compared to last month. This easily topped the estimate of 0.3%. Looking compared to last year, retail sales were up a healthy 2.7%. Nonstore retailers continued to see strong growth with a 6.7% gain compared to last year and while growth has slowed, food services and drinking places still showed good growth of 3.4%. It appears both electronics and appliance stores and building material & garden equipment & supplies dealers have bottomed with gains of 5.2% and 0.4% respectively. This is the first time I remember seeing a positive gain in building material & garden equipment & supplies dealers in a long time. Furniture & home furnishing stores did remain a drag on the report as sales declined 2.4% compared to last year. Overall, I believe this was a great report considering we are seeing inflation slow and the consumer is still willing to spend. The soft landing many have wondered about is looking more and more possible with reports like this.   Are separately managed funds best for you? At Wilsey Asset Management, we manage all our accounts separately and have done that now for over 30 years. What that means is our clients actually hold the securities in their portfolio versus buying shares in a mutual fund or ETF. This trend seems to be taking hold with other brokers as asset growth for separately managed accounts (SMAs) has been 30% over the past two years. SMA's are now at $2.4 trillion in assets in professionally managed accounts. This compares to $4.3 trillion in mutual funds and $1.9 trillion in ETF's. These managed accounts will generally use an outside money manager and it will not be quite as individualized as people would prefer. One thing to understand is the fees considering you are likely paying you're an advisor/broker a fee and then an additional fee to the SMA manager. Often times this strategy can cause confusion for the investor as well, sometimes we have seen this strategy produce 50 to 100 positions which can also be a nightmare to get out of. Lastly if you have questions on why certain positions are in the portfolio you will not be able to call and talk to the person making those investment decisions and you'll be stuck with a pre-scripted response from the broker. Be sure to ask your broker/advisor many questions if they are advising SMAs as it may sound better than it really is.   Financial Planning: When to get Umbrella Insurance Both home and auto policies contain liability coverage, which pays in case you are sued for damaging property or if you are responsible for hurting someone.  An example could be someone slipping on your driveway, but more commonly it is due to a bad car accident.  An umbrella policy adds extra liability coverage that kicks in after the home and auto liability is exhausted.  In recent years, litigation across the board has been rising, but also inflation has increased the cost of medical bills and auto repairs.  This in turn has resulted in more umbrella claims as costs are more likely to exceed the coverage on home and auto polices alone.  As a result, insurance carriers have increased premiums on umbrella policies (as well as home and auto policies) and have been more likely to deny umbrella coverage increases or coverage all together.  Even with these cost increases, it is still relatively affordable at a few hundred dollars per year, so if you are underinsured you should consider purchasing a policy.  Umbrella coverage comes in increments of $1 million, and the rule of thumb is to carry insurance equal to your net worth.  However, this can be excessive in some circumstances as assets like qualified retirement accounts and home equity have some protection against lawsuits. Generally speaking, if your net worth is over a million, you should have an umbrella policy, and depending on your net worth, the types of assets you own, and your exposure to liability, you may need to carry higher amounts of coverage.  The last thing you need after building a nest egg is for an unexpected lawsuit to take all your assets and put you back to square one.   Companies Discussed: JB Hunt Transport Services (JBHT), Mobileye (MBLY), Ulta Beauty (ULTA)

“Friendly fraud” is costing businesses $100 billion a year I was surprised to learn of a new term called friendly fraud. This is when a customer disputes a legitimate charge they made on their credit card, debit card, or another payment method. According to a recent survey,35% of Americans admit to committing this kind of fraud, and 40% know someone who has. This has come at a huge cost to merchants as it is estimated to cost them $100 billion per year. Some of the fraud is accidental as it can come about when a consumer doesn't recognize the merchant's name used to identify a purchase on their bill. Sometimes a merchant will have a name that differs from their commonly known name. If you are a merchant, you may want to look into this as it could help save you some of these potential costs. Of those that committed this type of fraud, 29% said it was accidental. Other reasons for committing this type of fraud included economic hardship (34%) and respondents knew someone else who had gotten away with it and then gave it a try (19%). I have to say, if you have intentionally done this, it is just wrong. It is really no different than walking into the store and stealing. Ultimately, this costs other people as merchants will need to charge more for their goods to offset these costs.   Google's monopoly ruling could be a huge loss for Apple This might sound crazy, but I believe the ruling by a federal U.S. judge that Google has illegally held a monopoly in search and text advertising might have a bigger impact on Apple's stock than Alphabet's. This case was filed in 2020 by the Department of Justice and a bipartisan group of attorneys general from 38 states and territories. It alleged that Google has kept its share of the general search market by creating strong barriers to entry and a feedback loop that sustained its dominance. The court found that Google violated Section 2 of the Sherman Act, which outlaws monopolies. In the ruling, the court focused on Google's exclusive search arrangements on Android and Apple's iPhone and iPad devices, saying that they helped to cement Google's anticompetitive behavior and dominance over the search markets. This should be a major concern for Apple considering Google paid them $20 B in 2022 and if we annualize the recent service revenue in Q3 of $24.2 B the Google payment would account for about 25% of service revenue. I can't imagine there are many costs associated with this for Apple, so the loss of this payment would essentially subtract $20 B from total profit. For Google the risk is that users might have other options for search engines, but with their strong reputation and well-run platform I don't think they would lose a lot of users.    The US debt continues to climb, should you be concerned? If you haven't heard the news already, you probably will hear it as time goes on, the US treasury estimates America's gross national debt at $35 trillion which was hit last week. No doubt about it, $35 trillion by itself is a scary number. But this number is only half the story. In accounting, a balance sheet has assets and liabilities. To know the total equation, one needs to know what the assets are for the United States government. It is estimated the government has assets of $178 trillion which is made up of real estate, oil and natural gas rights and other assets. It is also important to know that much of the real estate was bought many many years ago and is carried at book value, not the current value or market value. Taking it one step further and looking at the debt-to-equity ratio, the government would have a debt/equity of 24.5%. This is not a bad ratio at all and I'm sure many people across the country would love to have a personal debt ratio that low. So when you hear people complain about the debt, ask them what are the assets and their value? Most people don't have a clue! Thank you to most of the mainstream media that only wants to scare you, rather than educate you by giving you the whole story!   Financial Planning: Tax Changes in 2026 The Tax Cuts and Jobs Act of 2017 contained quite a few changes for federal taxation, but some of the more impactful differences were the tax rates themselves, the ranges of income that is subject to the tax rates, and the adjustment to deductions and exemptions. These went into effect in 2018 and are expected to sunset back to their original rules in 2026. We are now in 2024, so we only have 2 tax years left. There are 7 federal tax brackets which currently are 10%, 12%, 22%, 24%, 32%, 35%, and 37% and these are expected to increase back to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. This is one of the more well-known adjustments, but one of the lesser-known features is that the amount of income subject to each of those tax rates will be adjusting as well. Essentially this means the same level of taxable income will climb into the higher tax brackets more quickly beginning in 2026. In other words, you may fall into the 3rd tax bracket right now, but after the sunset, you would fall into the 4th tax bracket with no other changes to income. These tax rate and income range changes are both bad for your tax bill as they will increase tax lability in 2026. Alternatively, there is also the change to the standard deduction, itemized deduction, and exemptions which may be helpful for your tax bill in 2026 and beyond. Between 2017 and 2025, the standard deduction was increased, limits were placed on itemized deductions, and exemptions were eliminated. Based on your situation, the net impact of this is either a larger or smaller level of taxable income, which is what is subject to the tax brackets. Many people currently claim the standard deduction, but itemizing will again become more common in 2026 which results in lower levels of taxable income. What's funny is most people aren't familiar with how taxes work or how much they actually pay, they just know they pay “a lot” or “too much”. Consequently, people seem to let their opinion of former president Trump dictate whether they are in favor or not of these tax changes as he was largely responsible for them. We've seen people who love Trump and thought they got a tax cut, when their tax bill really didn't change much, and we've seen people who hate Trump thinking their taxes increased when really, they didn't. Every situation is different but generally people with lower levels of income will see a tax increase in 2026. This is because most low-level income earners do not itemize which means they will have a higher taxable income that is taxed at a higher rate. People with higher levels of income will either see relatively no change, or a tax increase in 2026 as they will likely itemize resulting in lower levels of taxable income but will be subject to higher tax rates. People who claim the standard deduction and who are in the middle tax brackets will likely see an increase in taxes in 2026 as their taxable income will be higher and will be taxed at higher rates. People who will itemize and who are in the middle tax brackets will either see not much of a tax change in 2026 or will see a tax decrease. People who are more likely to see a tax decrease are those in the third or fourth tax bracket living in a high-income tax state and who have a house with a mortgage with higher property taxes. This is because they will have a higher level of itemized deductions from the extra state income and property taxes, but their income is low enough so they aren't pushed too far into the upper brackets. Overall, the majority of people, even in California, will either see relatively no change or a tax increase in 2026, but there are a few who will see a tax decrease.   Companies Discussed: Intel (INTC), Merck (MRK), Charles Schwab (SCHW) 

Did the markets overreact to employment numbers? Markets headed largely lower Friday morning after nonfarm payrolls grew by just 114,000 in the month of July. This was well below the estimate of 185,000 and the downwardly revised June number of 179,000. Total revisions for the previous two months led to numbers that were 29,000 lower than previously reported. The major concerns here are that job creation is well below the average monthly gain of 215,000 over the previous 12 months and the unemployment rate has now ticked up to 4.3%, its highest since October 2021. This triggered fears over the Sahm Rule, which states the economy is in recession when the three-month average of the jobless level is half a percentage point higher than the 12-month low. The three-month unemployment rate average has now moved up to 4.13%, which is above the 3.5% level in July 2023. Frankly, with unemployment as low as it's been, I don't believe this rule provides a strong signal here. As for the lower payroll numbers, it should be expected after years of expansion that job growth would slow. I don't believe that means we are heading into a recession considering it is just one month of data and it still showed positive gains in the month. On the positive side, inflation concerns should be helped here considering wage inflation grew 3.6% from over a year ago, which was below the estimate of 3.7% and last month's reading of 3.9%. While this wasn't a great report, I don't believe there is much to panic about here.    The Job Openings and Labor Turnover Survey (JOLTs) The Job Openings and Labor Turnover Survey (JOLTs) showed job openings totaled 8.18 million in the month of June. This was a bit higher than the estimate of 8.1 million, but lower than May's upwardly revised reading of 8.23 million. The ratio of openings to unemployed workers still stood at very good rate around 1.2 to 1. I don't think this report will move the Fed's thinking for rate cuts one way or another as it shows a softening labor market that remains near a healthy level.   I'm not that impressed by the new sports streaming service Venu Sports. Venu Sports is the joint venture between Disney's ESPN, Warner Bros. Discovery and Fox. It will feature all three companies' portfolio of live sports. This includes the NFL, NBA, NHL, MLB, and college football. The service will cost $42.99 a month. The joint venture is aiming to launch before the start of the NFL season on September 5th, but it is still pending regulatory approval. It is also expected for further details to be released when it launches. My problem here is there are still so many sports games you are not receiving and $42.99 a month is quite expensive. Consider the fact that now Amazon, Apple, Alphabet and Paramount also own large sports rights. One thing I'll be interested in is how expansive the service will be. For example, with the NFL on Fox you are only able to view the local Fox game that is being broadcasted. With this new service would I be able to watch any NFL game that is being broadcasted on Fox that day? If not, I really don't believe this is worth the money. As for the business structure it will be interesting to see how it plays out. Each company will own a 1/3 stake, have equal board representation, and will continue to bid independently for sports rights. I find it interesting they have an equal share since they all bring different rights to the table. As it stands right now, I'm not a fan of this deal as a consumer nor would I be as an investor in one of these companies.   Are Microsoft and OpenAI going from partners to competitors? In Microsoft's recent annual report, it added OpenAI to its list of competitors. This list has included companies like Amazon, Apple, Google, and Meta, but OpenAI was a new major addition. The competitive landscape in AI continues to evolve and with the launch of OpenAI's search engine known as SearchGPT last week, the two companies are now competing directly in the search space. Remember when OpenAI was supposed to revitalize Microsoft's Bing search engine? It doesn't look like that will pan out. Microsoft said they are also competing with OpenAI in AI offerings and news advertising. After investing a reported $13 B in OpenAI, Microsoft is the biggest investor. The company also serves as the exclusive cloud provider for OpenAI and uses its AI models in its products. I would say this relationship is definitely looking more and more confusing, especially when you consider OpenAI's business model. According to their website, OpenAI operates as a partnership between the original Nonprofit and a new capped profit arm. I would say this definitely complicates how Microsoft will be able to monetize its investment. As for AI, while I still believe it will have an impact on our society, it's just too early to try and pick winners and losers in this complicated space.   Planning for the Expected and Unexpected A lot of people associate financing planning with “goal planning” such as preparing for retirement, a home purchase, or education costs, but life has a way of going in unexpected directions. It is equally important to take the steps necessary to prepare yourself in case the unexpected happens, because it inevitably will. This could be an illness, disability, job loss, death, divorce, income reduction, or anything else that negatively impacts your financial situation. Just because you don't know what's going to happen, doesn't mean you can't plan for it, and you want to have contingency plans in place so a bad situation doesn't become catastrophic. Some examples would be making sure you have an established emergency fund, also having additional liquid assets or access to credit, making sure you have the right types of insurance and the appropriate levels of coverage, spending that is under control, and not being over-leveraged at any given time. These aren't necessarily moving you in the direction of your goals, but they do keep you from going backward. I spoke to someone recently who's in their early 30's, has four kids and a wife that stays home with them, so he's the bread winner. It looks like the company he works for might be going bankrupt and he could be losing his job. So far he thought he has been doing to right thing by buying a home and saving toward retirement, but all their money is tied up in retirement accounts and their house, which doesn't have a lot of equity, so there's not a lot of funds to access if he suddenly loses his income. They may need to withdraw from their retirement accounts in which case the tax and penalty consequences will greatly outweigh the benefits they got by funding them. Hindsight is 20/20, but this is an example of what can happen and why you want to be prepared. Financial planning is about making the right decisions on a consistent basis to accomplish your goals, but it is also important to make sure you are in a position to handle whatever comes at you, good or bad. When opportunities come along, you want to be able to take advantage of them. When something bad happens, you want to be able to take care of it without it derailing your financial situation or lifestyle.   Companies Discussed: SoFi Technologies (SOFI), UPS (UPS) & DexCom (DXCM)

Q2 GDP not as strong as the headline numbers show While Real Q2 GDP increased at a 2.8% annualized pace and easily topped the estimate of 2.1%, there were some likely one time impacts that lifted the numbers. The major outlier was the change in private inventories as it added 0.82% to the headline GDP number. As we discussed after Q1 GDP, private inventories negatively weighed on GDP during that quarter as it subtracted 0.42% from the headline number and led to a disappointing growth for Real GDP of 1.4%. Government also saw a nice boost as it grew 3.1% in Q2 and added 0.53% to the headline number. Even though the report may not be as strong as the headline shows, I still believe it was a good report. Personal consumption expenditures grew 2.3% in the quarter as spending on goods was up 2.5% and spending on services was up 2.2%. Spending was different when compared to Q1 considering in that report goods spending fell 2.3% and services spending rose 3.3%. Private investment was also strong in Q2 as it rose 8.4%. Although residential was down 1.4%, nonresidential investment was up 5.2%. Equipment was the strongest subcategory as it was up 11.6% and intellectual property products also saw good growth of 4.5%. Trade was the only component that subtracted from the headline number. The increase in imports of 6.9% more than offset the increase in exports of 2.0% and led to a subtraction of 0.72% from the headline number. I believe this GDP report is exactly what we needed to see for a potential soft landing. We are still seeing growth of around 2%, but it is slowing which should help reduce inflation in the coming months.    June PCE Inflation continues to normalize as the June personal consumption expenditures index (PCE) increased 2.5% from a year ago. Core PCE, which is the Fed's preferred measure showed an increase of 2.6%. Both numbers were in line with expectations and they provide more evidence that an interest rate cut should be heading our way as we exit the year. This report does put more pressure on the Fed to provide a signal for fed policy direction at next week's meeting. I don't think there will be a cut at that meeting, but the market appears to be hoping that they at least hint towards a cut in September.    Legal battle between Warner Bros. Discovery and NBA is set to begin The NBA announced deals with Disney, Comcast and Amazon for rights to games for 11 years starting in the fall of 2025. The deals totaled around $77 B with Disney paying around $2.6 B per year, Comcast paying around $2.5 B per year, and Amazon paying around $1.9 B per year. These deals also include the rights for WNBA games. The current rights that will expire next season were for 9 years and nearly $24 B. Disney will air more than 20 games per season on ABC and up to 60 games on ESPN. NBC will air 100 NBA games each season, including about 50 that will be exclusive to Peacock. NBC is returning as a partner with the NBA after losing rights in 2002. Amazon will offer 66 regular season games. This was a major disappointment for Warner Bros. considering Turner Sports has carried live NBA games for nearly 40 years. This spells more trouble for TNT and TBS as this was a major asset for these stations. The popular “Inside the NBA” show on TNT is also in question if Warner Bros. is unable to win back the rights. Warner Bros did acquire matching rights as part of the current deal, but the NBA rebuffed the bid and said, “Warner Bros. Discovery's most recent proposal did not match the terms of Amazon Prime Video's offer and, therefore, we have entered into a long-term arrangement with Amazon.” It will be interesting to see how this shakes out. The NBA doesn't believe Warner Bros. rights extend to an all-streaming package, which was carved out for Amazon. The last time these deals were made I can't see how streaming would have been addressed. For that reason, my early inclination would be that it would be hard for the NBA to deny Warner Bros. their matching rights.    The IRS and Inherited IRAs After 5 years, the IRS has finally come to a decision with inherited IRA withdrawals. The Secure Act in 2019 removed the ability for most retirement account beneficiaries to stretch distributions over their life expectancy and now requires them to fully deplete the account after 10 years. With tax-deferred accounts, this severely limits compounding growth and increases the income tax burden on these beneficiaries. The component that has been up for debate is whether those beneficiaries also have to take required distributions during each of those 10 years. So far, no distributions have been required and a few days ago the IRS confirmed that a distribution will not be required in 2024. However, beginning in 2025, beneficiaries who inherited a tax-deferred retirement account in 2020 or later from someone who was subject to RMDs (which will be most cases) must begin taking small required distributions of their own each year as well. This does not apply to beneficiaries who are spouses, minors, or disabled, and while inherited Roth IRAs are subject to the 10-year rule, they will not have annual required distributions. Keep in mind, if you inherited an IRA in 2020 and wait until 2025 to start distributions, you now only have 6 years left to deplete it because you are still bound by the 10-year rule. This means larger annual distributions and maybe higher tax brackets. So even though you don't have to start, that doesn't mean you should continue to wait or that you should only take the minimum amount required. Every beneficiary should have their own plan on how best to distribute the funds at the lowest tax rate which will be dependent on their own income level, retirement date, level of their own retirement assets, and the fact that tax rates could increase in 2026. This could mean accelerating or deferring inherited withdrawals so they occur when your own income is lower.   Companies Discussed: Bank of America (BAC), Dominos (DPZ) and UnitedHealth Group (UNH)

Retail sales beats expectations but shows consumer is still softening. June retail sales came in flat compared to the previous month, this topped the expectation for a 0.4% decline. Compared to last June, retail sales were up 2.3%. Areas of strength included non-store retailers (+8.9%), food services and drinking places (+4.4%), clothing and clothing accessories stores (+4.3%), and electronics and appliance stores (+2.7%). Both furniture and home furnishing stores (-4.0%) and building material and garden equipment and supplies dealers (0.9%) were done when looking year over year, but they have perhaps started to turn the corner as they both showed month over month gains. Gasoline stations were also a negative weight as it was down 3.0% compared to last month and 0.4% compared to last year. Overall, I believe this is a strong report that shows an economy that is slowing but remains in a healthy place. With this news and other comments from Fed chair Powell markets have now priced in a 100% chance of at least one rate cut by the September meeting.    Will oil demand increase or decrease in years to come? I have been concerned about oil consumption and investing in oil related companies based on the increase in electric and hybrid vehicles. Unfortunately, there's not much help in predicting oil demand from the experts. British petroleum, also known as BP, expects oil demand will plateau by 2025. They believe the subsequent decline will depend on how aggressive countries get with carbon omissions. BP believes by 2050 oil demand could drop down to 25 million to 30 million barrels a day if countries get serious about a “net zero” goal. This would be a major decline from today's level of about 102 million barrels a day. But there's others who disagree such as OPEC which sees demand growing by 4.1 million barrels a day from 2023 to 2025 and continuing to rise at least through 2045. The Paris-based International Energy Agency forecasts a peak in 2029 and the US Energy Information Administration is looking for peak between 2030 and 2040. It also looks like Warren Buffett does not believe a peak is coming soon as he has been investing heavily into Occidental Petroleum and has a sizeable stake in Chevron. With all the uncertainty, I believe if an investor is going to invest in an energy company, it should be a well-diversified.    Japan's $1.5 trillion pension fund could be a black Swan for our stock market. Japan has grown their pension fund to $1.5 trillion over the years and has continued to increase the amount of money they invest in the US. As of March 31st, about 50% of the fund was held in foreign stocks and bonds, most of which was in the United States. The problem they have is their currency, the yen vs the dollar has fallen to levels not seen since President Reagan was in office. The investments in foreign countries have led to some criticism as some say it amounts to a vote of no confidence by the Japanese government in its own currency. It is unknown what US equities they hold, but the fund was up 23% in its most recent fiscal year. My concerns are what if they want to reduce their exposure to US equities and bonds to 30%? That would be a reduction of around $300 billion. What if they hold in their pension the high-flying technology companies? How would those stocks perform if the fund sold $100 to maybe $200 billion worth of stock? No one knows for sure, but with that 23% gain there is a high likelihood that they had a portion perhaps a good portion of the investments in the US technology companies.    A Major Mistake with Spousal Social Security When collecting Social Security on your own work history, you may collect between the ages of 62 and 70. Every month you wait, your benefit amount increases. In cases where one spouse did not work, or had a very limited earnings history, that spouse may qualify for a larger spousal benefit from Social Security. The maximum spousal benefit is one half of the higher earning spouse's full retirement age benefit amount, and the lower earning spouse would need to collect at their own full retirement age to receive it. If this half is more than what they would receive from their own earnings history, they will receive the larger spousal benefit, not both. If they collect before their full retirement age, they will receive a reduced amount. Also, the higher earning spouse must be collecting for the lower earning spouse to be able to collect a spousal benefit. Many people have the idea of deferring their Social Security until age 70 so they receive the highest possible monthly amount. This strategy may not be the best decision normally, and it can be even more problematic when a spousal benefit applies. I met with some people this week who had this idea. One spouse worked and the other did not, so a spousal benefit was definitely going to be applicable. The problem is, a spousal benefit does not get any larger beyond full retirement age, which in this case was age 66 and 10 months for both of them. They were both the same age, so if they had waited to collect until 70, the lower earning spouse would be deferring 38 months (from 66 and 10 months until 70) for no additional benefit. In this case the spousal benefit was about $1,900 per month so whether she collects at 66 and 10 months or waits until 70, she would still receive only $1,900. This mistake would have cost them over $70,000 in missed Social Security benefits. Fortunately, they had not reached their full retirement age yet and the working spouse had not retired, so they had not lost anything yet. If you will be receiving a spousal benefit from Social Security it is almost never helpful to defer beyond your full retirement age, which is usually around age 67.    Companies Discussed: CrowdStrike (CRWD), Amazon (AMZN) and PepsiCo (PEP)

Inflation continues to cool, creating more hope for rate cuts. The June Consumer Price index (CPI) rose 3.0% compared to last year, which was below last month's reading of 3.3% and the expectation of 3.1%. Core CPI, which excludes food and energy rose 3.3% from a year ago. This was below last month's reading and the expectation which were both 3.4%. This also marked the smallest annual increase in core CPI since April 2021. Food was up 2.2% over the last 12 months with food at home up 1.1% and food away from home up 4.1%. Energy was up 1.0% as gasoline was down 2.5% and electricity was up 4.4%. Motor vehicle insurance continued to be an outlier as it was up 19.5%. The shelter index also continues to be a problem for inflation as it was up 5.2% and accounted for nearly 70% of the 12 month increase in core CPI. While this is off the peak of around 8%, the shelter index continues to lag real time data considering the annual inflation rate for new rental contracts fell 0.4% in the first quarter this year. This was down from the record highs around 12% just two years earlier. Part of the reason for the lag in the shelter index is the government constructs it by sampling a “staggered panel” of renters and homeowners. It splits the sample into six groups, and surveys each on a staggered basis every six months. I do believe this means we will continue to see shelter fall, which should be a major positive for the inflation rate. With this report I believe the chance for two rate cuts before the end of the year is now more likely.    Producer Price Index disappoints against expectations The Producer Price Index (PPI) rose 2.6% in the month of June, which was above the expectation of 2.3%. Core PPI rose 3.0% in the month, which was above the expectation of 2.5%. Although this looks troubling, I still believe these rates are manageable, especially considering the several months of positive data when compared to the CPI. I don't think this report should be cause for concern, but it should definitely be monitored in the months ahead. I'm still looking for both core CPI and PPI to head closer towards the 2% target as we exit 2024.   The Labor Market Can be Confusing, Which Survey Should You Trust?  We received the job numbers last Friday and lately there have been big differences between the establishment survey and the household survey. Because of these major differences, some people say these numbers are not worth relying on. But if one understands why the two are different, it justifies that the establishment survey is the one to follow. The establishment survey/nonfarm payroll number comes from employers who detail how many employees are working at their company. The household survey is completed by asking households who is currently working in their household. We have seen an increase in undocumented workers and when these people receive a call from any US government surveyor, they do not want to answer any questions for obvious reasons. This has likely led to part of the discrepancy between the two surveys. I believe businesses will provide a more accurate picture of labor market over a simple household survey. I especially think this is true when you consider the household numbers are based on surveys of approximately 60,000 households. These household responses are then used to calculate the numbers for the entire US population.    Investors beware, what goes up must come down!  I remember since I was a little kid there was a saying: the higher you climb, the further the fall. I believe this applies to almost everything, including the Magnificent Seven stocks. The S&P 500 this year has increased in value by $6.2 trillion, the Magnificent Seven having contributed $4.2 trillion. Throughout history, we have seen similar periods with stocks that have dominated the market going all the way back to the 1920s when it was the railroads. Then about 20 years later, it was chemical companies and automobiles. If you lookback 40 years, who could forget the AT&T monopoly and their break up in 1984. Over history, markets have gotten it right when it comes to the benefit of technology, but the highflyers in the beginning generally do not do as well as time progresses. I believe many investors could lose buying the high flyers at these prices. Don't forget about the Tortoise and the Hare.   Financial Planning: What is the Goal of a Roth Conversion? A Roth Conversion is the process of transferring funds from a tax-deferred retirement account to a Roth account. When the funds are transferred, the amount is reportable as income and taxed during the year it occurs. However, once the funds are in the Roth, they can continue to be invested and grow tax-free without any required distributions in retirement. Unlike contributions, there is no limit on the amount you may convert. The transaction itself is relatively simple, you're just moving money from one account to another. The difficult part is determining when, how much, and how often you perform these conversions. Many people and advisors mistakenly think the goal of Roth Conversions is to reduce your lifetime tax bill, which is not the case. The goal, along with most retirement planning strategies, should be to increase your after-tax retirement income; reducing taxes is simply a byproduct of that. Reducing taxes and increasing after-tax income may seem like the same thing, but they are not. What matters when performing a Roth Conversion is the marginal tax rate at the time of the conversion and the tax rate in retirement if that conversion is not performed. This marginal tax rate includes all taxes such as federal, state, net investment income, capital gain, and IMRAA. If you can convert funds at a lower tax rate than they would otherwise be subject to if not converted, you will increase your level of after-tax income in retirement, which accomplishes the primary goal. If your goal was simply to reduce lifetime taxes, that may cause you to convert too aggressively by converting too much and pushing yourself into a higher tax bracket. If you live long enough this may reduce your total taxes, but if you paid too much tax upfront on the conversion, you may not have enough after-tax Roth funds to create the level of income you need. In many cases it is more appropriate to perform several smaller, more calculated conversions. You probably won't convert 100% of your pre-tax funds, you may still have some extra Medicare premiums to pay, you may eventually get pushed into a higher tax bracket, but that may be necessary if the net result gives you the highest level of income after paying those.   Companies Discussed: Carnival Corporation (CCL), Levi Strauss (LEVI) and International Paper (IP)

Largest US Banks  I continue to remain optimistic about investing in the large financials, specifically the money center banks. For the most part they trade at good valuations and the recent stress test shows they remain healthy. All 31 of the largest US banks passed the Federal Reserve's annual stress test, which provided a hypothetical scenario where unemployment levels rose to 10%, commercial real estate values decreased by 40% and housing prices fell by 36%. Following the results, the banks released plans to buyback stock and increase dividends. JPMorgan increased its dividend 8.7% and authorized a new $30 B share repurchase program. Jamie Dimon noted the dividend increase marked the second this year for JPM. Citigroup raised its dividend 5.7% and said it would continue to assess share repurchases. Bank of America increased its dividend 8%, but made no mention of share repurchases. Wells Fargo increased its dividend 14% and said it has the capacity to buy back common stock over the four-quarter period starting Q3 2024 through Q2 2025. You likely won't see these stocks double over the next 12 months, but I believe many of them over the next few years could produce sound returns of around 10% when including dividends.   Jobs Report The labor market continues to soften, which should be a positive for Fed rate cuts. Nonfarm payrolls increased by 206,000 in the month of June, which was better than the 200,000 estimate but less than the downwardly revised gain of 218,000 in the month of May. Combined, nonfarm payrolls in April and May were reduced by 111,000. Looking under the hood, the report was even weaker than the headline number indicated considering government was the second largest contributor adding 70K jobs in the month. Health care and social assistance continued to lead the way as the sectors added 82.4K jobs and construction was strong as well as it added 27K jobs. Areas of weakness included manufacturing (-8K), retail trade (-8.5k), and professional and business services (-17K). Wage gains also continued to soften as average hourly earnings were up 3.9% year over year. This was below last month's reading of 4.1% and is well below the high in 2022 of 5.9%. The unemployment rate climbed to 4.1%, which tied the highest level since October 2021. Part of the increase in the unemployment rate came from a 0.1 percentage point increase in the labor force participation rate to 62.6%. The so-called prime age rate, which focuses on those between ages 25 and 54, rose to 83.7%, its highest in more than 22 years. While a lot of this report may sound negative, it is important to remember that the labor market is softening from a very strong level. We also need to see the labor market soften to give the Fed more confidence in their ability to cut interest rates. I would say this report was very positive considering it achieved the goal of softening without being damaging. We should keep an eye on the reports moving forward to make sure the labor market doesn't fall off a cliff, but as of right now I don't see that happening.    Labor Market In the recent JOLTs report, job openings showed the labor market continues to soften but to a healthy level. Openings stood at 8.1 million in the month of May, which was an increase from 7.9 million in April. While openings have fallen from a record of around 12 million in 2022, they are still above prepandemic levels when they were tracking at just under 7 million. The report showed the number of job openings for each employed worker remained at 1.2. This is below the peak of 2.0 in 2022, but it is right around prepandemic levels. I would not be surprised if we continue to see the labor market soften even a little further. I believe this would be healthy for the economy as it would create a more balanced labor market between employers and employees.   Risky Investing I'm very concerned that the bar on risk taking in investing continues to rise. We are already dealing with craziness like GameStop, Roaring Kitty, cryptocurrencies with no real value, and technology companies that have expectations that the earnings will continue to go to the moon. Now add to that list what is known as “zero days to expiration” better known as 0DTE options. These options currently account for nearly half of the daily volume of the S&P 500 index options, more than double the 17% in 2020. These are simply one day options on the S&P 500 and the NASDAQ 100. It is estimated by early 2025 these 0DTE's will be available for individual equities as well. That's unbelievable! There will be sometime in the future that an event will cause wide volatility and many of these gamblers will lose large amounts of money. I'm disappointed that this is being allowed and the SEC and other regulators are letting this happen. I can't believe I'm going to put this in print, but maybe I should send this to Elizabeth Warren. I'm afraid unsuspecting people with money will see on social media some people shouting how they made tens of thousands of dollars one day with small investments. What you won't see is the larger majority of investors losing large sums through this gambling tool. In fact, retail investors lost more than $350,000 on 0DTE options on an average trading day between May 2022 and September 2023. You also won't see the fact that institutional traders with their algorithmic trading and market makers are able to pounce on split second moves, leaving retail investors with the losing crumbs. I'm in hopes sometime down the road we will see these smaller brokerage firms that are pushing the 0DTE's hit with large fines and hopefully forced into bankruptcy. However, in the meantime, these brokerage firms will be bringing in millions and maybe billions of dollars in fees and commissions. There are more portions of the market now that is no longer investing, but more like playing the lottery or gambling and betting on short term movements. In my opinion 0DTE's should be illegal and people gambling like this should lose their money as it is high risk gambling. What concerns me is they will relate it to the stock market and when they lose money they will say the stock market is risky. If you invest in good quality equities and have a time horizon of 3 to 5 years and they have strong fundamentals, stocks are not risky. Unfortunately, many people right now are caught up in the hype and are more into gambling rather than investing.   Financial Planning: Reviewing Mid-Year Income Now that we are half way through the year, it can be helpful to review your income to estimate how you will end up by the end of the year and make some adjustments. Maybe you had some unexpected income like extra capital gains or a bonus or perhaps your business had more sales than you were expecting. These increases in income may push you into a higher tax bracket or trigger income-related surcharges like the net investment income tax or IRMAA. More income is better than less, but if this is the case, now is the time to mitigate the tax hit. If you are still working, it may be helpful to increase retirement contributions or change which accounts you are contributing to. If you are retired, you might want to adjust how much you are withdrawing from accounts or adjust which accounts you are withdrawing from. It may also be necessary to adjust your withholdings or make an estimated tax payment if you have not withheld enough so far to prevent extra penalties and interest for underpayment of taxes. With rising rates, the interest for underpayment of taxes is much higher than in years past. Other tax strategies like Roth conversions are better implement at the end of the year, but making mid-year adjustments can help your annual income end up where it needs to be.   Stocks Discussed: Micron (MU), Whirlpool (WHR), Nike (NKE)

May Retail Sales May retail sales showed the economy is continuing to decelerate, which is exactly what I think we need to see. The release showed retail sales were up 0.1% compared to last month, which missed the estimate of 0.2%. When looking at May 2023, retail sales were up 2.3%. While this doesn't show a booming economy, I still believe it is a healthy level. Nonstore retailers continued see strong growth as sales were up 6.8%. It appears as the comparisons have gotten more challenging sales growth at food services and drinking places is slowing as sales were up 3.8%. It appears we have seen a turn in electronics and appliance stores as sales were up 1.8%, but furniture and home furnishing stores (-6.8%) and building material and garden equipment and supplies dealers (-4.3%) remained the two weakest groups in the report. Overall, I think this report should provide further evidence that a rate cut by the Fed should be warranted as we exit the year.  Annuities I have always cautioned people when it comes to annuities. Over my 40 years of financial experience, I have seen annuities sold to people by companies that later went through bankruptcy and insolvency. Two companies come to mind, Baldwin United and Executive Life Insurance Company. After these bankruptcies some policy holders only received 2/3 or so of their investment and no interest at all. I was curious how some annuities were paying high yields over the last few years with interest rates so low. Thanks to an investigative team from Barron's, they discovered a report from the Federal Reserve Bank of Chicago dated June 3rd that life insurers are relying more heavily on private placements and generally higher yielding securities that are exempt from federal reporting requirements and are lacking an active secondary market. According to the report, private placements now are about 20% of all life insurance bond holdings, which is up from 15% just five years ago. I believe holders of these annuities have no idea that their annuity is backed by private loans from soccer teams, film financing, and even sports broadcast rights. They are definitely far riskier than the old insurance companies that would invest in good quality equities along with highly rated bonds. Consumers need to be aware because in the brochures that are given by the sales people who have no idea what's in the portfolio, they're still saying these are as safe as CDs, savings bonds, money markets, and treasury bills. Unfortunately, that is not the case and I believe down the road we could be reading about seniors who were depending on these annuities for their retirement and they have stopped receiving income from the annuity and/or have lost some of their principal. My recommendation is to understand what you're investing in and make sure the investment advisor you're dealing with is knowledgeable about the investments and not just selling you a product for a big commission or a trip to Australia or Morocco as some annuity companies have given as an incentive to their brokers with the best sales. It's always best to deal with an investment advisor who is 100% a fiduciary.  New Car Sales Maybe you're driving around in a car that is six- or seven-years old thinking gosh my car is old, perhaps I should replace it with a new one. Well don't be in too much of a hurry. The age of your car is well below the average vehicle on the road which is currently 12.6 years as reported by S&P Global Mobility. That Is up from the average age of 11.2 years just 10 years ago. This is caused by many factors, not just the average cost of a new vehicle which is around $47,000. You also have higher interest rates, your registration will be higher, and insurance premiums could increase by double digits with a new car. There are some people who just don't want the hassle of going to buy a new car and having to deal with the car sales person that could put a lot of pressure on them. Some people flat out just don't like the new cars and they miss the old buttons and easy access to turn things on and off as opposed to the new touchscreens and technology that can take hours and hours to learn. New car sales have done well over the last few years and probably will continue to stay strong for years to come, but there are a few people out there that are just resisting the technology and will stay with their current vehicle for many more years to come. Navigating the Social Security Earnings Limit Social Security can be collected between the ages of 62 and 70, but if you apply before your “full retirement age”, which is usually 67, you will be subject to an earnings limit. This rule states that for every $2 of earned income, such as wages, you have above the annual limit of $22,320, $1 of your Social Security will be withheld from you. This limit does not include retirement income like pensions, interest, capital gains, dividends, or IRA withdrawals. Also, once you reach your full retirement age, this rule no longer applies meaning you can continue to work without any benefit reduction. If you do have Social Security benefits reduced due to this earnings limit, once you reach age 67, you will receive a credit for the benefits you did not receive and your monthly payments will be permanently increased to compensate for it. In other words, the benefits are not totally lost, just deferred until your full retirement age. This might happen if you retire and return to work, or simply apply for Social Security before you retire. Most people retire partway through the year, so it is common for wages in the first half of the year to exceed the $22,320 limit. However, there is a second component to this earnings rule which states if you apply for Social Security in the same year you retire, as long as your monthly earnings are less than $1,860 once you begin Social Security, there will be no reduction. It is also important to note that this earnings rule is the main reason your “full retirement age” is significant. It is a misconception that it is better to wait until full retirement age to collect when in reality every month you wait beyond age 62 up until 70 your benefit amount increases. If you are retired, your full retirement age is irrelevant as the earnings limit will no longer apply.     Stocks Discussed: Dave and Busters (PLAY), Airbnb (ABNB) and Rivian (RIVN)

May CPI I would say I was very optimistic after the May Consumer Price Index (CPI) was released. Headline CPI increased 3.3% compared to last year, which was below the estimate and last month's reading which both stood at 3.4%. Core CPI which excludes food and energy was up 3.4%, which was below the estimate of 3.5% and last month's reading of 3.6%. This also marked the lowest reading since April 2021 when inflation concerns really began and the core CPI was at 3.0%. In March 2021 core CPI was at 1.6%. The shelter index continues to be the heavyweight moving core CPI as it was up 5.4% over last year and accounted for over two thirds of the annual increase. Many areas of the report have come back down to more normal inflation rates with areas like food at home increasing just 1% compared to last year. Food away from home was a little more challenged as that was up 4% compared to last year. I believe much of this can be attributed to the continued demand for bars and restaurants and the increased wage pressures. Although energy saw a 2% decline compared to the previous month, it was 3.7% higher than last year. This stems from the major fall in energy prices last year that I believe will make for difficult comparisons over the next few months. Two major areas that have remained problematic include admission to sporting events, which saw an increase of 21.7% compared to last year and motor vehicle insurance, which saw an increase of 20.3% compared to last year. It was positive to see a monthly decline in motor vehicle insurance of 0.1%. I believe this category will not be a problem in 2025 as much of the rate increases have now taken place. Overall, I believe this report should be supportive of a rate cut, but we will need to see more reports like this with further progress in the coming months for a cut to actually occur.  May PPI After a positive Consumer Price Index (CPI), the Producer Price Index (PPI) delivered more welcome news on the inflation front. May headline PPI rose 2.2% compared to last year and when comparing against the month of April there was a decline of 0.2%. Estimates were looking for a 2.5% increase in the annual number and a 0.1% increase in the monthly figure. When looking at core PPI, which excludes food and energy, the report showed and increase of just 2.3% on annual basis which was below the expectation for a 2.5% increase. These numbers are right around the Fed's 2% target and should be a positive indicator for CPI and PCE as we continue to move forward.  Private Investment Deals Investors be aware that your local broker could start hitting you up for private investment deals to fund apartment complexes somewhere around the country. The problem is the banks are starting to clamp down on just loaning money for projects on apartments that may be losers. In 2023 almost 500,000 new apartments were opened which is the most since the 80s. That growth is expected to continue and it's estimated to be around the same number in 2024. We have said before this will help bring down housing costs probably by 2025 as there are so many apartments on the market that the owners will give so many free incentives and reduce the rents just to get people in and provide the owners some cash flow. This will affect the housing market along with the CPI since shelter costs are a big part of that index and lower rents would help reduce the inflation numbers.  Apple Stock I was surprised to see Apple move more than 7% higher a day after the developer conference on Monday and close at a record high. There was a lot of hype leading up to the event as the company was anticipated to detail more about its AI strategy. I'm not sure if I saw the same conference, but I was not overly impressed by the details. Apple launched Apple Intelligence which can proofread your writing, or even rewrite it in a friendly or professional tone. It can create custom emojis called “genmoji,” search through your iPhone for specific messages from someone, summarize and transcribe phone calls or show you priority notifications. It can even tap into OpenAI's ChatGPT to provide you more detailed answers from Siri. ChatGPT is also built into systemwide writing tools. So, for example, Apple said you can create a bedtime story for a child and add images created by ChatGPT. Since the updates will only take place on the iPhone 15 Pro, Pro Max, and newly built phones, the hope is there will be a major upgrade cycle. Personally, I just don't see how these updates will get many people to move and buy a phone that will cost at least $1,000. I know new emojis is definitely not enough for me to upgrade. I also do worry about how this will impact the relationship with Google. Alphabet currently pays Apple around $20 B per year to be the default search engine on Apple devices. If more people begin to use the AI function and do less search, why would Alphabet continue to pay such a hefty fee? For a stock trading at close to 30x this year's projected earnings, there is now a lot riding on this next iPhone cycle.  What should you do with your Annuity? It is very rare that I come across someone who fully understands their annuity. Annuities can be either qualified or non-qualified and their status will determine how they are taxed. A qualified annuity means it was purchased with retirement funds while a non-qualified annuity was purchased with non-retirement funds. Generally qualified annuities are more flexible because they can be surrendered and rolled into another IRA without tax. However, if non-qualified annuities are surrendered, the entire gain becomes taxable at ordinary income rates. Because of this sometimes (but not always) it can make more sense to annuitize non-qualified annuities which is the process of converting the funds into a pension-like stream of income. This is still taxable, but the gain is spread out over time rather than realized in one year. I recently spoke with someone who is close to 80 years old and owns a non-qualified annuity. It turns out their annuity has two annuitization options. They can either withdraw 5% of the account value for the rest of their life, or they can withdraw 7% of the account value until the account value has been reached, but would also stop upon death. The issue here is in both of these cases, there is a decent chance they will not live long enough to get all their money back, let alone any growth. Another option would be to surrender the annuity to guarantee they receive all their funds back, but then they would pay a decent chunk of it in taxes. This is one example of many that illustrate if you have an annuity, make sure you also know when and how to use it because waiting will limit your options.   Stocks Discussed: Docusign (DOCU), Ferrari (RACE) and Southwest (LUV)

Jobs Report  The Jobs Report showed the labor market continues to remain on good footing considering nonfarm payrolls rose by 272,000, which easily topped the estimate of 190,000. Strength occurred in health care and social assistance (+83.5K), leisure and hospitality (+42k), professional and business services (+33k), and construction (+21k). Government was also strong as it added 43k jobs in the month. I generally don't like to see government adding this many jobs as it is essentially an expense to taxpayers and it can detract from showing an accurate picture of the private labor market, which should ultimately drive our economy. The strangest part of the report was the divergence between the establishment survey and the household survey. While the establishment survey showed strength, the household survey showed the unemployment rose to 4% for the first time since January 2022 as the level of people who reported holding jobs fell by 408,000. Wage inflation was also a slight concern as average hourly earnings rose 4.1% compared to last year. This was above the estimate of 3.9% and last month's reading of 4.0%. Overall, I'd say this report was somewhat complicated with a mix of positives and negatives. I don't think it provides any evidence for the fed to cut rates, but I also wouldn't view it as problematic. JOLTs The Job Openings and Labor Turnover Survey (JOLTs) showed there were 8.06 million job openings in the month of April. This missed the expectation of 8.4 million and was also below the prior month's reading of 8.4 million. The number marked the lowest reading since February 2021 and it was well below the peak above 12 million in March 2022. While this all sounds like bad news, I believe this puts us back in line with a more normal labor market. Even with this decline, the labor market is still historically strong and I believe there is further room for it to soften without causing problems. There are still about 1.2 job openings for every available worker, which puts us back in line with where we were before Covid.  NVIDIA and the S&P 500 There is no doubt that AI has pushed Nvidia to records that are nothing short of astounding. It should be noted that when you include Microsoft, Meta, Amazon, Apple and Alphabet into the equation, these six companies now account for nearly 30% of the value of the S&P 500. Nvidia alone has accounted for close to 35% of the index's gain this year. Even a powerful freight train eventually gets derailed when it gets going too fast. What could cause Nvidia to fall off the tracks? I see more articles about how the demand and future sales of AI could be overhyped. If that comes to be true, then the earnings estimate for Nvidia will fall, which would cause a deep decline in the stock price. It is currently the king of the mountain and no one can knock it from the top, for now. But no company stays on top forever and competition can come out of nowhere causing the price of chips to be cut dramatically, which also could cause a problem for earnings. Keep in mind Nvidia does not make the chips, they rely on Taiwan Semiconductor to manufacture the chips for them. The contracts that they have are rather secret, but what if Taiwan Semiconductor says they want a bigger piece of the pie? This could really hurt Nvidia's profits and there's no other company that can produce the chips at this time. I think it could be a very rocky summer for equities, especially stocks that are trading at valuations that are well above the norm.  Natural Gas Prices It was a hot May across the country, except for here in San Diego. We seemed to have some nice weather with temperatures still in the 70s. But with hot weather across the country, it increased electricity demand as people cranked up their air conditioners to stay cool. Before the increase in demand, there was a large inventory of natural gas that brought natural gas prices down to levels not seen in a long time. The reduction in natural gas inventories to more normal levels has allowed natural gas prices to rise and they now trade around $2.60 per million British thermal units which was about 65% higher than the low reached in late March. It is forecasted that this could be a hot summer, which means a higher use of natural gas for electricity to run those air conditioners. One area that is helping is solar, which is reducing some of the need for natural gas. Currently, estimates are that natural gas should not be too much higher as recent prices are perhaps just enough to bring back the drillers. This should make consumers happy with lower natural gas prices and the drillers happy since they can drill more and get a reasonable price for natural gas. It's a nice situation, but keep in mind it will not last forever and something will cause the market to move one way or the other and spoil the party.  Game Stop Roaring Kitty is back and I must say I still don't get why people follow this guy. He seems nice and all, but he has profited tremendously from this GameStop (GME) craziness. Keith Gill who goes by Roaring Kitty now holds 5,000,000 shares of GME and has 120,000 call options with a strike price of $20 that expire June 21st. It is unlikely he will be able to take full possession of that stock after the options expire as he would need $240 million to take custody of it after exercising the calls. Just looking at the value of his GME shares he has a net worth of at least $140,000,000. Considering he started this crusade sharing his positions with a $53,000 stake in September 2019 he must have sold during the craziness in 2021. I cannot think of any other way that he was able to amass such a fortune considering the major fall in GME's stock price that occurred over the last few years. The initial premise for buying the stock in 2021 was to stick it to hedge fund managers who were shorting the stock. At that time short interest was over 100% and a short squeeze was rather easy to achieve. Recently the short interest was around just 20%. While the intention was to essentially take money from these big hedge funds, I believe there were many small investors that Gill profited off and this time around if he sells with a big gain, I believe it will come at the expense of even more small investors. The company has terrible fundamentals considering the business model is dying with sales that declined 29% compared to last year and a loss of $32.3 m in the recent quarter. GME also said it would sell an additional 75 million shares on top of the 45 million share sale it had announced in May that raised more than $900 million.   Stocks Discussed: Salesforce (CRM), Foot Locker (FL) and eBay (EBAY)