Smart Investing with Brent & Chase Wilsey

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

Church pension plans may be at risk I hate to say this because we all want to believe that one of the safest places to go is church. Unfortunately, there are church pension plans like Saint Claire’s Hospital in Schenectady, New York and Saint Joseph Hospital in Rhode Island that had no or very little money left for retirees when it was time for their retirement. You may be wondering how can that be? Pension plans should be safe especially under federal law where there are protections from the Employee Retirement Income Security Act of 1974, which is commonly known as ERISA. You may also think if you know something about pension plans that employers must pay into the pension benefit guarantee corporation or what is also known as the PBGC. Unfortunately, when the government came up with the federal law on pension plans to protect retirees, there was concern about the constitutional separation of church and state and they did not want to cross that line. So they exempted churches and employers related to the church, which would include schools, hospitals and publishers. Church pension plans are allowed to contribute to the pension benefit guarantee corporation, but they’re not required to and unfortunately most do not. It is sad that we cannot trust some of our religious leaders to protect our financial future. If you or someone you know works for a type of association related to a church and they have a pension plan they may want to dig deep into it to make sure it’s really there. Unfortunately, there have been church pension plans that have exaggerated the returns on their investments in their pension plan and ultimately collapsed when people began retiring. It may be unfortunate but it could be wise to have a secondary retirement plan if you work for a church just to be on the safe side so you have something there in your golden years!    Structured products are back from 2008 Structured products that destroyed the economy in 2008 are back once again. In 2008 there was nearly $1.8 trillion of structured products issued. For 2025, the experts are forecasting structured product issuance of $2 trillion. If you don’t understand what a structure product is, it is nothing fancy other than Wall Street creating loans that hide their true value. In 2008 these were mainly mortgage-backed loans that Wall Street sold and told people there’s no way that these borrowers would default on their real estate loans. Today, they are even riskier with the loans backed by weak assets such as credit card debt, lease payments on cars, airplanes, golf carts and even plastic surgery loans. Recently in Las Vegas there was a convention for four days that was packed with bankers from Wall Street and around the country that were all in the buzz about the hype of the profits they can make off of these structured products. So far investors have been safe and have not had any losses, but that will change in the years to come especially if the economy weakens. With higher demand, prices for these products are now higher and I believe overpriced. The higher demand also creates riskier investments that look similar to products with less risk but make no mistake, they have far greater risk. It appears to me that the greed on Wall Street is back and the bankers are trying to tell you that stock investing is out. They tell you that you should be putting your money into these structured products for diversification to avoid market fluctuations, but the real reason for this is the fees they make are so much higher than if you just invested in good quality equities that pay dividends and grow over the long-term. Wall Street makes nothing off of that!   Jobs report seems uneventful, which is a good thing February nonfarm payrolls increased by 151k in the month, which was less than the estimate of 170k. While I wouldn’t say that’s a positive, it was better than last month’s reading of 125k and it still shows the labor market remained healthy. Revisions to the previous two months were extremely minor as December was revised up by 16k and January was revised down by 18k for a net impact of -2k. Many areas remained strong with health care and social assistance adding slightly over 63k jobs, construction saw growth of 19k jobs, transportation and warehousing was up close to 18k jobs, and manufacturing increased by 10k jobs. Some areas were a little disappointing with professional and business services declining by 2k jobs, retail trade fell by a little over 6k jobs, and leisure and hospitality was the biggest drag with a decline of 16k jobs. The big question many people had was if the cuts from the Department of Government Efficiency, also known as DOGE, would be felt in this report. It appears there was a minor impact as government jobs actually increased by 11k in the month, but that was in spite of a decline of 10k federal jobs. My estimation is that we will see the declines for government jobs increase in future months as the survey data came largely after many of these announced job cuts. In a separate report from outplacement firm Challenger, Gray & Christmas there were 62,242 federal job cuts in the month of February. The report also showed U.S. employers announced 172,017 layoffs in the month of February, which was the highest monthly amount since July 2020. Announced layoffs through the first two months of the year totaled 221,812, which was the highest for the period since 2009 and up 33% compared to the same period last year. While this may sound concerning, the big question that we will have to follow is can the private sector replace these cuts with new hiring? Based on the continued strength we have seen in job openings; I believe the labor market will remain in a good place. With that said, the data should definitely be much more eventful in the months to come.   Avoid State Taxes from Federal Debt Interest rates have been higher than normal for the last several years, and many investors have been taking advantage of this by placing cash in areas that pay higher rates of interest.  A great way to do this is by buying U.S. Treasury Obligations such as Treasury bills, notes, and bonds.  These are guaranteed, often pay a higher interest rate than high-yield savings accounts or CDs, and the interest is exempt from income tax at the state level. By purchasing a money market mutual fund that holds exclusively U.S. Treasury Obligations, you keep all those benefits while also maintaining liquidity.  While this should not be viewed as a long-term investment, it is a great place for short-term cash.  However, in order to receive the tax benefit, the interest income must be property reported.  Every year investors receive 1099-INT’s for interest income and 1099-DIV’s for dividend income which includes interest from U.S. Treasury Obligations.  However, the tax-exempt status of the interest is not always obvious on the 1099 form, especially when the interest came from a fund.  Every year, custodians like Schwab, Fidelity, and Vanguard produce a supplementary tax information form that breaks down how much of their funds’ income was from non-taxable government debt.  This form along with the 1099 can be used to calculate exactly how much tax-exempt interest you had so that you can correctly report your investment income.  Whether you do your taxes yourself, or work with a tax preparer, make sure you are aware of any federal debt interest so that you don’t overpay on your state income taxes.   Companies Discussed: Sempra (SRE), The Mosaic Company (MOS), Zoom Communications Inc. (ZM), & Discover Financial Services (DFS)

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

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

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

Job openings post a sharp decline The Job Openings and Labor Turnover Survey, also known as the JOLTs report, showed job openings of 7.6 million in the month of December. This was below the estimate of 8 million and the reading of 8.09 million in the month of November. While this may sound disappointing, this still leaves the ratio of open jobs to available workers at 1.1 to 1. A softening labor market is still not a bad thing considering it is coming from such a strong spot where workers have had an immense amount of power over employers for a couple of years. The Fed wants to make sure the labor market isn't too strong as it could cause inflationary concerns, so I actually see this as a positive considering it is still a good report, but not too strong. I still believe the labor market could soften further without it being problematic for the economy.   Jobs growth still looks positive Although the nonfarm payrolls growth of 143,000 in the month of January missed the expectation of 169,000, I still see the number as healthy for a growing economy. This number also came after upward revisions of 100,000 for December and November. The January number was slightly off the average of 166,000 in 2024, but I would expect to see a lower total in 2025 given the fact that the unemployment rate is extremely healthy at 4%. I was surprised to see wage growth accelerate to 4.1% in the month, which was higher than last month’s reading of 3.9% and was at the highest level since May 2024 when it also registered 4.1%. At this level I wouldn’t say wage inflation is problematic, but I would say it is worth watching. If it reaccelerated to a higher level that could pose problems for the battle over inflation. I would say overall the job report looked healthy with no major surprises and for the most part it would point to a labor market that is continuing to soften, which I believe is good for our economy as a whole.   Redemptions are high for climate mutual funds Climate mutual funds, sometimes called green funds, grew quite rapidly from 2019 through the beginning of 2024. Apparently, investors began realizing that the equity concentration in these mutual funds really hurt their returns in 2024. Redemptions of $30 billion means investors wanted to leave these climate sensitive mutual funds to invest elsewhere. It is estimated worldwide that climate focused mutual funds are approximately $534 billion. Redemptions of $30 billion is a pretty big hit considering that equates to around 5 to 6% of fund assets. Based on how times are changing, I believe going forward investors should not expect their returns to keep pace with the overall market. Another problem for investors is when redemptions in these funds are high, the fund manager must sell off assets to raise cash, perhaps at lower prices which can really hurt the performance of the fund going forward. This is because the stocks have been sold out of the portfolio to raise cash and if the stocks rebound, the fund performance will lag because of the missing equities that had to be sold. On the other side, if they sell positions with a gain, this will create tax consequences for investors.    Behind the curtain of private equity Private equity over the last few years has become the cool thing in investing. Investors have been trying to get into private equity as an alternative asset, which I personally do not believe in because of the behind the curtain details no one knows what’s going on. Over the last 10 years, private equity assets have increase 300% to around $4 trillion. What’s even more amazing is that the fees collected by these private equity firms has increased 600%! A trade group by the name Institutional Limited Partners Association has had enough. They are pushing for new guidelines to standardize financial reporting for private equity investors including public pension plans, university endowments, and charitable foundations. What I thought was crazy is that private equity firms will vary how much they disclose to their clients based on how much they invest. The small investors will get less information than the bigger investors. In my opinion, it is not a wise place to put your money as I like to know what is going on with my investments. There are ways that the private equity firms are enhancing returns by using certain types of financial engineering as opposed to the old way of selling the companies they buy and returning cash to the investors. The most revealing thing I could find was the median fee that the small investors pay is somewhere around 2%. I have said many times in the past if your broker is trying to sell you or put you into the hot private equity market, I recommend saying no thank you and find another broker.   Are 401(k) Loans a Good Idea? Taking a 401(k) loan may seem like an attractive option for quick access to cash, but it often comes with significant financial drawbacks that make it a bad idea. When you borrow from your 401(k), you are essentially taking money out of your retirement savings, which means losing potential investment growth and compounding returns that are crucial for long-term wealth accumulation. Although you repay yourself with interest, the interest rate is usually lower than what your investments could have earned if left untouched. Additionally, 401(k) loans must be repaid within a set timeframe, and if you leave your job, either voluntarily or involuntarily, the outstanding balance becomes due. Failure to repay results in it being treated as a distribution, triggering income taxes and, if you are under 59½, an additional 10% early withdrawal penalty, plus a 2.5% penalty in California. This can lead to a significant tax burden and further reduce your retirement savings. Moreover, and this is the biggest drawback in my opinion, when you repay the loan with interest, even though you are paying that interest to yourself, you are paying that interest with after-tax dollars which means you are being taxed twice.   First you have to earn that money and pay taxes on it in order to pay the interest, and you are taxed again when you withdraw that money in retirement. Many people also fall into the trap of taking multiple loans, which can create a cycle of dependency and derail long-term financial security. While a 401(k) loan might seem like a convenient way to borrow, the risks of lost investment growth, tax consequences, and potential repayment difficulties make it an unwise financial move in most situations.   Companies Discussed: Fox Corporation (FOXA), PVH Corp. (PVH), Dollar General Corporation (DG), United Parcel Service, Inc. (UPS)

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

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

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

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