PC Sales We have seen global shipments of PCs decline to 245 million this year, a drop of nearly 100 million from 2021 when global shipments reached 342 million. You may think that PCs are going to go the way of the dinosaur, but that is not the case. Personal computer companies are preparing new PCs that will begin arriving within the next few months that have AI in them. I’m sure you’ve heard of the CPU, which is the central processing unit, a GPU which is a graphics processing unit and now there is a NPU, which is a neural processing unit. The NPU can process very large data sets efficiently and will pick up most of the AI computing requirements. Just recently, Intel unveiled an AI PC acceleration program which will use AI techniques on such things as content creation, security, audio effects and video collaboration. It is expensive and time consuming to run AI in the cloud which has 1.76 trillion parameters but a PC can be more focused just on certain areas as opposed to the entire universe of AI. Maybe in the next couple years we will see a big boom in PC sales.   Commercial Real Estate I know many people are concerned about commercial real estate, but I believe there are some great opportunities given the extremely negative sentiment. The office sector has been of great concern, but when listening to the conference call for a public REIT we own in the portfolio I remain quite optimistic. The CEO pointed to many major positives including new tenant leasing marking the 11th consecutive quarter at or above pre-COVID levels. Leasing has been extremely strong this year and the company expects to see the highest amount of new tenant leasing since 2016. Retention rates also look good coming in at 70%. Don’t get me wrong there are some definite cracks in the sector, but be careful throwing the baby out with the bathwater. In fact, JLL recently reported that after analyzing its vast data set of office buildings, comprising over 2.7 billion rentable square feet across the top 25 MSAs (Metropolitan statistical area) 50% of the sector's vacancy is concentrated in the bottom 10% of the office stock. I believe the office still has a place in our economy but it is the strong Class A properties that will remain.   Growth Companies People and investors always like the excitement of growth companies with high expectations that they will have great returns. This week the growth company WeWork filed for bankruptcy in New Jersey. This company has never seen a quarterly profit but yet the stock price did reach a high of $130.80, it currently trades for less than a dollar. The big problem with this growth company was excessive expansion which caused excessive losses and rising debt they could not pay. At our firm, Wilsey asset management, I still continue to believe as I have for many, many years we will not invest into or hold a company that has no earnings and high debt. I may have missed some huge gains on a few companies, but I do believe being cautious and not having losses from companies filing bankruptcy is a far better plan for a long-term return and also, I think it is much easier on the emotional side.   Financial Planning: 2024 Tax and Retirement Changes As we get closer to the end of the year, more information is being released about 2024. Each year the IRS adjusts the tax brackets for inflation and in 2024 the increase will be 5.4%. This is a good thing as it allows slightly more of everyone’s taxable income to fall in lower brackets and results in a tax reduction. The standard deduction, which acts as a deductible expense for most taxpayers, is increasing for married couples from $27,700 to $29,200 plus an extra $3,100 if 65 or older. For single filers it is increasing from $13,850 to $14,600 plus $1,950 if over 65. Retirement account contributions are receiving an increase as well as the maximum contribution for employer plans like 401(k)s is increasing from $22,500 to $23,000, plus an extra $7,500 for savers older than 50. IRA contribution limits are increasing from $6,500 to $7,000 plus a $1,000 catch-up contribution for those older than 50. With these upcoming changes everyone should review their income and savings plans for 2024 to make any necessary adjustments.

Employment While the employment numbers missed expectations, it is a big positive for interest rates as the labor market is slowing and should provide evidence for the Fed that their hiking cycle can end. The headline number showed nonfarm payrolls increased by just 150,000 in the month of October vs the expectation for an increase of 170,000. The prior two months were also revised lower by a total of 101,000 jobs. While this may sound like bad news the key takeaway here is the labor market is softening, but it is still doing ok. Areas of strength were health care and social assistance (+77,200), government (+51k), construction (+23,000), and leisure and hospitality (+19,000). While I generally don’t like to see government jobs leading the way in employment reports, hiring has lagged in the sector and has now finally returned to pre-covid levels. Manufacturing was a major loser in the month as 35,000 jobs were lost. While this may sound troubling, 33,000 of those lost jobs came from motor vehicles and parts which can be attributed to the UAW strike. With the resolution now in place with the auto manufacturers, we should see most of these jobs come back next month. Also, another positive on the inflation front was average hourly earnings which increased 0.2% in the month versus expectations for 0.3%. Compared to last year average hourly earnings were up 4.1%, which would mark the smallest year over year increase since June 2021.   Labor Market Even with a softening labor market, there are still plenty of jobs out there. The Job Openings and Labor Turnover Survey (JOLTs) showed there were 9.55 million available positions in the month of September, which means the ratio of job openings to available workers still stands at an impressive 1.5 to 1. The number of layoffs in the month also headed lower and stood at just 1.5 million compared to 1.7 million in the month of August. As a reminder, before Covid in 2019 layoffs averaged over 1.8 million per month.   Federal Reserve Survey A recent Federal Reserve survey said the average American is now worth $1 million, which is up 42% from $749,000 back in 2019. Now you may be thinking that includes multi-millionaires and billionaires, this is why the median wealth gives one a better idea of where America stands. From 2019 to 2022 median wealth hit $193,000 which is an increase of 37% adjusted for inflation. 16 million American families or a little over 12% now have wealth exceeding $1 million which is up from 9.8 million in 2019. These millionaires have received over 90% of their wealth from owning stocks, which is above the 87% home ownership rate. It was also discussed that for the most part they became wealthy over time and it did not happen quickly. A lesson for the younger generation, don’t be in a hurry to make big returns and lose your money. Be smart by investing in good quality equities and using taxpayer advantaged programs like IRAs and 401(k)s. Also, it is important to look where you will be in 30 years not 30 days.   Interest Rates While I believe over the next couple years rates will decline from these levels, I’m not optimistic it will be a major decline. One reason for that is the elevated government deficit. It was announced the treasury will be auctioning off $776 B of debt in the final quarter of 2023 and $816 B in the first quarter of 2024. This comes as the government recently announced the fiscal 2023 budget deficit would be about $1.7 T, which is an increase of $320 B compared to the prior year. It is important to remember that the debt market is based on supply and demand. If there is not enough demand at lower interest rates, to absorb the remaining supply of bonds the interest rate would need to climb.   Financial Planning: Adjustable-Rate Mortgage Demand Spikes It’s no secret that mortgage rates have climbed to their highest levels in over 2 decades. This has caused many potential home buyers to consider adjustable-rate mortgages as their initial interest rates can be significantly less. While 30-year fixed loan rates reach 8%, the rate for a 5/1 ARM loan hovers around 6.75%. These have a fixed rate for the first 5 years of the loan before becoming variable. Borrowers then have the idea of using an adjustable-rate mortgage to lock in the lower initial rate, simply to refinance before the fixed term ends, hopefully at a lower rate in the future. However, while the rate can look more attractive, these loans generally come high higher point costs. A point is an extra fee attached to a mortgage that is due at closing. Currently mortgage rates are priced based on the assumption that borrowers will look to refinance as soon as mortgage rates fall. Since ARMs have a lower initial rate and therefore less interest, extra point fees are added to make up for the fact they will likely be refinanced. Home buyers must look not only at the interest rate, but also the point cost, and how long they expect to have that loan before moving or refinancing. With mortgage rates at their current highs, it may make sense to accept a higher rate temporarily if the ultimate plan is to refinance in the next few years.

Investing Volatility A recent client survey by Charles Schwab produced some viable insights during difficult times like this. Over the longer term 33% of investors attributed their greatest investing success to patience through volatility. It is hard to patient during the ups and downs, but the reality is when holding good quality investments, it has proven to always be the right thing to do. Unfortunately, patient doesn’t mean 2-3 months and sometimes it may mean 2-3 years. The funny thing is that even though that patience has always paid off, our emotions lead us to want to sell at the worst times and many people end up doing so costing themselves drastically in the long term. The second most cited reason for clients’ greatest investing success was careful research which came from 16% of respondents. We always tell people that before we step in and by a company, it’s at least 10-15 hours of research. This doesn’t mean you won’t have volatility, but it does give you more comfort in knowing and understanding your investments during the difficult times which allows you to be patient. The biggest culprit for an investors worst investment was lack of research with 20% saying this was the cause. This doesn’t surprise me as many people are quick to jump into the hype or invest in something because a friend or family member thought it was a good idea. Unfortunately, like the survey shows we have seen this work out poorly for many investors. Another big culprit for the worst investment was high risk with 13% of respondents citing this reason. In today’s society people want to try and make a quick return, but that is not how investing works. People want to try and get big returns and they end up losing massively. We tell our client’s a reasonable target should be around 8-12% in the longer term. Anything in excess of this and you are likely taking big risks that could put your portfolio in jeopardy.   PCE There wasn’t much in the Personal Consumption Expenditures Price Index (PCE), which is the Fed’s preferred measure for inflation. The headline number was up 3.4% which was the same as last month. The core PCE, which excludes food and energy was up 3.7% and was one-tenth lower than the reading in August. Core PCE hit a peak around 5.6% in early 2022. With the aggressive increase in short term rates, the recent increase in the 10-year treasury, and the resumption of student loan payments likely slowing the economy somewhat I still believe the Fed should allow these hikes to sink in and evaluate where we stand in the coming months.   Recession It is interesting how many people believed we were going to see a recession in 2023, but yet the numbers keep proving the doubters wrong. Today’s Q3 GDP report showed annualized growth of 4.9%, which topped the estimate of 4.7%. It’s important to point out that this report does account for inflation. The primary driver of growth here was the consumer as spending increased 4% in the quarter and accounted for 2.7 percentage points of the total GDP increase. Both goods and services saw nice increases as spending grew 4.8% and 3.6%, respectively. Gross private domestic investment also saw a major increase of 8.4% and accounted for 1.5 percentage points of the total GDP increase. Within this category the change in private inventories was the major contributor as it accounted for 1.3 percentage points of the headline number. Government spending and investment also grew 4.6% and accounted for 0.8 percentage points of the headline number. The only detractor in the report was trade as the net exports of goods and services took away 0.08 percentage points from the headline number. While I believe this will likely be the highest GDP report we see for some time, I do believe we can still avoid a recession as the consumer remains in a good spot.   Financial Planning: Annuity Sales Continue to Grow As market volatility continues, annuity sales continue to climb. Last quarter annuity sales hit $89.4 billion which is an 11% increase over the 3rd quarter of 2022, according to LIMRA. Sales reached a record in 2022 and that record may be beat in 2023. This is common during times of uncertainty in the market as investors and retirees look for safer places to put their money and many advisors are happy to sell them. This can feel more comfortable in the short term, but typically leads to underperformance in the long term. Retirees must remember that inflation and longevity risk, in addition to market risk, need to be factored into their retirement income plan. Annuities reduce portfolio volatility and can provide peace of mind at the expense of performance. Even in retirement, assets need to grow to outpace inflation and provide income, and lower performance increases the risk of running out of money too soon.

CPI I was somewhat disappointed by the Consumer Price Index (CPI) as I believed there would be a slower growth in the inflation rate. With that being said, I don’t believe the report is problematic. The headline number for September of 3.7% matched August’s rate and was only slightly ahead of the expectation of 3.6%. The core rate which excludes food and energy came in at 4.1% which was right in line with expectations and was below August’s reading of 4.3%. This was also the lowest reading on core CPI since September 2021 when the report showed inflation of 4%. Regarding the miss on the headline number, it is important to remember that with the recent increase in energy prices we have lost a major benefit that was pushing the headline number lower for most of this year. In fact, energy prices only fell 0.5% compared to last year and gasoline prices were actually up 3%. This compares to just a few months ago in the month of June when energy prices were down 16.7% and gasoline prices were down 26.5% compared to the prior year. These declines were extremely helpful for the headline number CPI number. One area that remains surprisingly high is the shelter index as it climbed 7.2% compared to last year. I have pointed at many times that this is a lagging indicator, but I am surprised to see how much it is still weighing on the overall inflation front as housing/rent prices have cooled tremendously on a real time basis. With that said, the shelter index accounted for over 70% of the total increase the core CPI. I still believe the shelter index is likely to cool as we end the year which would be very beneficial to both headline and core CPI. Stock Market Volatility You may be wondering why there is so much volatility in the markets lately and I will tell you it’s because of too much information. I’ve been managing money for over 40 years and remember back when Alan Greenspan was the Federal Reserve chairman and he was the only member of the Fed who would speak. He also did not speak very often. He spoke so little that financial commentators on TV would make decisions based on the size of his briefcase on what decisions he may make. The FOMC consists of seven members of the Board of Governors and then there are 12 Regional Federal Reserve Bank Presidents. It seems to me that many more of these Governors and Federal Reserve Bank Presidents are speaking publicly on their thoughts. I do agree that we need information but not the opinions of so many different people who can change their mind when they meet and make decisions on interest rates and policies. I know it will not change, but I think too many people giving their views on what they think will happen is doing nothing more than causing volatility and confusing the investor. In the end it doesn’t matter what they say it is only important what they decide when they meet eight times a year. Everything else is just a bunch of confusing noise. Treasury Yields Many investors have been concerned by the move higher in treasury yields, but I believe it has been more a move towards normalization. Sure, rates have climbed rapidly, but if you go all the way back to 1790 the average yield for U.S. government debt is 4.5%. We are slightly above there now and may drift a little higher considering history shows that the fed-funds rate and the 10-year Treasury have tended to peak around the same level. This means we may breach the 5% threshold, but I do believe we would not see rates climb much from there and would mean we are near the top. Over the next few years, I believe we could see rates around the 4% level. Investors need to be realistic and understand the days of one or even two percent rates are in the past and extremely unlikely to occur anytime soon. Higher rates don’t always necessarily mean stocks can’t perform well and in fact from the mid-1980s to 2008, real rates were more than a point higher than now, and stocks returned 15% a year.

Jobs Report The September jobs report was released on Friday, October 6 and at first glance it was scary because it was so good. But then as the day moved on the report was analyzed further and positive information was found. What was scary about the report was 336,000 jobs created, twice as much as expected. This caused concern that there would be a definite increase in interest rates in November by the Fed. Also giving more concern was the July and August numbers were revised higher 119,000. But as the day progressed and the numbers were analyzed, it was understood that average hourly earnings had only increased 0.2% below the expected 0.3%. This is also the mildest we have seen over the last 18 months. The federal reserve has been concerned about wage growth, and this report is proof there should be no concern on wage growth. The strength in the job market was seen in leisure and hospitality, healthcare, professional, scientific, and technical services. What this report is revealing is that we can increase people working but yet wages are not getting out of hand which is something the federal reserve was concerned about. The consumer price index which is the gauge on inflation will be released next Thursday, October 12 and based on what we are seeing here at Wilsey Asset Management we believe it will be a good report and if that holds true, we could be done with anymore rate increases for the rest of 2023 which raises the green flag to invest in the right equities.   JOLTs Report The JOLTs report showed Job openings rose by nearly 700,000 in the month of August to 9.61 million. This easily topped the estimate of 8.8 million and means there are still about 1.5 jobs available for each unemployed worker. Layoffs also remained low at just 1.7 million. While this is positive for the labor market, concerns remain that a tight labor market could pressure the Fed to continue tightening policy. I believe there are other factors on the inflation front that should lead to a stabilization from the Fed rather than a continued increase. The positive news continued to push treasuries higher, and the 10-year treasury pushed passed 4.75% to reach its highest level since 2007.   Oil Prices We have seen a dramatic rise in gas at the pump which has been caused by the rising price of oil. Just a couple of months ago at the beginning of July oil was at $71 per barrel, it has increased substantially and ended September at $91 per barrel. Yes, that is a 28.2% increase. At the end of September, we also saw US commercial crude inventories at their lowest level since December 2022. Before you jump to conclusions and think gas prices are going to continue to rise, let me give you some fundamentals behind the scenes. Because of the rising prices gasoline consumption is declining and if prices were to hit $100 per barrel that would cause a further decrease in consumption. It is a world market and China has built up over the last three years a very large inventory of oil which they acquired at low prices. This means they likely will not be coming back into the market, since they have more than adequate supplies. Also, if oil were to hit $100 per barrel that could bring more inventory online increasing the supply and also it is possible that Saudi Arabia would bring back some of their production that they took off line earlier this year. Keep in mind an unexpected supply shock would cause oil prices to continue to rise, barring that scenario I believe we should be close to the top!   Investment Returns Last week in a newsletter we said that we see a very good fourth quarter for investors as it could produce some good fourth quarter investment returns. The personal consumption expenditures price index (PCE) was released and came out at 0.4% last month. Core prices which exclude food and energy only rose 0.1% which is the weakest monthly increase since 2020. If you look at June through August of this year core prices only increased at 2.2% on an annualized basis, which is very close to the Fed’s 2% target. Based on this data, I believe the Federal Reserve once again will pause at the meeting on October 31st. I’m seeing no indication of rising inflation overall, even with the increase in prices at the pump I believe there will be another positive PCE Report released about a month from now and then no increase in interest rates once again in December. If you agree with this data, you should not be sitting on much cash or short-term instruments that pay 4-5%. You should be investing that money in good quality equities or else you’ll be scratching your head in January on what you missed.   Financial Planning: Social Security: A Solution to Insolvency? It is well known that the Social Security trust fund is running out of money. It is projected that the program will be insolvent in about 10 years at which point beneficiaries would only receive 80% of their expected benefits. While we think it unlikely this will come to fruition, there will absolutely be changes to the program over the next decade. Most proposals to fix this problem involve an increase to taxes or a decrease in benefits in some capacity as the Social Security trust fund by law can only invest in US treasuries and cannot borrow. Over the last few years, US Senators Bill Cassidy and Angus King, who sit on opposite sides of the isle, have been working on an alternative solution. The idea is the federal government would borrow $1.5 trillion over 5 years for an “unrelated” third party to invest for the next 75 years. In the meantime, the Social Security insolvency would be financed with additional government borrowing. After 75 years, the accumulated investment principal would repay the $1.5 trillion plus any additional borrowing and accumulated interest and the balance would go to the Social Security trust fund. Over any 75-year period the US stock market has always far outpaced the return of US treasuries so in theory this would solve the issue without tax increases or benefit cuts, but this borrow-to-invest strategy, known as a pension obligation bond, is frowned upon for government agencies. Between the borrowing and investing, not to mention government corruption, there’s a lot that can go wrong here, and failure in a program as large as Social Security would be catastrophic for American taxpayers.

Food Stocks I enjoy food quite a bit, but looking at food stocks I’m beginning to think I like them better. Food companies in 2023 are down between 15 to 25%, and these are levels that some have not seen in 10 years or longer. You know a lot of their names like Kellogg and Campbell Soup. They are not as exciting as tech companies, which have really helped the index rise this year, but with dividends at 3.5 to 5% I think investors should consider looking at these stable companies.   Portfolio There is only one business day left in September and you may be concerned on where your portfolio stands for the month or maybe even year to date. I want to refresh people’s memory that September is historically the worst month of the year for investing and this September looks like it is holding true to the history. But based on what I’m seeing, this is setting the stage for a very strong fourth-quarter gain. We are seeing lower inflation, which means we are closer to stable interest rates and there are some very good values in equities. This is why investors who buy quality and stay the course do receive good long-term returns. If you have good quality equities, do not panic and sell out as I believe you will miss out on some very good future gains.   Automobile Strike You may be thinking that the automobile strike from the UAW against Ford, General Motors, and Stellantis won’t affect you because you’re not in the market for a new car. Well, think again. The UAW President, Shawn Fain, is not just striking against the car manufacturers, but also is causing parts suppliers that don’t have large inventories to have a disruption in the supply chain of parts. What that could mean for you if you own a Ford, General Motors or Stellantis, is you could be turned away when you need repairs on your car like maybe brakes or a water pump. I still believe the union is being rather greedy with workers of the car manufacturers making between $65,000-$95,000 a year and asking for a 40% increase over the next four years along with other benefits, it just seems excessive to me. And who pays? the consumer.   Gold I noticed today that gold is now down to $1848 per ounce and over the last six months has lost 5.7%. It looks like the high was reached this year on May 4 at $2049.73 which if you were unfortunate to buy that day that would be a loss of 9.8%. I bring this up because I know in the last six months or so I’ve received more inquiries about buying gold then I have in quite a while. I am steadfast with my recommendation this year, not to invest in gold I see no reason for it. Even with the government shut down we are looking at I see no reason to invest in gold in 2023.   Financial Planning: Social Security and Medicare changes in 2024 As we get closer to the end of the year, we are getting more information about the benefit and cost changes coming to Social Security and Medicare. Next year the expected increase for Social Security payments is 3.2%, which is quite a bit lower than the 8.7% COLA last year and the 5.9% COLA in 2022. For the average beneficiary receiving $1,792 per month, this increase results in $57. The annual increase is determined by the change in inflation from the third quarter of 2022 to the third quarter of 2023, so we won’t know the official change for a few more weeks. Last year we saw Medicare Part B premiums decrease from $170.10 to $164.90. However, in 2024 these premiums will be increasing again up to $174.80. This 6% increase is largely attributed to the cost of a new Alzheimer’s treatment coming out. Medicare Part D, Medicare Advantage, and Medicare Supplement premiums are expected to be mostly unchanged from their current levels. Overall, even though the benefit increase from Social Security will be relatively small, it will be enough to cover the increase in Medicare costs.

US Advantages I always enjoy seeing advantages of the United States over China. In the recent book “Chip War” written by Chris Miller he writes that across the entire semiconductor supply chain, including chip design, intellectual property, tools, fabrication and other steps, the Chinese only has a 6% market share. That compares to 39% for the US, South Korea at 16% and Taiwan at 12%. The author also points out as China pushes forward with cloud computing, autonomous vehicles, and AI its market share will continue to grow. The x86 server chips will be the workhorse of modern data centers which are dominated by AMD and Intel.   Snacking in the US I can’t remember the last time I had a Twinkie, but apparently, I’m in the minority. The snack business overall in the US is up 8% in the past two years with consumers eating three or more snacks a day. Overall, US snacks increased by 11% last year to a total of $181 billion. The demand has led to 1 million Twinkies being produced each day. This could be why J.M. Smucker recently paid $4.6 billion for Hostess brands which over the last 15 years has filed bankruptcy twice. Twinkies were started back in the 1920s by James Dewar who delivered pound cakes from a horse drawn carriage. If you want to know where the name Twinkie came from, Mr. Dewar came up with the idea after passing a billboard for Twinkie toes shoes. He thought Twinkies would be a great name for a snack. Hostess which owns Twinkies filed for bankruptcy back in 2004 and again in 2012 after the company failed due to a strike over a labor deal with the Baker’s union. It looks like this time being owned by J.M. Smucker; Twinkies will last longer. You may not know this, but they also prolonged the life of a Twinkie from 26 days to now they will last on the shelf for 65 days. I guess I will have to try a Twinkie and bring back the days of my school lunches when I was a kid.   Stock Market You may be worried about investing because of the high levels of the stock market. At Wilsey Asset Management, we have talked about how it’s an overconcentrated market and overall, it is still expensive. Famed investor Warren Buffet also feels the market is expensive, he has what’s known as the Buffet indicator, which he uses to see when the market is expensive. He compares the Wilshire 5000 index to the GDP of the country. The perfect market price is when the market has the same value as the GDP. Buffet points out that the Wilshire 5000 is currently $49 trillion, well above the GDP at $26.9 trillion. To bring the Buffet indicator from a high level of 182% down to 100%, the market would need a decline of 45%. No one, including Buffet, expects to see a 45% decline in the market. What I have said, and agree with Warren Buffett on is that for the next 5 to 10 years we will not have much of a gain in the overall market as the GDP will increase to catch up to the index and normalize the ratio. To make money in your portfolio going forward one must remember it is not a stock market, but a market of stocks and one has to find good stocks that are of good value with good dividends. This will bring the investor better returns over the next 5 to 10 years.   Financial Planning: Premium Financed Life Insurance Cash value life insurance is sometimes sold as a retirement planning vehicle. Premiums are paid with after-tax dollars which covers the fees, cost of insurance, and builds cash value. If enough cash value is accumulated, you can take out loans against it, which is not taxable because it is technically debt. In retirement, the cash value can continue to grow tax deferred while loans can be structured as a “tax-free” income source. The loan balance increases from the withdrawals and compounding interest, but the income/loans may continue as long as the loan balance does not exceed the cash value of the policy. At death, the life insurance death benefit is used to pay off the outstanding loan balance. One challenge for these types of plans is they require substantial amounts of cash value collateral to produce a worthwhile income stream. To build the necessary cash value, extremely large premiums are required which can be difficult to add into someone’s budget. This is where premium-financed life insurance comes in. Instead of the policy owner paying the premiums themselves, they obtain a 3rd party loan to pay the high premiums and then make payments on that loan. The hope is that the cash value will grow faster than the loan balance and at some point in the future, a second loan can be taken against the insurance cash value to repay the loan used to pay the premiums. At that point, additional loans can be taken from the cash value to produce the “tax-free retirement income”. It may go without saying but this type of plan can get complicated and risky pretty quickly. If structured correctly and with some luck, this strategy can produce some retirement income, but there are so many areas where it can fail, and when you invest using debt and fail, the losses are compounded. High net worth and accredited investors can be attracted to these plans from believing they need a more sophisticated and tax-advantaged strategy, and advisors are happy to sell them because of the massive commissions that come along. However, these plans are extremely risky and in pretty much every case there is a more appropriate alternative.

UAW Strike Based on recent readings, it looks like the UAW will strike against the auto makers. I’m certain the auto makers will need to increase pay for the auto workers, but this could perhaps cause them to raise the prices of their cars to cover the increase in labor costs. I hope the head of the union and union workers read the following. It now takes 42 weeks of income to buy the average new car. This compares with 2019 when it was 33 weeks. How far do the unions think carmakers can increase prices on consumers and still make a profit? I honestly don’t believe the union leaders explain to their workers the reality of running the businesses that they strike against. Financial statements of all the automakers are public information that could be read by a CPA and give the union and its workers a reality check. Government Shut Down Here we are in September and the end of the federal government's fiscal year is fast approaching ending on September 30th. The question is will the government shut down in October if the Democrats and Republicans can't agree on funding legislation. At our firm, Wilsey Asset Management, we don’t worry about short term movements in the market caused by political turmoil because we know that they will come up with some type of a settlement sooner or later. Looking back in history in 1978 and 1979 the market did decline when the government shut down. But, in total there have been six shutdowns since 1978 that lasted five days or more and on all other occasions since 1978 the market increased. This included a 10% climb during the December 2018 to January 2019 shutdown. I do believe investors have come to understand government shutdowns are now, sad to say normal and they will come to a resolution at some point. So, with that said, we will not be selling any positions in our portfolio based on a government shutdown. I'd recommend the same for all investors. We all know market timing does not payoff. Apple in China The news for Apple in China should concern shareholders. China recently announced that they would ban iPhones and other foreign-branded devices at work for officials at central government agencies and they would not be allowed to bring them into the office. It was then reported by Bloomberg that China is planning to extend the ban on iPhone use to state-owned corporations. China does make up a good chunk of revenue for Apple as it is currently accounts for around 19% of total revenue. I do find the timing of these reports somewhat odd as Huawei, which is a big competitor to Apple, recently announced their new smartphone known as the Mate 60 Pro that is capable of ultrafast data connectivity to rival 5G. This will definitely threaten Apple’s market share in the country. Back in 2019, Apple held 56% of smartphone sales over $600 in China while Huawei held 39% of the market share. As Huawei has had to battle limitations on components due to US restrictions their market share sank while Apple’s expanded. In 2022, Apple held 70% of the market share compared to just 11% for Huawei. As the battle between the US and China continues, I do worry this could cause a big sales hit to Apple. Not to mention, who knows what else China could look at banning when it comes to Apple’s service revenue in the country. Credit Cards Last quarter Visa had $8.1 billion in revenue and earned $4.2 billion. MasterCard had similar results with $6.3 billion of revenue and net income of $2.8 billion. If you have been following me for a while, you know, how opposed I am to merchants now charging a 3% fee if you use a credit card on the purchase. They say if you pay cash, you can save that 3% credit card fee. Whether I like it or not that seems to be sticking and I have to believe this will be a big headwind to the credit card companies. One reason for the growth of these companies has been the increased use of credit cards. In 2016, 31% of purchases were in cash and credit card purchases were just 18%. In 2022 cash purchases dropped to 18% and credit card purchases climbed to 31%. I believe that trend will be changing going forward as consumers save 3% on their purchases by paying cash. Also adding to problems for Visa and MasterCard is what is known as FinTech and other non-bank financial firms which includes companies like PayPal that offer peer to peer payments bypassing the networks. I don’t see how these things cannot reduce the growth of the big credit card companies which trade at around 25 times forward earnings. The credit card companies point out they saw 22% of the revenue in the last quarter come from value added services such as fraud protection and data analytics. But I believe you would still have to use the credit cards to get the services. I’m confident that the financial industry is changing and this will hurt the revenue and earnings of Visa and MasterCard.

Jobs Report The Jobs Report reaffirmed exactly what the Fed should be looking for and that is a softening labor market. Nonfarm payrolls increased by 187,000 in the month of August. This beat expectations of 170,000, but the previous two months were revised lower by a total of 110,000 payrolls. This would put the three-month average at around 150,000 added jobs per month. This is well below the average monthly gain of 271,000 over the prior 12 months and is in line with 2019 when job gains averaged 176,000 per month. The unemployment rate also increased 0.3% in the month to 3.8%, but this was largely due to the increase in the labor force participation rate which increased 0.2% to 62.8%. This was the highest labor force participation rate we have seen since February 2020. With more people coming back to the labor market, more competition could be a big positive for lower wage inflation. In the month average hourly earnings came in slightly below expectations at 4.3%, which is off the high of 5.9% last year but likely still too high for the Fed. Health care and social assistance led the way in the report adding 97,300 in the month, leisure and hospitality came in second adding 40,000 jobs, and construction was also strong adding 22,000 jobs. The strength in construction does not come as a surprise considering the strength in the industry. The most recent construction spending report showed a 0.7% gain in the month of June to $1.97 T. This marked the 7th straight month of gains and it does not look like the industry is slowing. Areas in the report that were weak included transportation and warehousing which was down 34,200 and information which was down 15,000. The transportation industry was likely hit with the bankruptcy of Yellow as there was a drop of nearly 37,000 positions in trucking. The information sector was hit with the Hollywood strike as the sub-category for motion picture and sound recording dropped close to 17,000 jobs. Job Openings The amount of job openings declined to 8.8 million in the month of July. This was down from the original reading of 9.5 million in the month of June and marked the lowest level of job openings in 28 months. June’s reading was also revised lower to 9.2 million. The July reading greatly missed the estimate for 9.5 million openings. Job openings have fallen drastically from the record of over 12 million last year as companies have hired many new employees and have also become more cautious on the economy largely due to increasing interest rates. The number of job openings for each unemployed worker was still strong at 1.5 which compares to pre-pandemic levels around 1.2. For context, before Covid at the beginning of 2020 job openings totaled about 7 million. As the labor market has softened, the number of people quitting their jobs has also declined. Job quitters had topped 4 million for much of the post-pandemic period, but that has softened this year and in July the level was just 3.5 million which was the lowest level in two and a half years. This should be good news on the inflation front as less competition for workers should result in less wage inflation. Inflation The Fed’s closely watch gauge for inflation, known as the PCE, showed little change and few surprises in the month of July. The headline number showed a gain of 3.3% compared to last year which did rise slightly from June’s reading of 3.0% and Core PCE which excludes food and energy was right in line with expectations at 4.2% compared to last year. This was a slight uptick compared to June’s reading of 4.1%. I do wonder how impactful summer spending was on prices as consumer spending was up 0.8% in the month of July. This was the biggest gain in six months. Spending was powered by the best ever Amazon Prime Day, the box office hits of Barbie and Oppenheimer, and the Taylor Swift concert. Without major events like these, there could be pressure on spending which would have an impact on pricing and inflation as well. I still believe hitting the 2% target will require some time, but inflation is still heading in the right direction and there should not be a need to hike rates at the Fed meeting in September. Bank Fees A couple different bank fees have been coming down with the average overdraft fee falling 11% from last year to $26.61 and non-sufficient funds fees hitting an all-time low average of $19.94. One fee that has been rising is ATM fees. The average ATM fee rose to a record $3.15, this marks the 22nd record in 25 years. Fees for using an out-of-network ATM also jumped to a record high of $4.73. If you are using ATMs a lot, you should consider finding a banking network that is convenient for you to avoid the high ATM fees. I was also shocked to see in a Bankrate survey that 27% of checking account holders are regularly hit with fees, which can add up to an average of $24 per month, or $288 per year. There are many different banking options where you can efficiently use a checking account and avoid these fees. Many banks also waive these fees if you use direct deposit or maintain a certain balance. It is just silly to waste money on unnecessary fees. Make sure you understand your banking relationship and any fees that may be associated with it. Investing Fluctuations From time to time I hear from potential clients that they are afraid to invest because of the crazy times we are in. Many times, this has to do with the political landscape. I tell them that US politics has always been messy and crazy. I have included some examples you may remember, the others you will have to check the history book. During the mid-1960s through the mid-1970s the country was divided over civil rights. Remember in 1965 when Watts went up in flames? Or in the 1970s when the national guard killed four students at Kent State? This led to protests at 350 campuses, involving an estimated two million people. Also, you can’t forget when thirty-five thousand antiwar protesters assaulted the Pentagon in October 1967. The early 70’s was a crazy period to say the least as the U.S. experienced more than 2,500 domestic bombings in 18 months from 1971-72. Going back further, will require the history book but in 1888 Republicans won the White House, held the Senate and held the House but just by four people. During a floor vote if more than four Republicans were missing, House Democrats would demand a roll call and refuse to answer when their names were called. The measure would fail because there was the lack of a quorum. This kept the House from acting for months. In 1838 Whig William Graves of Kentucky shot and killed Democratic Rep Jonathan Cilley of Maine in a duel over charges of corruption. In 1824 Andrew Jackson led the four-way presidential race with 41% of the popular vote and carried 11 states but with 99 electoral votes came up 33 short of a majority. The contest went to the house where each delegate had one vote and they seated John Quincy Adams even though he was the runner up with 84 electoral votes. For the next four years, Andrew Jackson condemned the corrupt process and said it deprived the people of their right to a free election. In the next presidential election in 1828, Andrew Jackson defeated John Quincy Adams. These are just some examples of the craziness our country has been through. Unfortunately, crazy times will continue but ultimately good businesses will continue to survive and thrive. That is why I tell people to ignore the noise and focus on the businesses in your portfolio. Financial Planning: IRMAA There is a tax for over 5 million Americans known as IRMAA, which stands for Income-Related Monthly Adjusted Amount. It applies to Medicare Part B and Part D premiums for single filers over $97,000 and joint filers above $194,000 of income and can increase annual costs by thousands. This is in addition to the .9% tax on earned income and 3.8% tax on investment income for single filers above $200k and joint filers above $250k of income. In some cases, IRMAA can be appealed if income has reduced due to marriage, divorce, death of spouse, or reduction of work or income, but this can be difficult and time consuming so it is necessary to stay diligent. The most common income sources that trigger IRMAA are capital gains or Required Minimum Distributions from retirement accounts, so it is important to plan out your retirement income ahead of time to reduce not only federal and state taxes, but IRMAA as well.

Home Sales Existing home sales fell 2.2% in the month of July from June. Compared to July 2022, sales were down 16.6% and homes sold as the slowest July pace since 2010. Demand has definitely been hit by rising interest rates and on Monday, the average interest rate on 30-year mortgages rose to 7.48%. This was the highest level since November 2000. It will be interesting to see how home sales are impacted in the reports over the next couple months as existing home sales are based on closings which means these contracts for the current report were likely signed in May and June. The supply of homes has also been a heavyweight on the sales levels as there were just 1.11 million homes for sale at the end of July. This is down 14.6% compared to last July and is the lowest level since 1999. Looking compared to pre-Covid levels, there are half as many homes available for sale. While the tight inventory has depressed the sales rate it has kept prices elevated and there was actually a 1.9% increase in the median price of a home compared to last July. Durable Goods The headline number for durable goods orders may worry some and give them reason to question the strength of the economy, but as always you have to look deeper into those numbers. The headline showed orders fell 5.2% in the month of July, but much of this decline came from Boeing. Orders for commercial planes can be extremely volatile and in the month of June they soared 71%, but then in July fell 44%. If the volatile transportation sector, which includes automobiles and planes, is excluded orders actually increased 0.5% in the month. Excluding the volatility created by Boeing, durable goods orders have now increased three months in a row. With all the volatility from Covid, I do believe the manufacturing sector and the overall goods economy can continue to strengthen from a challenged level over the past year. Pay Decline We said a few years ago that eventually workers would be coming back to the office and they would not have the same leverage for getting higher pay. That time may be just around the corner. According to ZipRecruiter, the average pay for the majority of jobs has declined from last year with some of the steepest declines being seen in technology, transportation, and other jobs that had big hiring back two years ago. ZipRecruiter conducted a survey in July with about 2000 employers and the results revealed that nearly half of the employers said they had reduced the pay for recent job openings. I don’t see the this reversing. I think in the next year or two we will see further declines in pay as competition for jobs comes back to a more normal level.

Real Estate Investment Trust Months ago at my investment firm, Wilsey Asset Management, we made a decision to go into a real estate investment trust to begin buying class A commercial property that was on sale. I was happy to read recently that the big Wall Street firms are now raising billions of dollars to invest in commercial property that is on sale. If you’re considering doing this as well, be sure to understand where the properties are located and verify that they are class A buildings. You also want to make sure you are not overpaying based on the fundamentals of the real estate investment trust and you should understand the debt level and when that debt is coming due. An investor should be able to get a yield of around 5% or higher plus I believe there could be some great appreciation. Keep in mind your investment time horizon for this should be somewhere between 12 and 24 months, do not expect a turnaround in just a few months.   Sales Retail sales came in with a good report as sales in July were up 0.7% compared to June. This easily topped the estimate of 0.4% and compared to last year sales were up 3.2%. Gas stations weighed heavily on the report due to lower gas prices as sales decline 20.8% compared to last year. If these were excluded from the headline number, retail sales grew at an even more impressive pace of 5.8% compared to last year. Areas of strength included food services and drinking places (+11.9%), nonstore retailers (+10.3%), and health and personal care stores (+8.1%). Areas that continued to be negative included furniture and home furnishing stores (-6.3%), building material and garden equipment and supplies dealers (-3.3%), and electronics and appliance stores (-3.1%). These categories were all beneficiaries from covid, but with the beginning of the pandemic now more than 3 years ago I do wonder when some of these items that were purchased then will need to be replaced. For example, I do know laptops have an expected life expectancy of around 3-5 years so sales there could start to turnaround in the coming months.   Barbie Movie Move over Batman and hello Barbie! Barbie has now become Warner Bros. Discovery’s (WBD) highest grossing domestic film of all-time. The movie has now topped $537M which comes in above Christopher Nolan's The Dark Knight, which generated $536M in 2008. Barbie does have the benefit of inflation as prices are now higher than 2008, but considering the weak box office post Covid the feat is still quite impressive and it shows the potential reach and advertising power of the recently combined Warner Bros. Discovery. From a global box office perspective, Barbie has collected over $1.2B which would make it the second highest grossing movie worldwide for WBD after Harry Potter and the Deathly Hallows: Part II. I personally have not seen the movie, but apparently many people have!

United Auto Workers I understand that unions want to try and provide benefits for their workers, but the United Auto Workers (UAW) seems to be asking for unachievable demands. The negotiations with Stellantis, Ford, and General Motors are underway and the UAW is demanding a 46% pay increase over the next few years. There would be a 20% increase effective once the new contract is signed and then there would be 5% raises annually until 2027. On top of the massive pay increase the list of demands includes the restoration of cost-of-living pay, defined benefit pensions for all workers, and restoring retiree health coverage. The President of the UAW, Shawn Fain, also brought up more paid time off and a 32-hour workweek. If the UAW was able to get their full list of demands this would destroy the US auto companies and limit their ability to compete. Bankrupting these companies helps no one. As of now the current contract is set to expire on September 14th and I believe there will be a strike as the two sides are likely very far apart.   Gold 26% of Americans believe gold is currently the best long-term investment, which is an increase from 15% one year ago. Unfortunately, people are investing in gold near the all-time high of $2,069/oz hit back in 2020. It is strange to me because gold is supposed to be a very good inflation hedge, but the risks of inflation seem to be subsiding. The Wall Street Journal recently did an article on gold and they mentioned a gentleman who lost thousands of dollars in his retirement plan by betting on biotech shares in early 2021. He has now invested in gold and feels comfortable and says he can now sleep at night. It makes no sense to me why someone would do a risky investment in biotech and then turn around and put all their money into a single commodity such as gold. This is why the average investor only earns on average around 3% per year. During periods like this, people tend to forget when investing in gold you can still lose money. In fact, if we look at GLD which moves with the price of gold, in 2013 shares fell more than 28%. The 10-year average return on GLD is also extremely lackluster at just 3.48%. At the end of the day gold is a just a piece of metal that is only worth what the next person will pay for it. Ultimately, I would not be investing in gold at this time.   CPI The Consumer Price Index (CPI) continued to show positive signs in the month of July as the headline number of 3.2% was below expectations for 3.3%. Core CPI which excludes food and energy was still higher than the headline number at 4.7%, but it was the lowest reading since October 2021. Shelter continued to be a heavy weight on the report as prices were up 7.7% compared to last year. This increase in shelter costs accounted for more than 90% of the increase in the CPI report. Other areas that remained troublesome included motor vehicle insurance (+17.8%), motor vehicle maintenance and repair (+12.7%), and food away from home (+7.1%). Food at home was much less problematic as it was up just 3.6% compared to last year. Energy continued to be a major positive as prices were down 12.5% compared to last year and regular unleaded gasoline in particular was down 20.3%. Overall, I’d say this was a great report, but I will say oil prices have increased as of late and I do worry they could become problematic for inflation as a whole if they do not stabilize.   PPI The Producer Price Index (PPI) showed wholesale prices in July were up just 0.8% compared to last year. Some may point to the month over month gain of 0.3% being higher than expectations of 0.2% as a problem, but considering the year over year number is under 1% I still believe it’s a good report. Looking at core PPI, which excludes food and energy, prices were up 2.4% compared to last year. This was tied for the lowest annual increase since January 2021. Services were a problem in the report rising 0.5% in the month. This was the largest gain since August 2022, but much of the increase came from a 7.6% surge in prices for portfolio management which likely can be attributed to the increase in stocks we have seen this year. There’s nothing in this report that leads me to believe the Fed needs to continue on its rate hiking path.

Jobs Report The Jobs report showed nonfarm payrolls grew by 187,000 in the month of July, which missed the estimate of 200,000. The unemployment rate ticked down to 3.5% vs the estimate it would hold at 3.6%. Areas of strength included healthcare and social assistance (+87,100), construction (+19,000), and leisure and hospitality (+17,000). Healthcare in particular has been on fire lately as it has accounted for 35% of the job gains in the past 3 months. There were some areas of weakness which included manufacturing (-2,000), professional and business services (-8,000), transportation and warehousing (-8,400), and information (-12,000). Professional and business services were weighed down by a loss of more than 22,000 jobs for temporary help services. Wages were a positive in the report as average hourly earnings grew 4.4% compared to last year which surpassed the estimate of 4.2%. At this rate I would say the growth is not excessive, but it is always growing above the recent inflation rate which is good for consumption. Overall, I would say this report is not very exciting as it really doesn’t show us anything new. The labor market is softening, but it still remains in a good spot.   Job Openings Job openings in the month of June of 9.58 million were below the estimate of 9.7 million and they were at the lowest level since April 2021. Compared to last June they were down 12.6% or by 1.4 million openings. This sounds troubling, but it is important to understand there are still 1.6 job openings out there for every available worker. Also, even with the decline we still have a very strong labor market. Looking back to February 2020, job openings totaled just 7 million and in 2019 they averaged just 7.2 million per month. Layoffs were a positive in June as they came in at just 1.5 million. In February 2020, before Covid, layoffs were close to 2 million and in 2019 they averaged 1.8 million per month. The labor market will likely continue to soften as the economy normalizes from the Covid disruption just a few years ago.   Shopping Malls It’s no surprise that malls that were big 10 to 20 years ago are now struggling. This has caused a problem where malls are now worth 50 to 70% less than the valuation peak back in 2016. Roughly 20% of all malls financed through commercial mortgage-backed securities are underwater because the loans are much higher than the value of the property. What has been hurting the malls is large anchors like Macy’s, JCPenney and Sears have closed nearly 900 department stores between 2018 and 2020. This is a big jump from the 175 they closed from 2016 to 2017. Not all malls will go out of business. What has worked is newer, well located properties that have strong tenants and have generated healthy traffic. A good comparison here in San Diego would be North County Fair in Escondido, which looks like a ghost town compared to Fashion Valley, which is in the middle of a remodel, and still has a good amount of traffic in stores worth going to. I would caution investors to be wary of trying to pick up bargain prices on these properties. I’m sure some will survive, but I would say overall in five years we will see many less malls and in my opinion they are not worth risking capital on as an investment.   Trucking Company The trucking company Yellow was forced into bankruptcy because of three things in my opinion. The first was bad management, which caused the second problem of acquiring companies and piling on debt. This includes acquisitions like in 2003 when they bought Roadway for $1 billion and just two years later USF for nearly $1.4 billion. Number three was labor costs that were pushed to high levels by unions and their 22,000 workers. Approximately 7,000 employees were nonunion. This company filed bankruptcy in 1951 then again in 2010 they wiped out most of the shareholder value to get the union to agree to cuts of benefits and pay. They also had issues with bankruptcy in 2014 and once again during Covid in 2020. The company may still continue to operate in bankruptcy, but the shareholders will likely lose most if not all of their money. Old contracts are worthless and the bond holders may get some type of a deal. Roughly half of the companies $1.5 billion in outstanding debt was owed to the federal government who loaned the company money during Covid to keep them afloat. This is why at my investment firm, Wilsey Asset Management, we pay close attention to the balance sheet and debt levels.

Stocks When it comes to managing our half billion dollar portfolio, we always talk about how it is a market of stocks and not a stock market. With that being said, it doesn’t mean we don’t have a clue what’s going on with the indexes. We continue to feel that the indexes will fall from the rapid upward climb this year. What do we base that on? With the S&P 500 index being up more than 17% year-to-date, people should realize that the seven stocks of Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia and Tesla, which have a combined Market cap of $11 trillion, are responsible for 73% of that 17% year-to-date return. I don’t know what you think, but our thought at Wilsey Asset Management is that is not normal and it is a warning sign that the index could lose steam and begin to slide back down the hill.   Nasdaq With the Nasdaq up over 34% this year and the S&P 500 up over 18% this year, would you be surprised to find out the Dow is actually closer to its all-time high even though it is up just over 6% this year? Many times people do not realize how hard it can be to recoup major losses like the Nasdaq saw last year when it fell more than 33%. From their respective highs, the Dow is down 4.7%, the S&P 500 is down 5.7%, and the Nasdaq is still down 12.4%. It’s important to remember that a 1% gain does not full offset a previously witnessed 1% loss, so for the Nasdaq to return to it’s all time high it would actually need a 14.2% gain. While investing in fancy growth names can be exciting it’s these potential major turns that keep me out of the growth stocks as it can take you years to recover.   Home Sales Existing home sales in the month of June fell 18.9% compared to last year. This marked the slowest pace of home sales for June since 2009. Even with the decline in sales, the median price of $410,200 held up well falling just over 1% compared to last June’s record number. The reason for this is the inventory level has struggled immensely as it fell 13.6% to just 1.08 million homes available for sale. Affordability has really challenged the first-time home buyer as the group made up just 26% of sales. This is down from 30% last year and it is the lowest level on record since the Realtors began tracking this number. I continue to believe home prices will be in a go nowhere trend for the next couple years as affordability will limit upside potential and the lack of inventory will prevent a substantial decline.   Economy While Retail sales grew just 0.2% in the month and were below expectations of 0.5%, the numbers continue to feed my belief that a soft landing in the economy is possible. The consumer is slowing, but it appears by not enough to create a hard landing. Looking year over year retail sales were up 1.5%, but a decline at gas stations of 22.7% weighed heavily on the report. In fact if gas stations were excluded, retail sales would have climbed 4.2% compared to last year. Grocery stores also had a much lower impact as they saw an increase of just 1.1% compared to last year and were actually down 0.7% compared to last month. The goods economy continues to get hit as furniture and home furnishing stores saw a decline of 4.6%, department stores were down 5.2%, and building material and garden equipment and supplies dealers were down 3.2%. For the first time that I can remember in many months, electronics and appliance stores saw an increase of 0.9%. I do believe many of these industries that produce goods could be near a bottom and as we lap easier comparisons they could return to growth. Areas that remained strong in the report included health and personal care stores (+6.3%), food services and drinking places (+8.4%), and nonstore retailers (+9.4%).

CPI If I told you last year we would see inflation at 3%, would you believe it? In the month of June that is exactly what we saw as the CPI rose 0.2% compared to May and it was up just 3% compared to last June. Energy prices continued to be a major positive as they fell 16.7% compared to last year with unleaded regular gasoline falling 27.1%. Other areas of the economy also saw nice declines with airline fares falling 18.9%, major appliances were down 10.7%, and used cars and trucks saw a decline of 5.2%. Food still saw an increase of 5% in the month, but there was a substantial difference between food away from home as it was up 7.7% and food at home was only up 4.7%. Grocery price inflation saw a peak of around 14% last summer so prices have slowed quite substantially with products like eggs (-7.9%) and bacon (-10.1%) showing nice declines compared to last year. Core inflation which excludes food and energy still remained higher than most would like to see at 4.8%, but it did fall from last month’s reading of 5.3% and it is well below the peak last year of 6.6%. As a reminder the headline CPI reached a peak of 9% last year. It is important to understand shelter prices continued to weigh on the report as they were up nearly 8% and accounted for approximately 70% of the monthly increase. I continue to believe shelter costs will decelerate substantially which would be a major benefit to both core and headline CPI. I think as we close at 2023 inflation will be a concern of the past.   PPI The Producer Price Index (PPI) was even better than the CPI report as it showed positive signs for cooling inflation. In the month of June, the PPI was up just 0.1% compared to last year. In June 2022, the PPI showed a huge increase of 11.2%. Energy prices provided a major benefit to the report, but even core PPI, which excludes food and energy, was up just 2.6% compared to last year. As I said after the CPI report, I just don’t see inflation being a problem as we exit this year.   Real Estate Market In recent data from the National Association of Realtors it was found the nearly 40% of Americans between the ages of 25 and 44 who bought homes last year plan to stay in them for 16 years or more. This sounds problematic given the current lack of inventory, but over the next 5 years I believe many of these survey respondents will change their minds. This mainly stems from life changes like marriage, having kids, and even divorce. On the other side I do not believe interest rates will remain this high on mortgages and we could see rates settle around the 5% level. While I believe they will not fall back into 3% range, it is much easier to give up your 3% mortgage for a 5% mortgage instead of trading it in for a 7% mortgage, especially if you’ve outgrown your current residence. The real estate market is very strange right now, but I believe with time it will normalize.   AT&T AT&T has seen its stock price struggle over the last few years and it could get worse. On Monday, July 10 in the Wall Street Journal there was an article from their investigative reporting team titled “Telecom Giants Left Behind Miles of Toxic Lead Cables”. It was on the front page and two full pages in the first section discussing how AT&T and other telecom giants have left behind a network of cables covered in toxic lead that stretches across the United States under the water, in the soil, and on poles overhead. Unfortunately, I know what follows which will be a number of lawsuits from legal firms across the country. We believe over the next six months or so as the company defends itself against these lawsuits it probably will have to cut the dividend and there could be a decline of at least 20% or more in the stock price. This company had such a bright future in the next six months as other expenses were falling off and their cash flow would increase. We now see the same future for AT&T as what 3M has been going through over the last couple years with their stock price cut in half and they will have to pay out billions of dollars in settlements. In today’s society, lawsuits continue to mount costing businesses of all sizes from small to large hundreds of billions of dollars in settlements and legal fees. Until there is more clarity on this situation I could not recommend a buy on this stock.

Employment Report The employment report showed nonfarm payrolls increased 209,000 in the month of June which was well below the expectation for growth of 240,000. Payrolls were also revised lower by 110,000 in the months of April and May. The report marked the slowest month for job creation since December 2020 when payrolls fell by 268,000. So far this year, we have seen a 6-month average of 278,000 in monthly job creation which compares to the average of 399,000 in 2022. While this all may sound like bad news, I believe it remains positive as the labor market is softening, but it still remains strong. In fact, if we look back to 2018 job creation averaged 223,000 per month and in 2019 it was just 176,000 per month. Wage growth in the month was 4.4% compared to last year, which is in line with many readings this year and softer than last year's peak of 5.9% in March. Job growth remained strong in areas like health care and social assistance (+65,200), construction (+23,000), and professional and business services (+21,000). Growth in the leisure and hospitality sector has cooled as the group was up just 21,000 jobs in the month. It still remains 2.2% or 369,000 jobs below its February 2020 level. Government employment was a big gainer in the month as it added 60,000 jobs to the report. I generally don't like to see Government jobs leading the charge, but the sector still remains 161,000 jobs below its February 2020 level. Areas that were soft in the report included transportation and warehousing (-6,900) and retail trade (-11,200). The participation rate remains stuck at 62.6% as it has been there now for four consecutive months. In February 2020 it was at 63.3%. While some may point to the younger generation not working, I believe most of this stems from more people retiring. In fact, the prime-age participation rate which measures those between 25 and 54 years of age rose to 83.5%, its highest in 21 years. Overall, I think this report provides more evidence we could see that soft landing.   JOLTs The Job Openings and Labor Turnover Survey (JOLTs) showed job openings fell by 496,000 in the month of May to 9.8 million. While this may sound concerning, this level still produces 1.6 jobs per available worker. It is important to understand this remains above pre-pandemic levels and I believe we can have job openings continue to decline and still have a good labor market. Layoffs also remained little changed at 1.6 million, this is also still below pre-pandemic levels.   Work From Home Productivity You may hear some arguments from people that work from home about how productive they are, but data from the BLS, known as the Bureau of Labor Statistics, states otherwise. It was discovered that people working full-time from home put in 2 1/2 hours fewer per day than the workers who go into the office. If workers were to work at the same rate as they did back in 2019, our economy would be more productive, and the labor shortage would be less problematic. It was estimated that if workers filled up offices at the 2019 rate and worked 8.2 hours per day it would add roughly 800,000,000 weeks of more work, a nice boost to productivity. Maybe after Covid people have become used to not working and have become lazy?

Inflation The Fed's preferred gauge for inflation, the Personal Consumption Expenditures (PCE) price index, showed inflation is continuing to cool. The headline number came in at 3.8%, which is below last month's reading of 4.3% and well below last May's reading of 6.5%. This was the lowest rate we have seen since April 2021. Food prices have remained high and climbed 5.8% compared to last year, but energy prices have fallen dramatically as they declined 13.4% over the same time period. With consumers still spending in the service economy, prices in the service sector increased 5.3% while the prices for goods were up only 1.1%. Core PCE, which excludes food and energy, may have disappointed some people as it remained at 4.6%. So far this year, Core PCE has registered a reading of either 4.6% or 4.7% in every report. I continue to believe that both these rates will head lower as we exit the year. Although the Fed has indicated two more rate increases, I believe they should continue to hold rates steady as inflation looks to be pulling back due to the actions that were previously implemented.   Recession You may be waiting for the other shoe to drop and then bam we have a Recession; but I constantly see data that contradicts any chance of a major recession. 10 years ago, the annual manufacturing construction and outlay was roughly $50 billion. That’s a lot of money. Would you have guessed for 2023 that is going to be nearly 4 times that number at $200 billion? In 2020 foreign direct investment in the US was $150 billion and in 2023 it is more than double that amount coming in at $350 billion. Look around the country and you will see major construction on airports, highways, electric vehicles, and battery charging stations. I’m sure you could add a few to this list as well. Are we going to have a major Recession? I don’t see how.   Rate of Return How is that a 20% return can be better than a 100% return? It is based on the concentration of the portfolio. Many times, I hear people discuss how happy they are with the winners in their portfolio but come to find out they might only make up 1% of the entire portfolio. When we buy companies at Wilsey Asset Management, we start with a 6% investment as we have spent hours researching the company and feel very comfortable with it. A 20% return with a 6% allocation would produce a 1.2% overall benefit to your portfolio versus a 100% return with a 1% allocation would produce an overall benefit of 1%. I would rather understand the investments in my portfolio than take a chance on several businesses I know very little about.   Short Sells Short selling is when an investor is betting the price of a stock will drop. There’s currently about $1 trillion of short interest as those investors speculate the market will turn and head lower. The gain in the market has caused a paper loss for these short sellers of around $120 B this year. One of two things will happen. The stocks will turn around and drop and the shorts will profit, or the shorts will have to come in and cover themselves by buying the stock which will put upward pressure on stock prices. Based on valuations, I believe the short sellers will continue to be patient and wait for the drop.

Stock Valuations The tech boom and bust is often referenced as an example of the dangers of high valuations in the stock market, but one that is less talked about is the Nifty-Fifty. This was a group of 50 stocks back in the early 1970s that were known as "one decision stocks" meaning you could buy and hold forever. Investors became enamored by the group and pushed valuations to extremely high levels due to the companies and their strong balance sheets, high profit margins, and double-digit growth rates. The group included names like Polaroid which traded at over 90 times earnings and Xerox which traded at close to 50 times earnings. Come the stock market decline from 1973-1974 Polaroid fell more than 90% and Xerox was down close to 70%. Today, we know these names went bankrupt and serve more as a history lesson rather than serving consumers. The Nifty-Fifty wasn't just about stocks like these though as it included companies like McDonald's and Disney. McDonald's saw a P/E of over 85 and Disney traded at a little over 81 times earnings. During the stock market fallout, McDonald's fell close to 62% and Disney was down close to 85%. Ultimately, investors need to be very careful chasing high valuation stocks as the risk to the downside can be very high.   AI With all the talk about AI, I’m sure it’s come across people’s minds if it will replace financial advisors. I’m happy to report at this time the answer is no and as far as I can see in the future, I don’t see it. One has to remember that the information is still not 100% accurate. I also discovered from Andy Serwer, a writer Barron’s magazine, it doesn’t include content after September 2021. That’s a problem. A little over a week ago a question was asked of ChatGPT which weighs more, a pound of feathers or 5 pounds of lead. It said they weigh the same. Remember that ChatGPT scans everything that has been written, which may not be relative and can give the wrong answer. What I do think it will accomplish is to help smart advisers, who understand investing to obtain data quicker and perhaps more precisely. But whoever is reading that data still has to understand it or else it means nothing at all. I think it was a few years ago that the Robo advisor was going to replace many advisers. We see how that went, not very well. Overall, I think AI will make us smarter and it will allow us to do our jobs quicker but not replace jobs that still need the human brain to analyze the data or the human body to perform functions like a plumber or electrician.   Graduates I just saw an unfortunate report that the percentage of high school graduates ages 16 to 24 that were enrolled in college in 2022 has fallen to 62%. That’s over a four-percentage point drop from just 2019 when it was 66.2%. It could be because our colleges and universities are slowly pricing themselves out of the market to make it worthwhile to get a college degree, or it could be younger people don’t want to wait to start earning a living or start a career. It could also be a combination of the two.   Bitcoin I saw bitcoin was up 10% due to excitement over ETFs being launched for Bitcoin. Blackrock filed an application earlier in the week for a spot bitcoin ETF that would track bitcoin's underlying market price. This is just silly to me.... Why would somebody buy an ETF, which I'm sure Blackrock will charge a fee for, when all the ETF is doing is following the price of bitcoin. Wouldn't it just make more sense to buy bitcoin? Unfortunately, when an asset has no true fundamentals, this is the kind of news it will trade on.

Inflation Inflation continues to retreat from the high levels we saw last year. May's CPI report showed headline inflation rose 4% when compared to last year. This is a nice deceleration from last month's 4.9% gain, and it is well off last June's 9% increase. Areas that remained hot in the report included motor vehicle repair (+19.7%), motor vehicle insurance (+17.1%), and food (+6.7%). Many energy costs have seen large year over year declines and gasoline in particular is down around 20%. There are also other areas in the report that are showing declines. This includes airline fares (-13.4%), used cars and trucks (-4.2%), major appliances (-10%), and televisions (-11.5%). Core inflation, which excludes food and energy, was somewhat of a disappointment as it rose 5.3% compared to last year. While core inflation has not cooled as much as the headline number, it is important to remember that the shelter index rose 8.0% compared to last year and accounted for over 60% of the gain in core inflation. We continue to believe the shelter index will decline substantially as we exit the year and will be a major help in reducing core inflation. PPI More positive news on the inflation front as the Producer Price Index (PPI) for the month of May came in at a gain of 1.1% compared to last year. This compares to last month's reading of 2.3% and it is the lowest reading since December 2020. It is also well-off last May's reading of 11.1%. This continues to fuel my belief that inflation will be a much smaller problem as we exit the year. Companies no longer have the need to pass on the huge increases in prices they saw last year to the consumer.    Consumers People may continue to complain about the economy, but the consumer is still spending. Retail sales in May showed a gain of 1.6% compared to last year. There are some areas that remain negative which include furniture and home furnishing stores (-6.4%) and electronics and appliance stores (-5.0%), but the biggest negative in the report was gasoline stations which saw sales decline 20.5%. Much of this is due to the decline in gas prices. This was a big weight on the report and if it was excluded from the headline number, retail sales would have risen 4.0%. I would actually consider this a positive as consumers are able to spend in other areas of the economy rather than wasting money at the gas station. Areas that were strong in the report included non-store retailers (+6.5%), health and personal care stores (+7.8%), and food services and drinking places (+8.0%). Overall, this report shows me the consumer still feels good enough to keep spending, which I believe is positive for the economy.    Investment Choices Have you ever showed up to a party early and were the only one there? It can be kind of boring, but you know the party will start soon and it will get better. That is happening to many investors now, unless you’re in a few tech companies that mentioned the term AI. If you hold in your portfolio healthcare companies, financials, real estate, or energy, it’s been very disheartening year-to-date with those sectors going down. Don’t give up yet, stay at the party a little longer as there is light at the end of the tunnel. We see such things as the American Association of Individual Investors shows that bears outnumber bulls by eight percentage points. Usually, the bulls outpace the bears by 6.5 points. A survey from Bank of America of managers overseeing trillions of dollars in assets shows their cash position is now nearly 6% of a portfolio. This is up from under 4% at the end of 2021. The average peak for cash is just over 6%. I believe in the second half of this year you’ll see these managers trying to play catch up and get their money invested soon. The S&P 500 has come out of the 248-trading day bear market, which was the longest since 1948. By the end of the year, I believe we will see a nice catch-up in the sectors of the S&P 500 that have been lagging. I would not expect to see much in the technology stocks, and I would say at best they'll probably be treading water. So grab a glass of wine and be a little more patient as I believe you’ll be celebrating during the holidays of 2023 if you hold the right companies. 

Jobs Report After analyzing the recent jobs report further, I noticed some good news that was somewhat buried. There’s been concerns in this job market about the labor force participation rate remaining flat at 62.6%, which is still below the February 2020 pre-pandemic level of 63.3%. What appears to be happening is that the aging US population is causing more workers to retire. The good news that I have not seen or read before is that for workers ages 25 to 54, the participation rate is now 83.4%. This is a level not seen since 2007.    Crypto Lawsuit The SEC is back on the front-page news as they are fighting against cryptocurrencies. On Monday, they sued the large crypto firm Binance saying that they were operating an illegal trading platform in the United States and misused customer funds. The SEC also said they engaged in manipulative trading which made the volume of trading appear larger than it really was. It was also pointed out that they are commingling billions of dollars in customer assets and that they sent them to a third-party. The SEC has named the company and also the CEO Changpeng Zhao in the lawsuit. On Tuesday, the SEC filed a lawsuit against Coinbase, which is responsible for 53% of crypto spot trading volume in the US. The SEC pointed to the company not being registered as an exchange to trade securities. When a company is required to register with the SEC it involves giving investors financial statements and risk disclosures that have been approved by the regulators. Could these two major lawsuits bring cryptocurrencies to their knees? I would believe so. Where will the activity go if the major traders are gone? I was surprised to learn that some of the biggest shareholders of Coinbase are Vanguard, Fidelity, Blackrock, Morgan Stanley, and Goldman Sachs. In April 2021, Coinbase started trading at $381 per share, today it is trading around $53 a share. I think some of the big guys got sucked into the hype of cryptocurrencies. Unfortunately, their investors will pay the price.    Russell 3000 As individual investors and institutional investors have become somewhat shy about investing in equities, companies in the Russell 3000 show plans to buy back more than $600 billion of their shares in 2023. Buying back shares lowers the share count and this can increase the earnings per share and show a better value with a lower price to earnings ratio. In a recent report, Goldman Sachs analysts announced that over the last 25 years companies who have bought back their stock have performed better than those companies using their extra cash for capital expenditures, mergers and acquisitions. The Russell 3000 is an index of the 3000 largest corporations in the United States and it represents nearly 98% of the entire market capitalization of all US stocks.  Egg Prices Good news on the food front if you like eggs. The bird flu, known as avian influenza, pushed egg prices up to four dollars per dozen in January. Fortunately, there now appears to be some good signs of improvements. The bird flu killed about 59 million birds in the US since February 2022, but it appears that farmers now have it under control. Average retail prices were $2.70 per dozen at the end of April, well below the four dollars just six months ago in January. Farmers are working hard to protect the flocks from infection, which means more expenses, so we may not see much more of a decline in prices for now. But if we can continue on this path and inventories rise dramatically, we could see some more price declines over the next six months or so. Time to go have yourself a nice egg and cheese omelet. 

Jobs Report  Overall, I'd say the jobs report showed some good numbers. The headline number was strong with an addition of 339,000 new hires, easily topping the estimate of 190,000. The prior two months were also revised upwards by a total of 93,000. Payrolls were particularly strong in health care and social assistance (+74,600), professional and business services (+64,000), and government (+56,000). I generally don't like to see government being a major contributor to the jobs report, but it is important to note that government employment is still 0.9% or 209,000 jobs below the pre covid level in February 2020. On the negative side, the household survey showed the number of unemployed persons climbed to 440,000 and the unemployment rate increased from 3.4% to 3.7% with no change in the participation rate. While I do like to look at both reports, I will say I give more credence to the establishment survey as it is based on a sample of businesses rather than a survey of households. I do think the report does not provide evidence for the Fed to hike and June and I still believe a skip, or a pause makes the most sense.    JOLT’s Report Good news/bad news in the JOLTs report. The good news is that the labor market remains extremely strong. The number of job openings climbed from 9.7 million in March to 10.1 million in April. This means that there were 1.8 job openings for each unemployed worker in the month of April. Layoffs also fell by 264,000 in the report to 1.6 million. It's important to remember in 2019, layoffs averaged 1.8 million per month. The bad news is that this does not give the Fed evidence that the economy is slowing and may give them another data point to argue for another rate increase in June.    T-Bills  I was in the restaurant last week and could overhear a conversation of two gentlemen next to us and they were talking about T-bills. It seems everybody is talking about T-bills these days and the yield and what a great investment they are. I agree with that statement if you’re looking for short term returns, but if you’re putting long term money into T-bills, you are making a big mistake. No one seems to be listening to this advice though. In January 2022, only $1.6 billion of T-bills were purchased by individual investors. In April 2023, that number has climbed nearly tenfold to $13.4 billion. Again, I encourage people not to invest your long-term money in short term instruments, even when they sound attractive around 5%.    Nvidia (NVDA) Nvidia (NVDA) has now hit the $1 Trillion market cap club. I have said I am impressed by the company and the way it's been able to pivot into different businesses, but this valuation is just crazy. If we look at combining the market caps for Broadcom, AMD, Texas Instruments, Qualcomm, and Intel they would total $964 B. Last year's total sales for all of these chip companies combined would be over $180 B. For comparison, in 2023 Nvidia is estimated to have a little over $30 B in sales. Also, if we look at their sales compared to the other companies in the $1 Trillion market cap club, they need a lot of growth to catch up. The 2023 estimated sales for those companies: Apple $384.8 B, Microsoft $211.4 B, Alphabet $299.8 B, Amazon $559.7 B. It is likely Nvidia will continue to grow sales and earnings at a nice rate over the next few years, but at these valuations the company appears to be priced for perfection.

US Debt The talk began Thursday morning about a rating downgrade for US debt. The bad news continues to make headlines and drive broader markets and value stocks lower. We took a look at the US debt versus GDP which is similar to looking at debt versus income and over the last three years the ratio has been declining. In the second quarter of 2020 the ratio was 134.8. The most recent data reported was for the fourth quarter of 2022 and the ratio has improved by over 10% to 120.2. I have said this many times before, what we should be focusing on is increasing the GDP by growing the economy. This would then reduce the burden of the debt.    Savings Rate  Even though consumers have said they are worried about a potential recession, that has not stopped them from spending. In the month of April, spending rose 0.8% compared to March. This easily topped the estimate of a 0.4% gain. There was a $151.7 B increase in expenditures with $86.9 B of it coming from services and the remaining $64.8 B coming from an increase in spending on goods. Some have highlighted a concern over a depressed saving rate which fell to 4.1% in April from 4.5% in March. This was the first decline in the savings rate since last year. This rate has been depressed since the beginning of 2022, but I believe much of this is due to the over saving that occurred during Covid. There were some months in 2020 and 2021 that the savings rate was over 20% and in April 2020 it was 33.8%. If we look at the average savings rate from March 2020 - April 2023 it would be 10.1%. For comparison, if we look at the average savings rate from January 2017 - February 2020 it was 7.9%. I believe that Covid created a lot of excess savings in the economy that people can afford to spend more of their income each month due to the savings that were built during the pandemic. As we go out over the next couple years, I would expect to see excess savings continue to fall as the savings rate normalizes and continues to climb higher.    S&P 500 The five biggest companies in the S&P 500 account for nearly 25% of the entire index with a combined market cap of about $8.7 trillion. Those five companies are about 3.2 times the Russell 2000 which has a value of $2.7 trillion. This differential is now larger than the difference between the five biggest stocks and the Rusell 2000 during the dot-com boom. The five companies we're talking about are Apple, Microsoft, Alphabet, Amazon, and Nvidia. Something just doesn’t seem right investing in these companies at these levels.    Bitcoin You may have heard that recently there was a Bitcoin convention in Miami Beach. The excitement seems to be leaving Bitcoin based on the change in attendance. Last year, they had 26,000 attendees and this year it dropped to about 13,000 attendees. It was also noted at the entrance there was a sign that read “No bears allowed”. What does that tell you about the future of Bitcoin. 

Consumers Based on retail sales it looks like the consumer is softening, but I would not say to problematic levels. In the month of April retail sales rose 0.4% compared to last month and were 1.6% higher compared to last April. One problem here is these sales do not adjust for inflation and with inflation increasing 4.9% compared to last year, it appears most if not all of that gain can be attributed to higher prices for goods and services. While the headline number looks soft there are still areas where the consumer remains extremely strong. Food services and drinking places saw an increase of 9.4% compared to last year, health and personal care stores were up 7.9%, and non-store retailers had a gain of 8.0%. With grocery prices remaining high, food and beverage stores also saw an increase of 3.7% compared to last year. Areas that received a covid boom continued to struggle as furniture and home furnishing stores saw sales fall 6.4%, electronics and appliance stores saw sales decline 7.3%, and building material and garden equipment and supplies dealers saw sales decline 3.7%. The biggest negative in the report was gasoline stations as sales fell 14.6%. Overall, it appears the consumer remains in a good spot. They just aren't spending as much on goods and would rather spend money on travel and dining out.   Housing Market Existing home sales continue to remain under pressure as in the month of April they fell 3.4% compared to March and were 23.2% lower than April 2022. There are several factors which are likely contributing to the pressure which include higher mortgage rates, challenging affordability, and an extremely tight inventory picture. At the end of April there were only 1.04 million homes for sale. This was a 1% increase compared to last April, but at the current sales rate it represents a 2.9-month supply. Generally, 6 months is considered a balanced market. The affordability challenges have really hurt the first-time homebuyer and in the month of April they made up just 29% of sales. Historically, they are around 40%.   Investing Over the last few weeks, the markets and equities have seemed to go nowhere. They go up for a few days and then go back down for a few days. This can be very discouraging for investors who get impatient and then settle for a 5% T-bill. Over the last 12 months institutions have pulled $333.9 billion from stocks and over that same period, individual investors have pulled $28 billion. As of May 10, 2023, money-markets reached a record in total assets of $5.3 trillion. For patient investors they will be rewarded, could be next week, next month or three months from now. By the time some people realize it, they will have missed perhaps a 5 to 10% increase in their portfolio. Don’t forget what Warren Buffett said, “investors should be greedy when others are fearful." I will add to that, a good dose of patience helps as well.

CPI Headline CPI of 4.9% came in below expectations of 5.0% and registered the slowest growth since April 2021. It also marked the 10th consecutive month of slower growth since the report peaked in June 2022 at 9%. Areas that continued to see a growth in prices were food (+7.7%), motor vehicle insurance (+15.5%), transportation services (+11.0%), admissions which includes concerts, movies and theaters (+6.9%), and electricity (+8.4%). There continues to be more components that are registering declines compared to last year. Energy was a big one as it was down 5.1% as gas and oil prices fell from high prices last year. Gasoline in particular was down 12.2%. Other areas that saw declines included major appliances (-10.4%), used cars and trucks (-6.6%), and even airfares (-0.9%). The Core CPI, which excludes food and energy, did come in higher than the headline number at 5.5% but over 60% of that increase came from shelter costs which grew 8.1% compared to last year. If those shelter costs were removed from the report the Core CPI would have grown at just 3.7%. Overall, I continue to see inflation heading in the right direction as costs continue to decelerate.   PPI Big news on the Producer Price Index (PPI) as it came in with just a 2.3% increase in April. This was the lowest reading since January 2021, and it was well off the high of 11.3% in June 2022. This is so important because if businesses are not seeing costs increase as much, they should not need to increase prices as much for consumers to offset the costs. I really believe inflation will not be a problem as we exit 2023 and head into 2024.   Regional Banks The regional banks have really caused a lot of concern in the markets lately. Unfortunately, short sellers have stepped in and are magnifying movements of stock prices beyond belief. But if an investor looks at where some of these regional banks are trading, like Western Alliance at 2.3 times forward earnings or CoAmerica at 3.9 times forward earnings, it would appear that the worst is probably over. For the big banks, they have been beaten up somewhat as well, and are currently trading at 1.2 to 1.3 times tangible book value. If you back out the non-cash impact from potential bond portfolio losses, the price to tangible book value trades closer to one. The normal for big banks is more around two times tangible book value. For an investor looking down the road two or three years I think this is a good time to add some good bank positions to the portfolio after some strong research. I would also caution investors to be prepared for a bumpy ride for the next few months but if you wait and by the time everything looks good, you would’ve missed the opportunity.   Consumer Credit You may hear how terrifying it is that revolving consumer credit outstanding is at record highs and recently in February it was at $1.2 T. What you don't hear though is how that number relates as a percentage of disposable income. In fact, in the chart below you'll see revolving consumer credit outstanding as a percent of personal income was just 6.2% in February and is actually still below pre-covid levels. It's important to understand that when the price of assets and incomes rise so will costs and debt levels. The absolute level is not nearly as important as the relationship that the numbers have.

Jobs Report The jobs report showed nonfarm payrolls increased 253,000 in the month of April, which easily topped the estimate of 180,000. On the negative side, the prior two months saw revisions to the downside that totaled 149,000. Gains continue to moderate in the report as the April gain was below the 6-month average of 290,000, but with an unemployment rate of 3.4% I can't see payroll growth accelerating at this point. Areas that were at the top of the report included professional and business services (+43,000), health care (+40,000), and leisure and hospitality (+31,000). The growth in leisure and hospitality slowed substantially considering the 6-month average has been an addition of 73,000 jobs per month. The industry remains 2.4% or 402,000 jobs below pre-pandemic levels. No major industry saw a contraction in the report, but one negative was temporary help services declined by 23,000 in the month and since its peak in March 2022 it is down 174,000. One other area that continues to remain a concern was wage inflation. Average hourly earnings in the month increased 4.4% over the last 12 months. This increased from last month's reading of 4.2%, but compared to last April's 5.8% gain it was a nice deceleration. Overall, this report continues to feed my belief that the economy is in ok shape and inflation should continue to slow.   JOLT’s While the headline Job Openings and Labor Turnover Survey (JOLTs) shows a slowdown, it is again important to compare to pre-covid level given the strange economy over the past few years. Job openings declined 384,000 in the month of March to 9.6 million. This is down 1.6 million when compared to the end of 2022 and is the lowest level since April 2021. While this may sound negative, there are still 1.6 job openings per available worker and in February 2020 job openings stood at just 7 million. Layoffs also increased in the report by 248,000 to a level of 1.8 million. Again, while this may sound troubling, it is important to note that in February 2020 layoffs were 1.97 million.   Apple Stock If you have made money investing in Apple, congratulations. I must say though I was not impressed with the most recent earnings from the company. The company saw sales decline 2.5% compared to last year and EPS was flat. Service revenue, which has been a nice growth catalyst for Apple in the past, saw sales grow just 5.4% compared to last year. The company also still has a huge reliance on iPhone sales with that component of the business making up over 54% of total revenue in the quarter. Some may point to excitement over Apple's $90 B stock buyback plan and its 4.3% increase to the dividend. Unfortunately, due to Apple's size the buyback plan would only amount to about 3.2% of the shares outstanding and the dividend yield would be just 0.55%. With Apple trading at about 26.5x estimated 2024 earnings the stock is just too expensive for lackluster growth.   Consumer Spending We see different areas in the economy that appear to be slowing down, but that would definitely not be true for consumer spending on travel and entertainment. Both Visa and MasterCard stated during their earnings last week that this category continued to grow in the first quarter. Also, proving this fact is domestic airline ticket prices in the US increased to $393.85 at the end of 2022, that was an increase from $327.13 one year earlier. If you’re doing the math, that’s about a 20% increase. A recent look of people passing through the Transportation Security Administration (TSA) checkpoints on April 27 was up 11% from one year ago to 2.52 million people. The consumer is still spending. They are just spending in different areas, I guess they feel they have enough TVs and furniture in their homes now.

GDP Report While the GDP report showed the economy grew at an annualized seasonally adjusted rate of just 1.1% and was below expectations of 2.0%, it showed the consumer is still spending. In total, the consumer portion of GDP grew 3.7% as goods increased 6.5% and services spending grew 2.3%. What really hurt the report was private investment as it subtracted 2.34% from the headline number. Within private investment, the change in private inventories subtracted 2.26% from the headline GDP number. Residential investment was a negative in the report as it fell 4.2% and investment in equipment was also lower by 7.3%. Positives in the private investment space included nonresidential structures which saw spending grow 11.2% and intellectual property was up 3.8%. This report continues to make me believe that while the consumer may slowdown overall the economy is still in an ok spot. Companies will also likely need to rebuild those inventories which should be a benefit to GDP in future quarters. Inflation Positive news on the inflation fronts as the Fed's preferred measure, PCE, registered a year-over-year increase of 4.2%. This compares to last month's reading of 5.1%. Energy costs were a major benefit in the report as they were down 9.8% compared to last year. Critics will point to the Core PCE, which excludes food and energy. It came in at 4.6%, above expectations of 4.5% and barely below last month's reading of 4.7%. With that said I continue to believe energy is a core part of costs for businesses and with a leveling off in energy prices, I believe core inflation will continue to subside through the remainder of this year. Overall, I believe this was a good report as it continues to show inflation moving lower. Recession I continue to say I do not see how we would have any type of meaningful recession or perhaps even a recession at all. I have pointed out how strong the job market is and that when people have a job they will not pull back dramatically on their spending. Another reason why I do not see a major recession coming is because of what’s known as the M2 money supply. The M2 money supply is virtually all the liquid money in the economy, and it includes short-term CDs, checking accounts, savings, and money markets. It has pulled back from the peak one year ago of $21.6 trillion to a current level of $21.1 trillion. I continue to compare data to the great economy that we had back in 2019 before Covid and on December 31st of 2019 the M2 money supply was $15.3 trillion. So here we sit with anybody that wants a job can get one and liquid money in the economy (roughly $6 trillion more than back during the good economy in 2019). I have to ask how in the world could we have a major recession with so many people working and so much available money? Diet Drugs Maybe the pandemic is to blame or maybe it is the availability of too much food, but according to the Federal Centers for Disease Control and Prevention obesity has risen from 31% in 1999 to 42% in 2020. This is despite the fact that in 2020 there were $76 billion in sales for weight loss, medical programs, diet soda, low calorie frozen food and gym memberships. This all could be changing because of three diet drugs that have hit the market: Ozempic, Wegovy and Mounjaro. These new drugs don’t come cheap ranging from $900-$1400 for a one-month supply. Some side effects include nausea and diarrhea. I do question if it is different this time? I remember back in the 1990s the diet drug fen-phen was pulled from the shelves because users developed heart issues. Another over-the-counter diet drug Dexatrim was also linked to increased risk of strokes. Both drug companies, Novo Nordisk and Eli Lilly are hot now, but in this litigious society that we live in I just wonder how long it will be before the major billion-dollar lawsuits come out against these companies.

Remote Work Another sign that workers will be coming back to the office was a report that showed tech companies over-hired and that working from home did not prove to be that effective. Year to date, tech companies have laid off approximately 168,000 people and the layoffs are occurring for a couple reasons. First, they discovered that people were working only 4 to 5 hours a day logging in at 11 o’clock in the morning and wrapping up and logging off by 4:30 that same day. It was also discovered that some tech companies did become overzealous and looked at hiring more people as an ego boost and an indication that they felt business was going to grow rapidly in the future and they would need a lot of employees. Part of the hiring was done to keep talented employees from going to the competition, a hoarding of employee talent so to speak. No matter how you slice it, this is not a problem with the economy, but more with tech companies and people working from home. Special Purpose Acquisition Companies Another year has passed, and more data is in on what a bad investment Special Purpose Acquisition Companies, also known as SPACs, were. I hate to tell people I told you so but back when these blind investment pools were hot, we warned people. In 2022 the total write downs amounted to $11.6 billion a huge increase from $2.7 billion in 2021. The reason for the write downs is based on what is known as goodwill. This comes about when a business is acquired for more than the value of its assets. Accounting rules require the measurement of fair value to the assets annually. If that figure is less than the amount recorded in the books, the value of goodwill must be reduced. I have been in the investment world for 40 years, and I continue to see these hype investments that make Wall Street a lot of money. Unfortunately, in many cases the average investor loses money. This is why I continue to be a value investor and invest in a company when it’s on sale and sell it when it’s overpriced. Value Stocks I know people are fearful about investing now and when I tell them I expect to have a very good year come December 31st, I think they question my thoughts. Currently value stocks are very inexpensive compared to growth stocks. They are discounted more than they have been for four-fifths of the time in the history of the stock market. Another study also showed when inflation runs between 4% and 8% per year value stocks outperform growth stocks by 6 to 8%. People may be afraid of inflation, but it actually is a benefit to value stocks. I will keep investing!

CPI Headline CPI came in at 5% compared to last year, which was the lowest level since the May 2021 report and well off the June 2022 high of 9%. Some reasons for the slower gain include gasoline which was down 17.4%, used cars and trucks down 11.2%, televisions down 14%, and uncooked beef roasts down 4.4%. Areas that remain elevated include transportation services up 13.9% (Airfare was up 17.7%), electricity up 10.2%, and food was up 8.5%. The big problem in the report continues to be the shelter index which accounts for about 1/3 of CPI and rose 8.2%. Some people may point to a concern over core CPI, which takes out the volatile food and energy components, as it rose 5.6% compared to last year and was higher than February's reading of 5.5%. But looking closer at the numbers, the shelter index accounted for about 60% of the increase in core CPI. Excluding shelter, the CPI rose just 3.4% from a year ago. I continue to believe the shelter index will level off as we progress through the year and have a much smaller impact on CPI. Overall, I would say this inflation report was a major positive and should provide evidence to the Fed that a pause in rate hikes could make sense. PPI Huge news on the inflation fronts as the Producer Price Index (PPI) showed a month over month decline of 0.5% in the month of March. This was well below estimates for the index to be flat in the month. Looking at the 12-month change, the index showed an increase of just 2.7%. This was the smallest increase since January 2021 and is well off the high from last March of 11.7%. The Fed has pointed to concerns over services pricing, but this report also indicated that prices for services fell 0.3% in the month which was the largest decline since April 2020. With a report like this I really believe the Fed should consider not raising rates at the next meeting.  Retail Sales The headline retail sales numbers may concern some, but digging through the numbers they indicate exactly what we've been anticipating, a slowing economy not a troubled economy. The headlines read that retail sales fell 1% in the month, more than the estimate of a 0.5% decline but looking at the numbers compared to last March sales increased 2.9%. It's important to point out that this is not adjusted for inflation, which was 5% in the month of March. The biggest negative weight on the numbers was the decline of 14.2% at gas stations largely due to the decline in gas prices. If we exclude gas stations from retail sales, they would have been up 4.8% compared to March 2022. Other negatives included electronics and appliance stores which were down 10.3%, building material & garden equipment & supplies dealers were down 3.5%, furniture and home furnishings stores were down 2.4%, and clothing and clothing accessory stores were down 1.8%. The major gainers in the report were food services and drinking places which were up 13%, non-store retailers were up 12.3%, health and personal care stores were up 7.1%, and food and beverage stores were up 5.0%.  Real Estate Real estate transactions remain on the low side as housing prices are beginning to weaken. With the higher prices of homes and the higher interest rates many first-time buyers have been locked out of the housing market. The movement of the real estate market generally happens where people will trade up to perhaps a larger or more expensive home opening the lower priced homes for first time buyers. But with many of these homes the homeowners locked in mortgage rates in the 3% range, and they don’t see the benefit of buying a more expensive home with mortgage rates double what they’re paying now. I believe it will take years for the real estate market to adjust to a more normal market. 

Jobs Report Given the concerns around the economy, I'd say the jobs report was a positive one. It wasn't too hot which would've provided evidence for the Fed to increase rates more than anticipated, but it also wasn't too far below expectations and overall, it showed a softening labor market not a bad labor market. Headline payrolls grew by 236,000 compared to the estimate of 238,000, but the big highlight came from the average hourly earnings which increased just 4.2% on an annual basis and was the smallest increase since June 2021. For most of 2022 the annual gains were over 5% with March being the peak at 5.9%. This is more evidence that inflation is becoming a much smaller problem. Also, another highlight was the labor force participation rate again ticked higher to 62.6% which was the highest level since pre-covid levels. For comparison, in February 2020 the labor force participation rate was 63.3%. Areas that led the way in job gains were leisure & hospitality at 72,000, healthcare and social assistance at 50,800, and the Government at 47,000. Leisure & hospitality still remains 2.2% or 368,000 jobs below pre-covid levels and Government employment is still lower by 314,000 jobs, or 1.4 percent. There were 4 declining groups in the report as retail trade was down 14,600, construction was down 9,000, and manufacturing and financial activities were both down 1,000 jobs.   Labor Market The Job Openings and Labor Turnover Survey showed that job openings in February came in at 9.93 million. This was a fall of 632,000 job openings when compared to the month of January and it missed the estimate of 10.4 million openings. This was the first time since May 2021 that job openings fell below 10 million and while this may sound concerning, there are still about 1.7 jobs available for every available worker. Also, if we look back to January 2016-February 2020, the job openings ranged from 5.59 million - 7.59 million. Layoffs were also positive as they declined 215,000 from January to a level of 1.5 million. If we again look at January 2016-February 2020, layoffs ranged from 1.59 million - 1.97 million. Overall, I'd say this is a softening labor market but by no means is it a weak labor market.   Mutual Fund Managers I knew there were a lot of mutual funds out there, but I was shocked to see how few managers actually participate in their fund. According to Morningstar, some 4,643 out of a total of 7,108 funds have zero manager investment. I think this is just crazy and as much as people talk about different objectives and risk tolerance, I have always been a big believer that a good investment for me should be a good investment for my clients. Ultimately, I believe that everyone shares the same main objective when it comes to investing and that is to make money. This is why I invest in the same companies as my clients when we manage money.   Fact Checkers I continue to worry about people's overreliance on the internet/technology and even more so the so-called independent fact checkers. We recently did a post on the JOLTs report, and it was flagged for false information. When clicking on the reason for the false information, Facebook indicated it flagged the post because there is no record of Martin Luther King Jr saying, “Our lives begin to end the day we become silent about things that matter.” This was according to AAP FactCheck. Our post did not contain that quote or mention Martin Luther King. As a society, I believe we need to really emphasize critical thinking and doing more than just surface level research that relies on algorithms.   Tik Tok Statistics The numbers are staggering when it comes to TikTok. It is estimated that about 95 million Americans use TikTok for about 90 minutes a day. It is estimated the company will generate about $14.2 billion in revenue which is an increase of 43% compared to 2022 and 10 times what it was just three years ago. The biggest users of TikTok are coming from Generation Z who were born from 1997 to 2012. What is concerning is that these 11- to 26-year-olds could be having their minds and ideals twisted in ways that no one could foresee. It was also pointed out about 26% of adults under age 30 are getting their news from TikTok on a regular basis which is up dramatically from 9% back in 2020. At first thought, I’m a hard liner that we ban TikTok because of the backing from the Chinese government and what it could be doing to the young minds of our country. Then there’s the other side of the coin if we do ban TikTok did we just throw out our freedom of speech? Also, there could be repercussions for American companies operating in China, who generate billions of dollars benefiting US businesses and shareholders. One thing is for certain, this will not be resolved for years to come and there’s no doubt in my mind that it will not be resolved before the presidential election in 2024, because if it were banned now, politicians would lose many Gen Z voters.   ISM Services There has been some concern about economic data this week, but I believe this is exactly what we need for a healthy economy. Looking at the ISM Services PMI it registered 51.2 which was 3.9 percentage points below February's reading of 55.1. The reason this is important is because the economy is slowing, but a reading above 50 still indicates expansion. One of the most important components of the report was the Price index. It registered 59.5 which was 6.1 percentage points below the 65.6 recorded in February. It marked the 70th consecutive month of price increases, but it was the index's lowest reading since July 2020. This also marked a ninth consecutive reading near or below 70 which follows 10 straight months of readings near or above 80. I continue to believe that we can get a soft landing, or a small recession paired with a reduction in the massive inflation we have been seeing.   In the Office There is more evidence that people are coming back to the office. One was a recent survey where it says 72% of business employees are now in the office full-time or work at home very little. In 2021 the same survey showed 60.1% were coming into the office. My own personal observation agrees with the survey as I have noticed when I call different businesses, I hear fewer barking dogs in the background or kids running around screaming.   Money Movement The Silicon Valley Bank failure caused movements of dollars that has never been seen before. This is mostly because of the ease of transferring money from one institution to another. Banks below the top 25 banks experienced withdrawals of $108 billion, which is an all-time record.   OPEC and Oil Prices In a surprise move OPEC cut their production which caused a big rally in oil prices today. It appears the Biden administration missed an opportunity to buy back oil for the Strategic Petroleum Reserve which would’ve helped to stabilize oil at a higher price. Since the administration did not do that OPEC took it upon themselves to cut production to support oil prices. Oil rose 6% today crossing the $80 per barrel level.   Wells Notice to Coinbase The SEC recently issued a “Wells Notice” to Coinbase, which is saying a lawsuit is coming be prepared. What the SEC is saying is that Coinbase is trading tokens as an unregistered security and that they are not tokens but a security. If the SEC wins this suit against Coinbase it will virtually shut down all trading of most tokens in the US (imagine the price of Bitcoin if this happens) because they would have to register with the SEC as brokerages and exchanges, and they would also have to issue the tokens as securities. I do take the side of the SEC on this because more people buy and sell Bitcoin and other cryptocurrencies as a way to make a profit and not use it as a currency for exchange of goods and services. To me, it is the same as penny stocks, which really have no value and trade up and down on a daily basis.   Federal Reserve Raising Rates You may be feeling the pinch on your credit from rising interest rates, but you are not the only one. The Federal Reserve, who is raising rates, is also feeling the pinch. How is that you may ask? The Federal Reserve has over $5 trillion that it has borrowed from financial institutions and money market funds at short term rates. Now that those short-term rates have risen the Fed is now paying 4 to 5% on that $5 trillion. The Federal Reserve makes profits off securities that it owns. In 2021, they made almost $108 billion which they sent to the Treasury. But now because of the amount they are paying on the $5 trillion that they owe, it looks like in 2023 the Treasury will not be receiving any money from the Federal Reserve.

Consumer Confidence I was happy to see the consumer confidence number come in today at 104.2 for March which was up from February’s 103.4. For me this is another positive sign that we will not have a major recession, and that consumers will continue to spend on goods and services. I want to emphasize this is a good number not a great number. The reason I say that was from 2008 to 2012 the confidence number was below 60 but in 2019 it rose to nearly 140. So, I am happy with the current number for now.   Apple and Disney There is talk today, that Apple may be buying Disney. No numbers have been released yet but I do not believe this will take place or that it would make any sense for Apple. Apple may be looking for the media side to help grow Apple TV but if you buy Disney, you also must take care of the theme parks and the cruise lines which Apple has no experience or I feel no desire to do. They could spin those off, but I think if they are going down that path, they would be far better to buy either a Warner Bros. or Paramount, which are pure media plays. Also keep in mind Apple has not done any major purchases in recent years and its largest came in 2014 when it bought Beats for $3 billion. To buy Disney the current market cap is nearly $180 billion, versus Warner Bros. at nearly $37 billion and Paramount is just over $14 billion.   Binance This has been quite the week for Binance which is the world’s largest crypto exchange. You wouldn’t know it from the price of Bitcoin, which has now climbed to over $28,000. It defies logic, and I’m sure more people will get burned once again. The CFTC known as the Commodity Futures Trading Commission has charged Binance with operating illegally in the US and violating rules to prevent illicit financial activity. Billions of dollars have been walking out the door from the company, and as I said months ago, Binance would be the next crypto company to fall. As these crypto companies continue to fall, I don’t know how Bitcoin can stay at these levels.   Money Market Funds I was surprised to learn that roughly $120 billion flowed into money market funds in mid-March bringing the total assets to $5 trillion. The reason I was surprised is that money market funds are not insured, and if consumers were leaving the bank for safety the money was insured at the bank. Sometimes fear causes consumers to do silly things. One should stop and think before making financial moves.   Banking Industry Our banking industry has gone through major changes compared to just 15 years ago when the big banks were viewed as bad. They have now become the safest place to keep your money, or so people feel. In 2008 the feeling was we don’t want big banks, but that has shifted as the share of total banking assets controlled by the 25 largest banks is now at 68% which is more than double what it was 30 years ago. The number of US banks hit an all-time high of 30,456 banks in 1921 and as of 2021 there were just 4,236 FDIC insured banks. There is an ongoing consolidation of banks and I believe it will continue going forward.   LA Real Estate Tax Starting April 1st, LA will begin implementing a large tax on real estate valued over $5 million. I think this is a terrible idea especially since it applies to not just mansions, but multifamily and commercial property as well. Sellers of property will have to pay 4% of the total sales price for properties between $5 and $10 million and for properties over $10 million the tax will be 5.5%. The tax is on top of the current 0.45% transfer tax. I don't know who in their right mind would buy in LA when you can buy in surrounding markets and avoid the tax. I believe this will make the supply problem even worse and reduce demand in the higher market in LA. Unfortunately, I don't believe this will fix the affordable housing/homeless problem in LA like the bill was intended.   Pending Home Sales Pending home sales showed a small month over month increase of 0.8% in the month of February, but compared to last year sales were 21.1% lower. Pending home sales look at contracts that were signed in the month. I believe these sales will continue to have difficult year-over-year comparisons. There has been a slight increase in mortgage demand from recent weeks as rates have fluctuated, but compared to last year the demand for purchase applications was 35% lower. As for prices we did get data from the S&P CoreLogic Case-Shiller U.S. National Home Price index, and it marked the 7th straight month of declines. In January prices fell 0.5% compared to the prior month. They were still 3.8% higher than the previous year. Here in San Diego though prices were 1.4% lower compared to January 2022. I will say, be careful comparing this index against other ones as it does lag by a month. We are now getting data for the month of February in many cases, but this index is for the month of January. My expectation is that this index will turn negative on an annual basis in the coming months.   Buy Now Pay Later Apple has entered the buy now pay later arena, which I believe will put a lot of downward pressure on the stock prices of some of those companies like PayPal. It makes it very convenient for consumers who use apple since it’s already on their phone. It is a simple concept, buy now up to $1000 and make four easy payments with no interest or fees. I do always worry about consumers loading themselves buy now pay later debt and becoming over extended, but for Apple, this is just another service that they provide to their customers for convenience.   Global Trade In a recent trade agreement with China and Brazil, the deal was done using China’s currency the Yuan. You may be hearing that the dollar is not the strong currency any longer that is used in trade deals, but that is still far from true. Currently when it comes to global trade, the Yuan accounts for 3% of trade deals and the United States dollar accounts for 87%. We still have a very comfortable lead, but you must be aware that China is doing everything it can to get rid of using the dollar. Currently one Yuan trades for $.15.   Store Pricing I’ve always been a little suspect of going up to the checkout register as a person scans very quickly multiple items, wondering am I really getting the right price? Unfortunately, my fears have been verified from multiple states that retailer Dollar General is charging a higher price at the checkout register than the advertised price. Examples include a six pack of soda and a frozen pizza which were $1.25 higher than the shelf price, disposable cups were $1.70 higher and chicken strips were $2.80 higher. I was also disappointed to learn that state regulators on average allow up to a 2% failure rate on pricing. Dollar General has the highest penalties in states for over pricing the items, but it does happen at Walmart and even Circle K but to a lower degree. What I also thought was concerning was all the miss priced items that I read about were always priced higher, not one was priced lower. I guess this would be a good argument for self-scanning so you can verify the price, but now I’m thinking the price is not even listed on the item and you would have to write down each price you saw on the shelf for the product. Sometimes technology has its downfall.

Retirement Investment Rule I was disappointed to see Joe Biden veto the resolution to overturn a retirement investment rule that allows managers of retirement funds to consider the impact of climate change and other environmental, social and governance factors when picking investments. Biden says he signed the veto because "legislation passed by the Congress would put at risk the retirement savings of individuals across the country." Unfortunately, I think the veto does the opposite. You know which bank had a good ESG score? Silicon Valley Bank. I believe if fund managers want to consider ESG when investing then they can go for it, but I worry this will allow them to hide behind poor investments like a Silicon Valley Bank in the name of ESG.   Gas Prices What is California's solution to the highest gas prices in the US? More regulation. I don't understand what these lawmakers look at. The bill will allow the state to set a maximum gross gasoline refining margin and penalize any CA based refiner that exceeds that margin. The bill will also allow for a new watchdog agency and politicians say the legislation creates new transparency over refinery shutdowns, transactions that compose the crucial spot market where retail prices are set, export, and import activity, pipeline activity, and other aspects of the industry. There will also be a new ledger that will be kept for transactions on the gasoline spot market and regulators will have to be informed of all trades. I'm not sure why these CA politicians believe that refiners are only screwing over their state, maybe they should look at the excessive regulations and taxes as a reason for higher prices. The easiest way to help prices would be to encourage supply, this bill does not do that.   Home Sales When looking at the headline for existing home sales, some may be excited as they spiked 14.5% compared to the month of January. Looking compared to last February though, existing home sales were 22.6% lower. The median home price also saw its first year over year decline in 131 months, or nearly 11 years. It was a minor decline of just 0.2%, but I do believe that the decline will be larger in the upcoming months. Supply continues to remain problematic with just 980,000 homes for sale at the end of February. This continues to produce an imbalanced market with just 2.6 months of supply at the current sales pace. I still do not see a major decline in rates and believe the housing market will continue to struggle in 2023.   Harrison: "Home Buying vs. Renting"

Volatility of Stocks It amazes me how people believe that stocks are too risky and real estate is a much safer investment. Looking back nearly 50 years the truth is stocks have more volatility than real estate, but the returns on stocks far outperform real estate. Using a nationwide real estate Index versus the S&P 500 from 1975 to 2022, a $100 investment in US real estate would be up about nine times to $928, a pretty good return. $100 invested in the S&P 500 from 1975 to 2022 would have grown to $19,351. From 1990 to 2006 there is a period known as the great moderation where real estate outperformed the S&P 500. Looking back on history and realizing how much real estate has increased because of Covid I begin to wonder if we could be in for a long-term period of slowly increasing real estate and after inflation, perhaps a negative return. People tend to look at the recent history which can fool one into making poor investment decisions. People think just because something went up in the past it will continue to do the same going forward, but they do not realize that great advancements can lead to moderation for years to come. Why do people do so poorly in stocks? They confuse the volatility with risk and many times during a short-term decline in equities they will head for the exits and miss the great long-term returns that good solid equities can provide investors.   Consumer Price Index Inflation in the month of February continued its downward trajectory as the CPI increased 6% compared to last year. This was right in line with expectations and comes in lower than January's 6.4% reading and the peak of 9% in June of last year. Many of the normal culprits remained elevated with transportation services up 14.6% (airfares were up 26.5%), energy services were up 13.3% (electricity was up 12.9% and utility gas service was up 14.3%), and food was up 9.5%. There were some positives as gasoline was down 2.5%, citrus fruits were down 1.2%, beef & veal were down 1.4%, bacon was down 5.9%, major appliances were down 5.9%, used cars were down 13.6%, and televisions were down 14.8%. It is nice to see there are more categories in these reports showing a decline. When looking at core inflation, which backs out food and energy, it came in at 5.5%. A heavy weight in the report was shelter as costs were up 8.1%, if we backed this out from the core inflation it would have been 4%. I remain very optimistic over the trajectory of inflation especially when we consider the shelter index. It's important to remember that the index lags real time data as it takes time for leases to roll over into a new contract. Landlords typically renew leases every 12 months, which means current price dynamics won’t be reflected in new contracts for a year. I still believe CPI could end 2023 around 4%.   Producer Price Index The Producer Price Index (PPI) came in with a huge surprise, declining 0.1% in the month of February vs the expectation for a 0.3% increase. Compared to last February, the PPI grew just 4.6% which was down from January's annual gain of 5.7% and well off the peak level of 11.7% in March 2022. This was the lowest annual increase since March 2021 when it was 4.1%. Retail sales did show a 0.4% decline in the month, which could be good news considering it indicates a slowing economy. Year-over-year retail sales were up 5.4%. Food services and drinking places remained a big destination for consumers dollars as sales were up 15.3% compared to last February. Non-store retailers were also strong, up 8.5%, and grocery stores were up 5.8%, likely benefitting from higher food prices. Areas of weakness included electronics & appliance stores down 2.8%, motor vehicles & parts dealers down 0.2%, and gas stations were down 1.9%. I continue to believe that the data is showing a softening in the economy, which is providing relief to the high inflation levels we experienced last year. I continue to believe the Fed should hold rates where they are for the time being. With that said I still do not believe they should cut rates at all in 2023.   Gas Prices You may not be able to tell by the price of gas at the pump here in California, but oil has dropped down to under $70/barrel this week. Remember last year, about nine months ago when crude prices hit $122/barrel? I’m glad those days are gone. The reason for the decline is with the bank failures and also a big selloff in the international bank Credit Suisse some are thinking the economy is slowing down and less oil will be used. It will take a little bit of time for the big reduction in the price per barrel to flow through to the pump at the gas station, but it may not last long. We have the reopening of China's economy which could increase demand for petroleum and remember all the oil that was taken out of the strategic petroleum reserves? Well, that must be replaced. The talk was they should be buying it back anywhere between $67/barrel to $72/barrel. Let’s see if the government follows through with their plan. If they do, that would be more upward pressure on the price of oil.   Harrison’s Topic: “Where should you put your cash?”

Jobs Report The headline jobs number of 311,000 easily topped the estimate of 225,000 but marks a slowdown from January's level of 504,000. Leisure and hospitality remained strong with an addition of 105,000 jobs. With this solid number, the sector is now just 2.4% or 410,000 jobs below the February 2020 level. Other areas of strength included health care and social assistance (+62,800), retail trade (+50,100), government (+46,000), professional and business services (+45,000), and construction (+24,000). Information was the weakest group as payrolls declined by 25,000 and transportation and warehousing also had a decline of 21,500. The unemployment rate came in at 3.6%, which was above the expectation of 3.4%, but the participation rate increased to 62.5%. This was the highest level since March 2020, but still remains below the pre-pandemic level of 63.3%. On the inflation front, I was happy to see the increase in average hourly earnings of 4.6% missed the estimate of 4.8%. While this is higher than last month's 4.4% gain, most of 2022 saw gains of over 5%. Overall, the report may have been too optimistic for the market and could fuel further fears of more rate increases. I do continue to believe the labor market will continue to see gains, but at a much softer rate than the last couple of years. There's nothing that really concerns me in this report.    Big Banks   Today SVB bank also known as Silicon Valley bank was closed by regulators. At first thought this sounds scary since this is the first bank closure since Washington Mutual back during the Great Recession. But when one digs under what assets this bank held, it is no surprise as they were very speculative. The assets of $212 billion pale in comparison to JP Morgan Chase with $4 trillion in assets but also the quality of assets or the lack thereof is what caused the bank's failure. Many of the assets were for either venture capitalists, or startup companies in the risky tech and life science world. The bank was also very loose with its valuations, where they would loan on the equity value before the stock would even go public. They also went as far as to loan against wineries wine inventories, which accounted for 2% of the asset value of the bank. It is important to note that when the economy slows down that is when all the speculative businesses come to light. It is important to understand that the big banks will not follow this road, because they base loans on true assets and income.   Stock Buybacks  The 1% excise tax that the government imposed this year on companies for doing stock buybacks has not seemed to change the course of companies buying back their stock. Through February 17th, $220 billion of stock buybacks were authorized by companies which was an all-time record. We continue to support stock buybacks by companies as long as they are buying their stock back at a good price and not borrowing money to implement the buyback.    Oil Companies Oil companies have made a lot of changes over the last couple of years and are being run more as a business looking at profits and cash flow rather than just production. It was estimated in 2019 that 15% of executive bonus compensation was based on production goals. By 2022 that was just 6%. The companies are now looking more at free cash flow which 18% of the incentive will come from hitting those goals, up dramatically from 7% back in 2019. There are also more incentives now for hitting environmental, health and safety goals. This will probably hurt production going forward with estimated growth of only 3% this year. Looking at it from a business perspective, it makes more sense to run your business based on cash flow and profits, rather than just production.    Harrison: "Big tax bill? Here’s some causes and solutions.”

Economic News Some people wonder why I don’t get so upset over the negative economic news that comes out. In the first half of last year, I kept saying yes it will be a difficult year but we’re not going to have a major recession. Looking back at some headlines, in March 2022 Goldman Sachs economists were forecasting a 20 to 35% chance of an economic contraction within 12 months. The CEO of JP Morgan Chase, Jamie Dimon, used the word hurricane in the economy going forward. Bank of America predicted a mild recession would hit before the year closed. Fast forward from the fourth quarter of 2021 to the fourth quarter of 2022, the US economy grew at 1%. It’s easy to be negative but one really must look at the data and say where will we be 12 to 24 months from now. I think our economy will continue to move along and inflation will continue to decline slowly. With that said I will continue to invest in good quality public companies and see what they will be worth in the next 12 to 24 months. Apartment Rent As I suspected, the large increase in apartments is putting downward pressure on rents. Nationwide rents have fallen about 3 1/2% since last August. It was also the first time in five years that rent fell every month over the preceding six months. If one drives almost anywhere in San Diego, you see new apartment buildings going up and nationwide, we are seeing the biggest supply of apartments delivered since 1986 with nearly a half million apartments coming online. This is good for two reasons. First is that obviously people will be spending less on rent and the second reason is this will ease some of the inflation pressure since housing is a big part of the CPI. Capital Gains Taxes One of the major benefits of being a long-term investor is the benefit of capital gains taxes. Rather than ordinary income rates, at the federal level gains are taxed at 0%, 15%, or 20% as long as the position is held for more than 365 days. In 2023, the standard deduction and income thresholds for capital gains increased which is a benefit for investors. In fact, you may qualify for the 0% long-term capital gains rate with taxable income of $44,625 or less for single filers and $89,250 or less for married couples filing jointly. This means you still may be able to make over $100,000 as a married couple and be in the 0% range after the standard deduction. Crypto Market Another hit to the crypto market! Silvergate Capital (SI), a cryptocurrency focused bank, plunged 58% in a single day of trading this past week. The reason for the massive decline was the company delayed its filing of the annual report as it needed more time to assess additional losses, regulatory scrutiny, and the big one its ability to continue as a going concern. In other words, they may not be able to operate for another 12 months, this is a major hint towards a potential bankruptcy. I've stayed away from crypto, and I'll continue to stay away from crypto. We've seen the fall of FTX and other exchanges and now the major concern from Silvergate leads me to believe there are more issues around the corner with more exchanges. This also continues to fuel my belief that the argument for wider adoption of these cryptos is fading fast.   Harrison: "Alternative Investments in Retirement Accounts”

Home Sales For 12 months in a row existing home sales have been declining. Recent numbers coming out from December show a drop of 36.9% from December 2021, month over month we saw a decline of 0.7%. Not helping the situation is the median existing home sale price did increase 1.3% from a year ago to $359,000. The inventory of unsold homes has climb to 980,000 as of the end of January but that still is a low amount of supply at 2.9 months. Interest rates on a 10-year treasury continue to increase, this will put more downward pressure on the housing market throughout 2023. We will continue to see declining numbers in new and existing home sales.   Credit Card Fee’s Running a small business is very hard, one must handle all the expenses, new accounts, and customers. But one thing that irritates me is when I go to a small business, and I use my credit card and they try to ding me for the 3% credit card fee. To me it’s just an easy out for them but it really is nothing more than a cost of doing business and is a convenient way for the customers to pay for their product. I’ve been going to the car wash place in Scripps Ranch for over 20 years and the last time I was there they charged me the 3% credit card fee, I told them that’s the last time they will see me. I’d rather see a business increase their prices and include all their expenses then try to hit me with a 3% credit card fee. What is next? Do they want us to pay their utilities? At my firm, we do allow our clients to pay for their financial planning fees by credit card and I would never think of charging them a 3% fee. I’m all for small businesses, but if you must charge a 3% credit card fee, you’re doing something wrong or you’re being greedy.   Inflation Decreasing I continue to say that I believe we will see more of a decrease in inflation overtime because I look at the raw cost of the goods and the cost of shipping those goods. One cost is shipping a standard 40-foot container from China to California. The peak cost was in September 2021 with a cost of $12,000. Today the average cost for that same 40-foot container is $1444. That is a decline of $10,556 or 88%. Another reason why I think prices will continue to fall slowly going forward.   Short vs. Long Term Thinking Last week’s strong economic information means we will probably see short term rates on the three- and six-month T-bill perhaps climb to 5% in the near future. Don’t get too excited about this. I want you to remember the old story about the tortoise and the hare. Do not drop your high-quality equities that are trading at reasonable valuations with decent dividends to rush into a 5% short term yield. Your short-term thinking will destroy your long-term investment results. Based on what we have in our portfolio, I would even be willing to bet that we should outperform the short-term treasuries. Remember in the fall equities are not looking where they are today but in the spring of 2024.

ChatGPT More hype has come into the markets, and it reminds me of the meme stocks and the cannabis companies. This time it is AI technology, and it is particularly around ChatGPT. Even large companies like Microsoft have seen a jump of nearly 20% in their stock price. The problem is ChatGPT doesn’t have an AGI or artificial general intelligence in which machines are able to learn and think for themselves. ChatGPT derives its information from word relationships found on the Internet and we know all the information on the Internet is not reliable which has led to incorrect responses from these AI products. So, while the excitement about ChatGPT is driving up stock prices, consumers will become disappointed with the responses they receive from ChatGPT, and I believe the stock prices will fall back again. One other potential pitfall could be litigation. We know how much our country loves lawsuits. To begin with who will be liable for misinformation? Also, another question mark is copyright protection. Copyrighted works are being used to train these AI services without consent, that could create more problems. For now, I'll avoid the hype! Retail Sales People may complain about the economy and inflation, but they are still spending. Retail sales in the month of January increased 3% from December, which easily topped the estimate for a 1.9% gain. Compared to last year retail sales were up 6.4%, which was right in line with the CPI reading of 6.4%. Compared to January 2022, every category in the report showed a gain in sales except for electronic and appliance stores which were down 6.3%. The big winner in the report continues to be food services and drinking places as they saw a gain of 25.2% compared to January 2022. Other big gainers included grocery stores up 6.6% and clothing and clothing accessory stores up 6.3%. With higher energy prices gas stations continued to see gains with an increase of 5.7% compared to last year. This is much more muted as we are now lapping the higher energy prices in 2022. All in all, I'd say this was a very strong report showing the consumer is still active. It confirms my belief that if we see a recession, it will be very mild. Option Contracts There’s a lot of risk in the market, especially with the technology companies and your expensive growth stocks. One indicator is the number of option contracts that are traded on a single day. In early February, 68 million option contracts were traded in a single day, that is an all-time record. I think this could also mean we could see a big drop again in the expensive growth stocks. 2023 Inflation The January CPI report was a disappointment today as inflation climbed 0.5% compared to December and 6.4% compared to last January. This is compared to the estimates for respective increases of 0.4% and 6.2%. The headline number also did see a small decline from December's gain of 6.5%. Food costs remain stubbornly high with prices gaining 10.1% year over year and food at home costs grew even more with an 11.3% increase. Energy also was a problem in the report as there was an 8.7% increase. Electricity was a big contributor as it was up 11.9% compared to last year. Shelter costs were up 7.9% compared to last year, and the monthly increase of 0.7% accounted for about half the monthly gain on the index as it accounts for about 1/3 of the entire index. I've talked about this in the past, but I do believe this component will soften throughout the year which would have a major impact on the overall CPI. There were some positives in the report as used cars & trucks saw an 11.6% decline compared to last year, televisions were down 13.2%, computers were down 6.2%, major appliances were down 3.9%, and bacon and related products were down 3.9%. I continue to believe that inflation will continue to decelerate as we progress through 2023, but it will likely remain a bumpy ride.

Short-Term Rentals We've talked a lot about the affordability problems when buying a new home, but one area we haven't discussed as much is the real estate investor. The short-term rental craze I believe created new investors who thought it would be easy to make money in real estate. Looking at the numbers, in 2021 investors made up 24% of single-family homes and in the first half of 2022 that number was still around 22%. This compares with a range of 15-16% annually going back to 2012. Unfortunately, things have started to change in the short-term rental market. According to the Wall Street Journal, one investor in Encinitas was able to rent her 2-bedroom condo for $1,000 per night on a holiday weekend, but she has had to drop her rates to $275 per night due to waning demand. The problem is not the demand, but it comes from the oversupply in the market. In fact, nights stayed were up 21.3% in the month of October when compared to last year, but listings surged 23.3% during the same time frame with 66,000 new rental properties listed in the month of October alone. With rising interest rates and lower rental rates, it becomes a whole lot harder to justify an investment in these properties and some prior investors could become at risk of not being able to keep up with the cash flow required to maintain the house. I believe this will lead to less demand in the housing market and a potential source of supply if investors need to sell underperforming properties. These factors could help bring down home prices even more. Young Investors Young investors across the nation who experienced big losses in investing are now pulling away from investing in stocks. Goldman Sachs estimates households will pull as much as $100 billion in 2023 from the stock market. This will hurt companies like Robinhood who encouraged young traders to do a lot of trading. Back in March 2021 Robinhood had as many as 4 million trades per day, that has now fallen to about 1.2 million trades per day. I personally think this is a good thing, many young investors just thought they could buy anything, and it would go up. Then they started using leverage and options which magnify the risk and that ultimately cost them even more. I have said for years if you’re averaging around 10% on your money over a 7-to-10-year period you’re doing pretty good. Unfortunately, some younger investors laughed at that and now have nothing left. And worse than that, they won’t come back to investing for many years missing out on some good growth over the years to come. Investing takes a lot of work and it’s not something that can be done quickly by trading stocks. There are very few people who can invest over the long term as their impatience and lack of discipline costs them good results. Super Bowl Betting America is excited about Super Bowl betting this year! A record 50.4 million Americans are expected to wager bets on the big game this Sunday. This a massive 61% increase from last year's record of 31 million Americans that said they would place a bet. In terms of the dollar amount this year it is anticipated there will be $16 B worth of bets on the game, which is more than double last year's amount of $7.6 B. From the financial standpoint, I must say this is a positive for the economy as consumers clearly have enough confidence and comfort in their financial situation to place bets. Personally, I won't be partaking in any bets this year. One thing that will be missing from this year's Super Bowl is those crypto commercials, especially from FTX. As for my pick, I'm going with the Eagles! Eurozone Approximately 6 to 9 months ago it was thought that the Eurozone was going to have an economic downturn that would destroy the region. That was mostly based on the fact that Russia had invaded Ukraine. In a surprise turn around, the Eurozone experienced economic growth in 2022 of 3.5%. That’s not the only surprise. It also surpassed the economic growth of the United States and China. Unemployment Rate Last week we saw the US unemployment rate drop to 3.4%, a low not seen since 1969. Keep in mind that is the average across the country so there are states that are below the 3.4%. The state of Utah has the lowest unemployment in the nation, coming in at 2.2%. You may be asking what state has the highest unemployment in the nation? That honor would go to the state of Nevada with an unemployment rate of 5.2%. AI & Home Prices There is a lot of buzz around ChatGPT and Bard from Google. I'd be very careful falling into the hype around this AI trade. Just a couple of thoughts here for potential risks. At this time the chatbot can contain factual inaccuracies, one that was pointed out was inventing fictious names or books that don't exist. With all the concern around misinformation that was spread on social media, how quickly will lawmakers need to step in and regulate this AI. Also, there are potential cases that could be extremely harmful to society liking hackers using it to write malicious code or students using it to do their homework. I do see there are some potential benefits here, but I do believe we should be extremely careful with this technology, and it could be years away before it can be trusted. While there are some exciting trends we will miss as value investors, I never like to fall for the hype and get burned. Some examples of this in the past include 3-D printing, pot stocks, and blockchain. Auto Insurance I was listening to a conference call from one of the insurance companies that we hold in the portfolio. Their earnings were down mostly from bad returns on the auto insurance side. They stated two reasons. First, increasing used car costs which by the way are coming down and will help the insurance company. Second, were higher settlement claims. In 2022 settlement claims in the United States were over $62 billion. This ultimately is a cost that is passed on to consumers. I have talked about this before with some overzealous attorneys increasing settlement costs. Don’t get me wrong, there are some good attorneys out there, but there are some that are very greedy. What this does as I’ve been saying all along, and this was also stated from the insurance company, is they now must raise insurance premiums. The company also pointed out that they will be pulling out of five states. This is where the consumer loses because they must pay higher premiums for excess settlements from those bad attorneys and there’s less competition in those five states and auto premiums will probably be increasing in those states. More competition means lower prices, less competition, higher prices. Movie Theaters Post Covid Movie theaters have had a hard time since Covid returning to the pre-pandemic days when they had profits. AMC has come out with what they call Sightline for shows that start after 4 PM. You will now have assigned seats in the movie theater and pay more for prime seats which are in the middle of the theater. If you want to sit down in front and break your neck that will save you some money. I guess the days of standing in line and rushing to be the first in the movie theater to get the best seats are over. I don’t think this will do much to improve the stock price which currently trades around $5/share. If you remember, this is one of those meme stocks and back in June 2021, the stock traded as high as $62/share. Daycare We continue to talk about the strong job market and how there are 11 million jobs that remain open. One obstacle for potential employees, specifically moms, has been daycare. There are currently about 58,000 fewer daycare workers in the US compared to February 2020. The cost of daycare for infants has also skyrocketed ranging anywhere from $8,000/year to as high $17,000/year in major metro areas. The cost may have to go higher because the average daycare employee earns about $19.74/hour. They just can’t compete with the national average of private sector workers earning around $32.93/hour. What is starting to happen is one of the spouses may elect not to go to work and instead stay home with the kids   Harrison - "When to file your taxes"

Labor Market Even with all the negative headlines, the labor market data remains resilient. The recent JOLTs report for December showed job openings increased 572,000 to a 5-month high of 11 million. This easily surpassed the estimate of 10.25 million openings and would mean there are 1.9 job openings for every available worker. Quits continued to remain elevated at 4.1 million. This is down from the peak in 2021, but if you look at the chart below you will see prior to Covid we hadn't seen a quits level above 4 million. Layoffs did climb slightly in the month to 1.5 million, but looking at the pre-Covid levels we are still below historical norms. I would continue to say we will see a reversion to normalcy rather than a crisis.   Jobs Report The jobs report was impressive to say the least. Headline payrolls for January increased 517,000, which blew past the estimate of 187,000 and comes on top of upward revisions to November and December which netted a gain of 71,000. The household survey showed an even larger gain at 894,000 and produced an unemployment rate of 3.4%, which was the lowest level since May 1969. Job gains occurred in every major sector with leisure and hospitality leading the way with an addition of 128,000 jobs, professional and business services added 82,000 jobs, government added 74,000 helped by the end of a strike from university workers, and healthcare rose by 58,000 jobs. The leisure and hospitality sector are now just 2.9% or 495,000 jobs below is February 2020 pre-pandemic level. Wage inflation was also reasonable with a 4.4% gain compared to last year. This was a deceleration compared to December's gain of 4.6%. The only major negatives I see are the participation rate and employment to population rate as they both remain below pre-pandemic levels. The participation rate came in at 62.4% vs 63.3% pre-pandemic and the employment to population rate was 60.2% vs 61.1% pre-pandemic. Overall, I'd say this was a very strong report and it continues to provide data that makes me believe we will not have a major recession.   Tailored Shareholder Reports Usually new regulation complicates the issue rather than clarifies it for the consumer. Recently, the SEC came out with a final rule called Tailored Shareholder Reports (TSR) which deals with mutual funds and exchange traded funds (ETFs). What I like about the rule is it mandates a 2-3-page document that will outline a fund's performance and fees, and give a brief summary along with some other information using plain English and charts. For those that invest in mutual funds and ETFs, this could be a good tool for comparison where to invest. If you’re working with a broker who is putting your investments into mutual funds, or ETF’s I’d recommend asking for the TSR on the investments they are putting you in or recommending.   Super Bowl Streaming The Super Bowl is now less than two weeks away and if you cut your cord from cable, you may have problems watching the Super Bowl. Last year it was easy because NBC carried the game, and you could simply switch over to Peacock and pay their $9.99/month subscription to watch the game. This year the big game is on Fox, and they don’t have a streaming service. You may have to look into sites like Hulu Plus, YouTube TV, or Sling TV. These are just a few suggestions but be prepared to pay more than $9.99/month. One other option you do have is good old rabbit ears antennas, which actually have advanced pretty well over the years. Fox still broadcasts over the air so that may be a free alternative. I’d start thinking about this soon, if you wait until Super Bowl Sunday morning, you may be running around to your neighbor's house to try to catch the big game.   Harrison – “Tax planning with the new RMD age”

Personal Consumption Expenditures The Personal Consumption Expenditures index (PCE) for December came in with an annual growth rate of 5.0%. This is down from the November level of 5.5%. Looking at the Core PCE, which strips out energy and food and is the indicator, the Fed closely monitors the inflation number looks even better with an annual growth rate of 4.4%. I've heard people continue to use the CPI and say that inflation is running at more than 3 times the Fed's 2.0% target. That is extremely misleading as the Core PCE is not nearly as high as the CPI. Overall, we still have work to do on inflation, but it is still decelerating at a good rate and I'm optimistic it will continue to improve as we progress towards the end of 2023. My projection is still that we will see one maybe two quarter point hikes from the Fed and then that rate would be maintained through the rest of the year. I do not see any rate cuts this year from the Fed as I believe the economy will be better than many fear. Tesla’s Reported Earnings Tesla reported earnings and they did very well. This sent the stock up as much as around 11% in trading. I have been against Tesla for years not because it’s a bad company but because it was too richly valued. That is now changing, the earnings for December 2024 stand at $5.79 with a price of the stock around $150 that gives a forward PE of 25.9. That's not great, but not as terrible as in the past. When the stock was at the low of $102 that would’ve been a forward PE of 17.6, much more reasonable. I’m not saying that Tesla is a buy, it still has more to drop or needs to see a larger increase in earnings for it to be considered a value. It is getting close, maybe in a year or two it could become a buy? Home Price Affordability Even with the recent declines in home prices, there is still a major affordability problem. In fact, looking at an affordability index from the National Association of Realtors (NAR) shows we are still out of line with pre-pandemic levels. The index is based on home prices, median family incomes and mortgage rates. Over the 12 months prior to Covid the index averaged 162 and the current estimate for January is a level of 106. The lower the number means the higher the problem is for affordability. There are a few ways the number could get back to the pre-pandemic level of 162. First, the average mortgage rate would need to fall to about 2.6%. Next, family incomes would need to increase by about 50%. Finally, prices for homes would need to fall by about another third. The most likely case is a combination of all 3 factors, but unfortunately, I don't see rates coming anywhere close to the 2.6% level nor do I see incomes spiking close to 50%. Therefore, I believe there is still more downside for home prices ahead. Debt Ceiling If you’ve been wondering why the yield on the 10-year treasury has been dropping it is because they have stopped issuing notes since we hit the limit. We just hit the debt ceiling, but anticipation of hitting that mark put a lot of downward pressure on the yield as demand and purchases of 10-year treasuries increased in anticipation of the debt ceiling. Once the limit is increased, then the government can go back to issuing more 10-year treasuries, and I believe the yield will increase. Layoffs and Over-Hiring You have heard about some major tech companies making big layoffs of 10,000 maybe 20,000 people and think, "oh my gosh this is huge." But if we go back just a few years to 2019, you will see that some companies may have over-hired. For instance, Meta-platforms back in 2019 had 44,942 employees. Now with data available for the 3rd quarter of 2022, the total headcount was at 87,314. That's an increase of 42,372 employees or over 94% in just a few years. Alphabet also over-hired with 2019 employees equaling 118,899 and as of the third quarter last year they increased their headcount by 67,882 to 186,779. The worst company with overconfidence in future growth would have to go to Amazon which had a 2019 headcount of 798,000 employees. That ballooned almost 100% to 1,544,000 employees, an increase of 746,000 employees. You may hear about more layoffs in 2023 for some tech companies, but keep in mind the 2019 numbers and realize that some companies let their hiring policies get out of control. Stock-Based Compensation Companies that use stock-based compensation when their stocks were rising made both employers and the employees happy. But what happens when the stock goes in reverse? No one is happy and shareholders lose the most. As a stock declines in value employees want more shares to equal what they received before, and employers need to keep the game going. They will issue more shares, but what that does is dilute future earnings even more. Be careful of investing in companies that excessively use stock-based compensation, the stocks could be flat for many years. Two companies that come to mind are Snap and Roku. Federal Reserve You may not know it, but the Federal Reserve has the ability to actually make profits. In 2021 the Fed earned $107.9 billion in profits but in 2022 that profit was cut in half to $58.4 billion because of rising interest rates. You may be wondering where the profits go. The Fed does not get to keep them. They send all their profits to the US treasury and if the Fed loses money, they create an IOU on the balance sheet. This is known as a deferred asset. They will carry that IOU until they once again make profits, and they will pay that IOU down before sending any more profits to the treasury. Declining Attention Span In a recent research study at the University of California Irvine, it was no surprise to learn that the attention span of both younger and older people has declined over the years. Back in 2004 people on average spent 150 seconds on a screen before switching. It has now declined to 47 seconds, a drop of over 2/3. The research also found that on average, people check their inboxes 77 times a day. I was surprised by that number, but it is on average. To restore our attention spans, people need to be more disciplined about when they check emails and use social media. If you only check it during certain times of the day, your attention span will increase, and your stress level will decrease. Try it. Let me know what you think. Working From Home Some employees working from home are still living in the Covid years thinking that they control the narrative of working from home. I remember people saying this was the new way of doing business. I said no it will go back to people going into the office. Those employees who are saying they would rather quit than go back in the office, be prepared to be unemployed. Those employees forget that if it’s so easy to work from home and not go in the office, then the employer can find someone overseas or in other places who will do the same job remotely for perhaps half the pay, and no health insurance or 401(k). I think over time we will see more employees heading back into the office because like it or not, a business is in business to make a profit not provide a social service. Offshore Oil Drilling There’s some good news long-term on the energy front. As of December 2022, approximately 600 rigs worldwide are available to lease for offshore oil drilling. It has been estimated that approximately 90% are working or under contract to work in the future. Looking back just five years, that number was only 63%. Another positive, based on demand, is contractors are now receiving about $400,000 a day for leasing their drill ships, that is nearly double what it was just two years ago. This is a big positive to the supply side of the equation for oil. Q4 GDP The headline advanced reading for Q4 GDP came in at 2.9%, which surpassed the estimate of 2.8%. Consumption (adjusted for inflation) was up 2.1% and 1.42% added to the headline number as goods were up 1.1% and services were up 2.6%. Residential investment was hit extremely hard as it was down 26.7% in the quarter and subtracted 1.29% from the headline number. Overall, private investment had a benefit of 0.27% to the headline number as the change in private inventories added 1.46% and nonresidential had a small positive contribution of 0.09% which was mainly due to an increase of 5.3% for intellectual property products. Net exports added 0.56% to the headline number as imports fell 4.6% in Q4, but exports fell at a lower rate of 1.3%. Government consumption added 0.64% to the headline number as spending grew 3.7%. A large portion of this came from federal non-defense spending which jumped 11.2% in the quarter. Overall, the report was lackluster and points to an economy that is decelerating. Chevron Buyback Chevron announced a $75 billion stock buyback to the shareholders. I can already hear the government and others saying how dare they do that; they should take that money and invest it in oil production to reduce prices. First off, shareholders take the risk of investing and should be rewarded when a company does well. The job of the CEO is to produce a good product and have returns for the owners of the company who are the shareholders. Why would a company invest billions of dollars into producing oil when down the road we know demand will be lower as we see more electric vehicles on the road not using oil. This is the best strategy for a company with a long-term time horizon. Remember, the government did add this year a 1% excise tax on stock buybacks which means the government will receive $750 million in extra tax from Chevron as it completes this buyback. Will that money go to something productive? Or will the government squander it away and waste it as usual on some silly programs. If you don’t like the company don’t buy their stock or gasoline. Peloton I keep seeing the commercial for Peloton that 92% of owners are still active on their Peloton. As the stock has now fallen to around $12-$13/share from its all-time highs of around $170/share, I’m curious how many people are still using their Peloton? I'd still rate this stock a sell and would like to see it become a profitable company before investing. S&P 500 One of my major concerns for the S&P 500 index remains its valuation. At the end of 2022 the index was trading at a Forward P/E of 16.65. That was down from the recent highs of over 22x, but I would still not consider it an attractive valuation as the 25-year average has been 16.82. There are two ways that the S&P could grow. There could be earnings growth, or the multiple could expand. For earnings growth I have seen estimates of around 4-5% earnings growth, which I think could still be optimistic. This means if the multiple were to remain constant, the S&P would grow around 4-5% this year. As for the multiple expansion, with interest rates rising and slowing growth I do not see the case to have the multiple rise. This is why I continue to believe the right stocks will outperform the market in 2023.   Harrison : "Shared Equity Agreements"

Inflation Big news on the inflation fronts today as the Producer Price Index (PPI) in December showed a monthly decline of 0.5% vs the estimate for a decline of 0.1%. Year over year the index showed an increase of 6.2% which is the lowest annual increase since March 2021 and is far from the high in March 2022 of 11.7%. This is a major positive as for over a year now I've been saying the CPI won't come down until the PPI comes down, as producers have needed to pass the higher costs onto consumers. A problem in the report is energy was a major benefit as the energy index fell 7.9% in the month and gasoline in particular was down 13.4%. Given the current landscape I do expect energy prices to increase from current levels, but not enough to make a dramatic difference to the inflation reports. Overall, this report gives me confidence in my estimate that we will see inflation in a range of 4-6% for 2023.   Consumer Spending Retail sales for December fell 1.1% compared to the prior month, this missed the estimate of 0.8%. Looking at the results compared to last December, retail sales climbed 6.0%. This did not keep pace with the CPI increase in the month of 6.5%, which likely means most if not all of the growth in retail sales was a function of higher prices. Areas that saw good growth compared to the prior year included non-store retailers as they were up 13.7%, food services and drinking places were up 12.1%, and grocery stores were up 7.3%. With lower gas prices in the month, gas stations saw a month over month decline of 4.6% but compared to last December sales were still 5.2% higher. Areas that struggled in the month continued to be electronics & appliances as sales fell 5.6%, department stores saw a decline of 0.6%, and furniture & home furnishing stores had a small gain of just 0.3%. I would say this report wasn't good, but again it wasn't overly concerning. It appears consumers are still spending but continue to prefer experiences rather than the products they loaded up on during Covid.   Debt Ceiling You may have seen the news about the concerns regarding the debt ceiling of $31.4T being reached. Frankly, I'm not too concerned about major problems stemming from this as it has been a recurring issue. In fact, from 1997-2022 the debt ceiling has been increased 22 times, which is essentially once per year. I do believe a deal will be reached to avoid jeopardizing the creditworthiness of the government. My concern is that we need to fix spending as we should not have to keep increasing this debt ceiling every year.    Costco Buyback Program I saw Costco announced a stock buyback program but looking at it closely it's unimpressive to say the least. The program authorizes $4 B worth of buybacks but that is through January 2027. The previous authorization was set to expire in April of this year and was adopted in 2019 with the same $4 B limit. Interestingly, the company only repurchased $1.4 B worth of shares under the program. Looking at the market cap for Costco of about $210 B, if the $4b was fully implemented that would only represent 1.9% of the overall shares. Also, considering the shares trade at about 30x 2024 earnings I believe repurchasing shares at this level would be a waste of capital.   Harrison – “Life Insurance Review”

Consumer Price Index (CPI) As anticipated, the CPI report showed a deceleration in inflation as the index gained 6.5% for the 12 months ending in December. This compares to 7.1% in the month of November and the peak of 9.1% in the month of June. Areas that remained extremely elevated included eggs up 59.9% over the last 12 months, fuel oil was up 41.5%, and airfare was up 28.5%. There are some areas that showed year-over-year declines with televisions falling 14.4%, used cars and trucks were down 8.8%, beef and veal were down 3.1%, bacon and related products were down 3.7%, and gasoline was down 2%. Gas prices have declined substantially and were a major contributor to the month over month decline of 0.1% for the CPI. I do worry energy prices could struggle to maintain these levels as China reopens and the US no longer releases oil from the SPR. Shelter continues to be a major problem as it rose 7.5% compared to the prior year. This continues to weigh heavily on the report as it occupies a weighting of around 33% with close to 8% coming from rents and 24% coming from private housing. I do believe with the affordability issues this growth rate will slow as the year progresses. I believe inflation will continue on its deceleration path and will maintain a level of around 4-6% in 2023. It is important to note the Fed prefers to use a measure known as the PCE and that will be released on January 27th. It appears this report has continued to come in lower than the CPI. As examples, in November PCE was 5.5% when CPI was 7.1%, in October PCE was 6.1% when CPI was 7.7%, and in September PCE was 6.3% when CPI was 8.2%. If that trend holds, we could see a PCE number that has 4 at the front end of it. While still a concern, I believe inflation will be a much smaller problem in 2023.   Santa Claus Rally The Santa Claus rally did happen this year, but you may not have noticed because it was only a gain of 0.8%. This is for the official Santa Claus rally which went from December 23 to January 4, 2023. It doesn’t happen every year, but this is the seventh year in a row that we have seen the Santa Claus rally. Don't be fooled by other imitations of the Santa Claus rally, the official one going back to 1971 is the last five trading days of the year and the first two trading days in January of the new year.   Stocks At my investment firm we like to invest in companies that pay and raise their dividends over time. We are happy to say that in 2022 the S&P 500 companies paid approximately $561 billion in dividends, up from $511 billion one year earlier. It's also worth noting that 373 companies in the S&P 500 increased their dividends in 2022 about 20 more than the 353 that increased dividends in 2021. Another benefit for shareholders is stock buybacks, which was about $960 billion in 2022. We believe this will decline somewhat because our wonderful lawmakers in Washington decided to add a 1% excise tax which will take effect in January on companies buying back their stock.   NFL NFL ratings were down about 3% from a year earlier hurt by the Thursday Night Football games on Amazon. Nielsen ratings said viewership fell to 9.6 million viewers that streamed on Amazon during those Thursday night games. That was a large decline from the 16.2 million viewers last year when the game was on Fox, the NFL Network, and Amazon. There could be a problem with advertisers who were guaranteed by Amazon that they would average 12.6 million viewers per game as they missed that mark. Also, for comparison, normally Sunday afternoon game viewership is around 19 million viewers. Fox and CBS carried Sunday afternoon games.   Harrison Johnson, CFP®: "529 to Roth Rollover"

Job Market The jobs report brought plenty of welcome news as the headline payrolls grew by 223,000 in the month of December, which easily topped the estimate of 200,000. This was a decrease from November's gain of 256,000, but it's important to remember that we've been discussing a deceleration in the jobs market for months now. Areas that remained hot included health care and social assistance at 74,400, leisure and hospitality at 67,000, and construction also grew by 28,000 jobs. Interestingly, Julia Pollack who is the chief economist at ZipRecruiter pointed out, “Health care has recovered to its pre-pandemic levels, but nowhere near its pre-pandemic trend, and hospitality is still not back to its pre-pandemic levels.” On the downside, information jobs saw a decline of 5,000 and professional and business services saw a decline of 6,000 jobs in the month. Overall, the unemployment rate fell back to 3.5%, which ties the lowest level since 1969. Part of this stems from the lower participation rate which currently stands at 62.3%, a full percentage point below where we were in February 2020 before the pandemic. Also, another measure of unemployment that takes into account discouraged workers and those holding part-time jobs for economic reasons also declined, falling to 6.5%. This is the lowest-ever reading in a data set that goes back to 1994. Probably the biggest market mover was the fact that wage inflation was up just 4.6% compared to the estimate of 5.0%.   Supply Management (ISM) One survey that doesn't get a ton of media coverage is the Institute for Supply Management (ISM) non-manufacturing PMI. This is an economic index based on surveys of more than 400 non-manufacturing (or services) firms' purchasing and supply executives. The recent report showed a reading of 49.6 which missed the estimate of 55.0 and was down from 56.5 in November. This was the first time since May 2020 the reading was below 50. A reading below 50 indicates a contraction in the service economy. The area I thought stood out the most was new orders received by service businesses as they fell 45.2 from 56.0 in November and marked the lowest level since May 2020 and was the weakest reading since 2009, excluding the collapse during the pandemic. The reason this is so important is that Fed Chairman Powell is pointed to concerns over price increases in the service economy, but if the demand is not there it will be harder to raise prices. Hopefully they will take this into account at their next meeting.   Tech Employees You have seen the headlines about all the laid off tech employees and may be thinking this is bad for the economy. What the media does not show you is the other side. A recent survey from ZipRecruiter shows that 79% of the laid off tech employees found a new job within three months. The job market remains strong, which I believe points to a recession that will be shorter and milder than other recessions.   Harrison Johnson, CFP®: "Secure Act 2.0"

In this episode, Brent and Chase discuss the education and fundamentals of investing and why long-term investing strategies work best over time. They also talk through topics like, price earnings (PE) ratio, book value, cash flow, dividend payout ratio, what to look out for on a company’s balance sheet, inventory turnover, buying strategies, and more! 

Inflation As expected, inflation continued to decelerate in the month of November. I was thinking there was a small possibility we might see a reading for the headline number in the high 6% range, but the headline number ended up coming in at 7.1%. This was lower than the expectation of 7.3% and below October's reading of 7.8%. As a reminder the peak came in June with a reading of 9%. Some areas that stood out were eggs which were up 49.1% compared to last year, airfare was up 36%, energy was up 13.1% as electricity was up 13.7% and unleaded gasoline was up 9.8% and shelter was up 7.2%. One item that hasn't been discussed much is that the US has had one of the worst bird flus in history, which has impacted the price of eggs. As for energy I continue to believe next year the comparisons will be much more favorable, especially considering the energy index fell 1.2% compared to last month as gas prices fell 2%. Housing costs, which make up about 1/3 of the entire index, have shown signs of cooling and I believe they will be much more muted in 2023. Also, I wanted to point out that used car prices fell 3.3% compared to last year. Remember at the beginning of the year when used car prices were up 40% in the month of February compared to the prior year? I believe like used car prices many of these categories that are extremely elevated will normalize next year also helping to reduce inflation. My expectation is that for December we will see a reading that shows at 6 at the front of it and for next year inflation will be in the range of 4-6% for the year. I believe this will bode well for the right stocks in 2023.   The Fed Report Markets did not like what Fed Chair Jerome Powell had to say after the Fed's meeting. The decision to increase rates 50 basis points or 0.5% was widely anticipated. It brings the target level to a range of 4.25% - 4.5%, which is the highest level in 15 years. What the market did not like was the terminal rate, or the point where the Fed expects to end rate hikes as it was higher than expected at 5.1%. I continue to believe this would be too high as the Fed should give the rate hikes and quantitative tightening (QT) more time to work through the economy. The Fed has been allowing a capped total of $95 B worth of bonds to roll off the balance sheet each month and since early June the balance sheet has declined $332 B to $8.63 T. I believe that inflation will naturally continue to decelerate next year and a reduction in the terminal rate could occur in the first part of the year. A softer tone from the Fed would be beneficial for the right stocks.   Job Market I continue to watch the jobs market looking at both past information and future information because I believe a strong job market will keep a recession very mild and it may not even be noticeable. I continue to hear from people that they are seeing all these layoffs from tech companies, but I talk about how there are many other companies that are hiring in 2023. Based on a recent survey, a nationwide staffing firm, LaSalle Network, says about 84% of companies it works with are planning to hire in 2023. This is roughly 20% higher than those planned to hire a year ago. The CEO Tom Gimbel says he has seen a 50% increase from last year in demand for salespeople and this is a positive sign because when a firm increases staff in the sales department they believe they have room to grow. So don’t just look at the headlines of 10,000 employees being laid off at some big tech firm and think the entire job market is collapsing. Look at the overall economic job market.   Harrison – “Sole proprietor or S-Corp pt. 2”

Producer Price Index (PPI) Although the headline Producer Price Index (PPI) number saw a gain of 0.3% compared to last month, I actually thought the report was in line with what we’d been expecting. If you look compared to last year the PPI increased 7.4% which is a nice deceleration from the 8% level in October and the peak of 11.7% in March. Part of the reason for the deceleration is the comps are getting harder. What I mean by that is last year the PPI showed an annual gain of 10% compared to the prior year. When we lap the 11.7% number in March, I believe it will be hard to grow another 7-8% off that number, especially with the decline in many commodities from their peak levels. As a reminder we don't believe inflation will be disappearing in 2023, we believe it will be decelerating to a level of around 4-6% for the full year.   Freight Costs More positives on the inflation front. Remember how constrained shipping was last year and how expensive it had become? Well now if you look at the prices, they have come way down. Freight costs from Asia-U.S. West Coast have fallen 90% compared to last year and now stand around $1,426/FEU (forty-foot equivalent unit). This pushed prices down by 5% when compared to 2019 levels. Freight costs from Asia-U.S. East Coast now stand around $3,723/FEU which is down 78% compared to last year and costs from Asia-Northern Europe are around $3,974/FEU which is 73% lower than last year.   Big Tech Companies I learned a long time ago not to just read headlines and think you understand what is going on. People have been saying things are getting worse because they see the big tech companies laying off people with headlines showing numbers like 10,000 layoffs coming. We have said that’s only a small part of the big picture and if you look at the recent jobs report, you will see the information sector, which includes many tech jobs, had a net increase of 20,000 jobs. I know it takes time to read the details when information comes out but if you don’t, you won’t have a clear understanding of what is really going on.   Plant-Based Meat Remember about three years ago the fad was no one was going to eat red meat and the company Beyond Meat was going to take over the meat aisle in the grocery store. Fast forward to today and the company has seen its grocery stores sales declining 12% even as they are cutting prices to try to boost their sales. In the most recent earnings report the revenue fell 23% year after year yielding a quarterly loss of $102 million. I still remember some people telling me I was missing out that I did not get it that people were switching over to plant-based meat. Back in the summer of 2019 the stock had peaked over $196 and is now down over 90% trading at $14 a share. When it comes to investing, I will always take strong fundamentals over the hype of the next best thing.   Harrison – “Sole proprietor or S-Corp”

Jobs Job gains showed a nice increase of 263,000 in November which easily topped the estimate of 200,000. Leisure and hospitality remained a major leader with job gains totaling 88,000 in the month as the sector continues to battle back from Covid. This sector still remains 5.8% or 980,000 jobs below February 2020. Retail trade and transportation and warehousing were the standout losers in the report as both sectors saw a decline in payrolls. Retail trade fell by about 30,000 jobs as general merchandise stores saw employment decline by 32,000 jobs and electronics and appliance stores saw employment decline by 4,000 jobs in the month. Transportation and warehousing had a decline of 15,000 jobs in the month. I was somewhat surprised to see these two sectors decline considering it's the holiday season, but the excess inventory levels could be weighing on employment as retailers could be trying to focus on expenses including labor and transportation and warehousing. The item I believe weighed most on the markets was the increase of 5.1% in average hourly earnings. It surpassed the estimate of 4.6% and it could give the Fed more ammo to continue on its rate hiking path as it tries to bring down inflation. I do believe this should not be a major concern for the Fed because, like inflation overall, I think wage gains will begin to slow to a more normalized level next year as the job market decelerates.   Personal Consumption Expenditures (PCE) The PCE, which is known as the Personal Consumption Expenditures, came out at 6% for October over the last 12 months. As we had predicted months ago these inflation indexes would show signs of easing. This is why there has been some recovery in equities. The PCE is what the Federal Reserve looks at in regard to interest rates so there probably will not be any surprises going forward. We continue to believe that inflation will slow down and if you’ve been out of the market and in particular the right equities since summer you have missed out. There are still some opportunities to get back in for quality long-term investors but sitting on the sidelines for the next 6 to 12 months based on current data will be a mistake.   National Retail Federation (NRF) You’ve probably heard that this is not going to be a great Christmas for retail. But as we say many times in our posts and other commentary, it’s important to understand what is being said and how it is being said. The estimate by the National Retail Federation (NRF) for holiday sales is expected to be between $942 billion to $960 billion, an increase of 6-8% over the $889 billion in 2021. This was a 13.5% increase over 2020. If we look back to 2019 when the economy was pretty strong, and everyone felt good, the NRF said holiday sales were $716 billion. Comparing the low end for 2022 of $942 billion, that’s a 31.6% increase from 2019. It does appear holiday shopping has gotten off to a good start considering the record of 196.7 million shoppers from Thanksgiving Day through Cyber Monday. This topped last year's level of 176 million shoppers and easily surpassed the NRF's estimate for 166.3 million shoppers. I don’t know about you, but I think those are pretty good numbers, all things being equal.   SEC The SEC, also known as the Securities Exchange Commission, had a busy fiscal year, which ended September 30th. Their penalties were up 67% from the previous year, hitting an all-time record of $6.4 billion. I wonder where that money will go, or will it get lost in the tangled web of government administration? The money is supposed to go to a fund that either protects investors, a fund that refunds investors who lost money, or the third option, the US treasury general fund.   Harrison – “Change for charitable donations this year”

Consumer Price Index Even with all the fear, the consumer is still shopping. In October, retail sales were up 1.3% compared to September and up 8.3% compared to October 2021. This outpaced the inflation rate in the October CPI report which saw prices grow 0.4% month-over-month and 7.7% year-over-year. There were definitely areas in the retail sales report that benefited from higher prices as sales at gasoline stations were up 17.8% compared to last year and grocery stores saw sales climb 8.0% during the same time frame. For reference, the CPI showed gas prices climbed 17.5% year-over-year and food at home prices were up 12.4%. Other areas of strength in the report compared to last October were food services and drinking places up 14.1%, non-store retailers up 11.5%, and building material & garden equipment & supplies dealers up 9.2%. The only two areas that saw declines were department stores, which fell 1.6% and electronics & appliance stores, which saw a decline of 12.1%. Two potential catalysts for the report included an additional Amazon Prime day in the month and the distribution of "inflation relief checks" of up to $1,050 in California. I hope that we do not see additional stimulus like this going forward as I believe it could create even more problems with inflation as it would create artificial demand. Inflation Good news on the inflation fronts this morning as the October Producer Price Index (PPI) climbed 0.2% compared to last month. This was below the estimate of 0.4% and resulted in a year-over-year gain of 8%. It's crazy to think that an 8% increase is good news, but the numbers are decelerating. In September the year-over-year gain was 8.4% and back in March the report showed a gain of 11.7%. If commodity prices can stabilize/decrease even slightly and if we stop pumping money into the economy, I continue to believe inflation will be much less of a problem in 2023. Home Sales Mark down 9 straight monthly declines in existing home sales as there was a decline of 5.9% from September to October. With an annualized pace of 4.43 million units in the month of October, existing home sales fell 28.4% compared to October 2021 and registered the slowest pace since December 2011, excluding the brief drop that occurred during the beginning of Covid. Demand has clearly taken a drastic fall but supply still remains an issue. With just 1.22 million homes for sale at the end of the month there's still just a 3.3-month supply at the current sales pace. With prices still expensive and mortgage rates likely to remain high, I'm still expecting a weak housing market in 2023. S&P 500 Companies As interest rates are rising, corporations are paying off debt to reduce expenses. The S&P 500 companies have about $9.3 trillion in debt and with businesses performing well, they are sitting on about $2 trillion in cash which is close to $500 billion more than these companies had in 2019. This will strengthen the businesses even more, increasing the value of many of these companies. Costco vs. Sam’s Club We all feel that the price for everything is going up, but there is one thing I found that for nearly 40 years has stayed at the same price. That is a hotdog and drink at Costco. Since 1985 that price has stayed at $1.50 and also, they have not done any shrinkage to the product. If you want a better deal than that you can now head on over to Sam’s Club and get a hotdog and drink for $1.38. To keep prices low this is what the economy needs, more competition & more supply, not a reduction in demand.   Harrison Johnson (CFP) - Income Related Monthly Adjusted Amount (IRMAA)

CPI Report The market rallied this morning on news inflation was not as bad as feared. The headline CPI number for October came in at 7.7% compared to last year, which was lower than the estimate of 7.9% and below last month's reading of 8.2%. Back in June the CPI hit 9.1%. I believe some investors believe this number could help lead to a Fed pivot, but I'm still not optimistic given their stance of being strong to fight inflation. With that being said, I believe they should slow down and let these rate hikes and Quantitative Tightening work through the economy. One major factor that I find interesting in the report is that rising shelter costs contributed more than half the monthly gain as it increased 0.8% compared to last month and was up 6.9% compared to last year. This was the highest annual increase since 1982, but one thing to take into consideration is that rising shelter costs don't necessarily have a large impact on the entire population. In fact, with more than 65% of the population owning their home, the monthly expense is much more fixed and shouldn't be subject to the current inflation we are seeing. I hope the Fed takes that into consideration as the report needs to be analyzed in its entirety.   Job Market I continue to believe that the feared recession will be mild. I have talked about how the strong job market has continued but one other aspect that is continuing is a lot of liquidity in the economy through what is known as the M2. M2 is a measure of the amount of money that includes currency, deposits, and shares in retail money market mutual funds. Like the job market this is holding strong at just under $22 trillion. Compare that to about three years ago when it was well under $16 trillion. So not only do consumers have a job to provide cash flow but savings accounts are flush with cash to continue to consume. CBDC’s (Central Bank Digital Currency) I have talked in the past about CBDC’s which are known as Central Bank Digital Currency and said that countries are moving in that direction. No surprise that governments move slowly, but as of today more than 100 countries and monetary authorities which include the European Central Bank, and the United States Federal Reserve are looking into how to digitize their currencies. But the direction they are going is not what you would think. They are not turning to the popular cryptocurrencies like Bitcoin or Ethereum for advice, they are turning to the big tech companies like Microsoft, Alphabet and even Amazon. The reason they are turning to these big tech companies is because of their development of digital wallets and smart phone apps. I still say if the world goes in this direction of Central Bank Digital Currencies the use of crypto currencies would be worthless.   Cryptocurrency Balance Sheets Balance sheets matter! I did a post on these crypto exchanges a few months ago questioning the assets for many of these crypto exchanges and now we are seeing the repercussions for weak balance sheets and overleverage as FTX announced solvency issues. FTX and its CEO Sam Bankman-Fried were seen as leaders in the crypto space and now it is collapsing. Bitcoin fell to under $17,000 this morning and many other cryptos are faring even worse. As a reminder, Bitcoin's all time high was close to $70,000. There is nothing in the world of crypto at this point in time that entices me, and this only adds to my concerns for the "investment" category.