"I Won't Back Down"

      Tom Petty recorded this song in April of 1989 as the lead single on the album "Full Moon Fever". The song,  written and recorded by Petty and Jeff Lynne, included George Harrison and Roy Orbison as vocalists. Petty's musical career was inspired by watching the Beatles perform live on the Ed Sullivan show. The album peaked at #3 on the Billbord Top 200 and was certified 5X platinum in the USA. Sadly, Tom Petty died of an accidental drug overdose in 2017.

     The message I derive from this song is to hold your ground in the face of uncertainty like the period we are now facing. People like me, who like to research and pick their own investments, and even professional investment advisors put a great deal of time and energy into choosing the right investment mix for themselves and clients. Why should we abandon all that work every time something happens in Washingtom or talk of recession is all over the financial news media? I have lived through many recessions, regime changes, financial crises, hyper-inflation, wars, and even a global pandemic and every time my portfolio recovers and goes on to new highs. The "experts" on TV would love to scare people into selling stock at a market low and convert to a large cash position but that is exactly what NOT to do. The fact is that you should be buying when good companies are being punished by policies beyond their control. 

     Nearly every evening, while I enjoy my favorite beverage, I watch my favorite financial show "Fast Money" on CNBC. The panelists and guests are very knowledgeable about stocks, bonds, trade, and political risks. I will listen and try to learn from them but rarely act on their recommendations because their message is largely geared toward traders, not investors. They are expressing opinions which are often debated and hotly disagreed on. Everyone has an opinion and I have mine. I can be right on my forecasts just as often as the experts and wrong just as often too. I don't need their mistakes added to my own. It is also important to remember that these people must fill one hour of content every night. This results in a lot of rambling talk that really tells you nothing about the direction of markets. Sometime I think that divergent opinions are staged just to spice-up the show and provide minutes of content. I won't make investment decisions based on financial drivel.

     If you make your own financial decisions, stay true to your choices of stocks, bonds, asset allocation, and tax strategies. If you find that your investments are out of favor, just wait and the pundits will love them again for the same reasons that you found them attractive in the first place. Like Tom sang, "Hold your ground, don't back down. Just remember, like the experts, you have the right to be wrong.

The Long Run

           The Eagles released "The Long Run" in 1979 on the Asylum record label. In addition to the song "The Long Run", the album contained two other hits in "I Can't Yell You Why" and "Heartache Tonight". The album was certified 7X platnum by RIAA and sold 8 million copies in the US. This was the sixth and last studio album for the original group and for Asylum records. The album debuted at #2 and hit #1 one week later holding that position for nine weeks.

     During market downturns like the one we are experiencing currently, I have to remind myself that investing (not trading) is a long term endeavor. The tarriffs recently announced by the Trump administration is a disruptive force in an already volatile market. Before the tarriffs roiled the stock market, a rotation was underway from the mag seven stocks (AI) into the other 493 stocks of the S&P 500 index. The one thing that markets don't like is uncertainty and currently there is plenty of it. CEO's are uncertain of their supply chains, costs of materials, expansion plans, investment in technology, and production levels which involves new hiring. As a result of this chaos, they tend to do nothing to add growth to their business and the economy. If clarity is not provided soon to the business community, then the R word (recession) may become a reality. If the slow-down in business activity is not enough, consider the fact that the stock market has lost 4 trillion dollars in value in the last month due to trade policies. Don't count on the fed to cut interest rates to bail-out the Trump administration's actions because the net effect of tarriffs is rising prices and more inflation.The next few months will test Jerome Powell's resolve to resist White House pressure and stick with his dual mandate of price stability and full employment.

     The silver lining to all this is that some former market darlings are now on sale at reasonable valuations considering their growth potential. Take Nvidia, it is trading at 24.4 times earnings and projected to grow 44% in the forseeable future. Financial stocks like banks and insurance companies are relativly immune to tarriffs and pay rich dividends. Money market funds are still paying in the 4% range and bank CD's are paying 4-5% on terms around 1 year. Energy companies and utilities are some of the best dividend plays out there and are reasonably priced. Midstream assets like MLP's are not dependent on the price of oil, they own pipelines and storage facilities and make money getting energy from the wellhead to refineries. REITS (real estate investment trusts) own all kinds of real estate and pay excellent dividends. Both MLP's and REITS have tax advantages that can help lower the tax liability if an increase in taxable income is expected (RMD at age 73). They are also good estate planning tools due to the "Return of Capital" feature.

     The good thing about our system of governace is that it can change every four years if the people want it to. This means that bad or misguided policies can be short-lived. While I don't know if the Trump tarriffs will level the playing field for world trade, I do know that they can be reversed by the next president. As a long term investor, I intend to stay the course with my investment strategy by not making any bold moves that may turn out to be wrong. Having a diversified portfolio of stocks, fixed income, mutual funds, etf's and cash is still the best strategy for any environment. My focus at this stage of my life is to minimize my tax liability going forward because of the RMD requirement to start draining my IRA. Instead of being in the accumulation phase of life, I am entering the draw-down phase. This requires careful planning and advice from investment professionals. 

     A sound long term investing plan supercedes recessions, Presidential terms, stock market corrections, economic crises, and trade barriers. It requires a minimal amount of maintenance once it's put in place. The income stream from dividends, interest, distributions from mutuals, and MLP's will provide peace of mind if Social Security or pensions get cut or reduced. The long run is a good mindset at any age. Just remember, "You can handle any resistance if you go the distance in the long run".

        

Baby It's Cold Outside

 This song was written by Frank Loesser in 1944 and first performed in his New York apartment at his housewarming party as a way to let his guests know that it was time to leave. It was so popular that he and his wife were invited to all the high society parties so they could end the evening with the duet. In 1949 MGM Studios bought the song and used it in their dud movie "Neptune's Daughter". In 1950 the song won an Academy Award for Best Original Song in a movie. The song has become a seasonal Christmas song but the movie was originally released in June of 1949. There have been so many recordings of this song over the years that it would be impossible to list them here. The version released in 2014 by Idena Menzel and Michael Buble' is the one I listened to for this post.

     Something else that has grown cold recently is the stock market. My portfolio has become a frigid wasteland. Many analysts are forcasting a gloomy 2025 for the stock market, citing the notion that the Federal Reserve Bank will not lower interest rates anymore during the year. There is also concern that the new administration will impose new tarrifs on China, Mexico, Canada, and European countries. The magnificient seven, or now called the mag 8 with Broadcom's, entry are also in a funk due to the slowdown in capital spending in the tech sector. Another factor may be that a rotation is occurring out of the growth stocks and into value stocks. Anything with a high multiple (PE ratio) is at risk of profit-taking at this time. Add in the rise in long term interest rates even in the face of the fed funds rate cuts and stock investors are nervous about just what that means.

     Market fluctuations are a normal and necessary function of stocks. Sometimes certain sectors and the  stocks within just get too frothy. The euphoria around AI simply got ahead of itself and needed some time to catch up with reality. In the meantime, some of the left-behind value stocks that have solid earnings and pay good dividends are attracting attention. So is the AI story over? My take is HELL NO! It will take some time for the companies that have invested many billions of dollars in new Data Centers and software to begin to see some return on their investments. In the meantime the valuations of some of the most promising stocks involved in the AI revolution are coming down. Even mighty Nvidia has seen its stock slump lately. I have no intention on selling my stake because even though the growth is slowing, it is still going to grow earnings faster than most other stocks this year.

     My strategy for the new year hasn't really changed much from last year. I still like getting over 4% on my cash and CD's. Money market funds haven't lowered their yields as much as I feared when Powell cut rates last month. I have directed some cash to local banks' CD's because they are not callable like brokerage CD's are. Shopping around for the best local rates still results in over 4% yields. The best rates are short term (one year or less) and thats fine because rates may rise late this year if inflation spikes back up. My holdings include growth, value, cash, and fixed income so I will stand pat until the spring thaw.

THE TIMES THEY ARE A-CHANGIN'

      Bob Dylan wrote this song in the fall of 1963 and recorded it in 1965 as a 45RPM single in Britain where it reached #9 on the UK singles chart that year. The song was later recorded on Columbia records in New York as the title song of his third album. The song's lyrics transcends time because change is always a constant in our lives. Many artists have recorded the song with great success and it was ranked #59 on the top 500 "All Time Greatest Hits" by Rolling Stone magazine.

     I believe the changes seen in 1963 will pale in comparision to what is about to happen in 2024 and beyond. The changes that artificial intelligence will bring will be life changing for nearly everyone. First, business will become far more effecient with fewer people. Unfortunately many will lose their jobs to AI automation. Machine learning has the ability to replace call center agents, clerical workers, accountants, paralegals and many other jobs currently performed by humans. One only has to look at the hundreds of billions of dollars being spent on AI to realize that the payoff for companies is to operate leaner. 

     The fuel that AI runs on is data. I have read that the Internet has nearly been exhausted of its data to feed the large language models being trained to run on Nvidia's GPU processors. So is this AI story about to run out of steam? I don't think so. Just imagine the massive amounts of data stored by research labs of drug companies, universities, goverments, technology companies, banks, and many other organizations. Suddenly, all this otherwise useless data now has value. It can be sold, traded, and added to the balance sheet of companies, making them much more valuable. Instead of wasting time and money on duplicate research, a drug company can buy the data already produced and bring products to market faster. AI has the ability to unlock bottlenecks in almost every industry. Maybe this is part of the reason that the S&P index as expressed by the index fund SPY is trading at a very rich PE of 27.8X.

     Once the training phase of teaching the "Large Language Models" is completed, the next phase will be the inference stage. This where the models actually generate answers to the questions being asked. I have read that this stage may be better handled by some of Nvedia's competitors such as AMD, Intel, or even custom chips by Amazon. Every one of the magnificent seven companies are trying to unseat Nvidia as the supplier of GPU chips to equip their data centers. At this time Intel is the laggard in the development of GPU's. They just fired their CEO in the hope that new leadership will right the ship but most analyists are skeptical that they can catch up. It  seems like all companies are being valued through the lens of their position in the AI race for dominance. At the current time, Nvidia has nothing to worry about because they have a lock on the GPU market for both the training and inference phases. 

     The flurry to build new data centers equiped with Nvidia's GPU's is rapidly draining cash from the seven major tech companies. Nvidia is the benificary of most of the spend but not all. Data centers will require lots of electricity, more than is currently available on the grid. This has caused many utility companies' valuation to skyrocket. Backup power is also critical for these new data centers. Diesel generators made by Cummins will give that stock a boost because not only will they supply the hardware but service of the equipment will be a long term revenue stream. Memory storage for data will also be required and Micron and Samsung should benefit from that. GPU's run hot so cooling is necessary for each server. A company called Vertiv sells liquid cooling systems but the stock has run up to nosebleed levels. Another beneficiary of the buildout of data centers is the large engineering companies who are tasked with the design and construction of huge new buildings.

     AI isn't the only transformative investing theme going forward. The development of GLP-1 agonists drugs have the potential to change the landscape of medicine forever. It is estimated that over one billion people worldwide could benefit from them. Currently they are only available in injectible form but a massive effort is under way to market an oral version. The pharma sector is currently out of favor due to the new administration taking office next year, making this an excellent time to pick-up some exposure to the best-in-class. The promise of deregulation over the next four years should benefit financials like banks, insurance companies, credit card issuers and consumer credit companies. 

     People my age don't really like change but it's coming anyway. The only difference between the change Bob wrote about in 1963 and now is the speed that it occurs. If you can't stop it you might as well profit from it. A little time spent researching these themes and acting on them might help you adapt to the changes a-comin'.

  

WHEN THE CHIPS ARE DOWN

     Ricky Nelson recorded this song in 1965 on Geffen Records and it appeared on the album "Mean Old World". Ricky became famous from his role on his parents' TV show "The Adventures of Ozzie and Harriet". His musical career took of due to the fact that on every third show he was allowed a musical performance to end the show. While the song never made it to the Hot 100 chart, his most famous hits included "Poor Little Fool", "Travelin' Man" and "Garden Party". Ricky became a teen idol in the 1950's and went on to act in motion pictures with top actors of the time. Sadly Ricky died in a plane crash on 12/31/1985. During his career he recorded 94 singles and 24 studio albums.

     After a huge run-up in price this year, the chip stocks are being sold off. Apparently, the valuations just got too high to handle so profit taking is happening now. Money is flowing into areas like drugs, realestate, utilities, defense contractors, and consumer staples. Companies like Nvidea, Microsoft, Apple, Amd, Tesla, Amazon, and Alphabet are giving back some of their gains for the year. The grandaddy of them all is Nvidea because they make the chips that drive the AI revolution.With a current trailing PE ratio of 51X Nvidia on the surface is priced to perfection. However, it is estimated that over $300B will be spent on AI over the next few years and most of that goes to Nvidia.

     Unfortunatly, I don't own Nvidia but I think I will get my chance soon. Today alone it lost 10% of its value and that trend will probably continue because some investors have made so much money they will lighten-up on tech and redeploy assets to safer, more value oriented stocks. Over the last 5 years, early investors in Nvidea have increased their principle over 30X so it only makes sense to take some profits. Also September is historically a volatile month for stocks and the set-up with a stressed consumer, disapointing earnings forcasts, and a Fed that is late to cut rates could add to the volatility.

     While others are redeploying cash to other areas of the market (which have run-up in price) I will wait for a chance to enter the AI theme which I believe is only still in the first inning. With a stock market that is not expected to perform well for the rest of the year, it is important to stick with the best companies in each sector. I think Nvidea fits that narrative. I have never done well chasing a high flying stock so I'm watching for when the chips are down.

Twilight Zone

The Dutch band Golden Earring released the song "Twilight Zone" in 1982 on their album "Cut". The song was the group's only top 10 hit on the Billboard Hot 100 list. The album fared better by reaching #1 on the Billboard Top Album Track chart in 1982. The song was written by guitarist George Koormans and was inspired by the spy movie "The Bourne Identity" and not the TV show "The Twilight Zone". I recommend my readers to listen to the song before reading this blog so as to "get" the analogy. As I write this blog, the chairman of the FOMC rate setting committee is announcing his intentions for interest rates for the rest of the year. It is also that time of year to plan your asset allocation for the rest of the year. It seems like we are in the twilight zone when it comes to just what interest rates will do for the last 6 months of 2024. Chair Powell left rates unchanged today {6/12/24) and indicated that he might lower rates one time later this year. The stock market took this news in stride and sent several indices and large cap stocks to new highs. This is surprising because most market analysts expected up to six rate cuts earlier this year. Any rate cut is good for stock prices and also for bond prices. A spike in inflation could torpedo any rate cuts this year because the Fed is looking for a 2% inflation rate which may be unattainable given the stickiness of nondiscretionary inflation in items like insurance and home prices. In the song, the lyrics talk about "When the bullet hits the bone" and thats the point of this blog. The bullet is higher rates that the goverment has to pay on its debt. We have come off record low rates that allowed the goverment to easily service their debt but much of that debt is going to be refinanced with much higher current rates. The fact is that the U.S. cannot afford to pay interest on an increasing deficit at these higher rates. Unlike a personal household budget when a person finds themselves up to their ears in debt, the goverment has an ace in the hole- they simply print a bunch of money to bail themselves out. Ordinary people just declare bankruptcy and start over. What's the result of running the printing presses nonstop? Inflation and lots of it. What's the fed fighting? Inflation. It's like chugging magnesium citrate and chasing it with a shot of Pepto Bismol. My plan for the rest of the year is largely unchanged from last January. Some of the CDs I hold are maturing and I am happy to replace them with CDs at higher rates and longer maturities. If rates do fall, I want to enjoy the higher interest payments longer. I am also only buying CDs from larger banks for saftey and I avoid any callable securities. It also pays to look at how often interest is paid because interest payments can be directed to high interest money market accounts for an extra boost to overall yields.The stocks and mutual funds in my portfolio continue to perform well, especially the large cap tech names like Apple, Microsoft and Lam Research. I still like the AI story but will invest indirectly in AI through things like utilities, renewable power plays and energy. In conclusion, the Fed has set its path for interest rates. I have planned to profit from rate hikes and stocks are poised to continue their long term rise. Artificial Intelligence will transform businesses for years to come, making them more efficient and profitable. The Goblin in the room that only a few analysts are talking about is the national debt which will lead to either tax increases, inflation, or recession. The market climbs a wall of worry, so enjoy the zone while it lasts.

My Guy

Mary Wells recorded the song "My Guy" in 1964 on the Motown label. It was written by Smokey Robinson of the Miracles and quickly rose to the top of the Billboard hot 100 singles by May of 1964. Wells became Motowns first female recording star but she never again reached the success that "My Guy" achieved. During the recording session, the studio musicians were having trouble getting the intro right and they decided to cobble together some rythms from other songs like "Canadian Sunset" to get the job done. They finished "My Guy" within their allotted studio time and the rest is history. The song returned to the Hot 100 list three more times: by Petula Clark in 1970, Amii Stewart & Johny Bristol in 1980, and Sister Sledge in 1982. As the end of tax season approaches, I am reminded of this song because I see a lot of brokerage statements from clients that I serve. Most of the clients that I serve are widows who lost their husbands many years ago and have a "guy" who manages their investment portfolio for them. This guy is usually an employee of a large national chain of wealth managers who simply executes a computerized program of trades during the year. Most of the investments are mutual funds with high management fees and a sales charge around 5%. After I input the dividends, interest, and capital gains into their tax return, I make it a point to ask if they have read their 1099 statement. The answer I usually get is "no, I wouldn't understand it anyway". I then proceed to show them the management fees they are charged and the "performance" those fees have generated. In almost every case the net result of all the excess trading done during the year is a net loss to the customer. Clients are also usually suprised when I show them how much they paid for such lousy investment returns. As an IRS certified tax counselor, I am not supposed to give clients investment advise, but I can point-out how badly they are getting screwed by their "guy". I understand that these wealth managers must make a living but I wonder why an actively managed mutual fund has to also be managed by some local guy who is just generating trades in the name of rebalancing. An actively managed mutual fund, as opposed to an index fund, is already being managed by a professional money manager. Why not just hold these mutual funds in a discount brokerage firm like Charles Schwab or Fidelity and save thousands in locally generated fees? Sometimes, clients consider these wealth managers their friends and are reluctant to confront them because they might be offended. Maybe the client is afraid to be left without someone to watch over their assets if they transferred their account. Having the fox protecting the hen house is never a good idea. Mutual funds are supposed to be a buy and hold investment and don't need to be constantly manipulated. Are all wealth managers just greedy opportunists sitting around waiting to steal your money? The answer is no. Just last week I had a client who had a very impressive portfolio and some nice gains for the year. I pointed out the fees he had paid and his reply was yes, he knew about them but the performance was worth it. I agreed and congratulated him for choosing a qualified money manager. The lesson here is that there are actually some good "guys" out there, you just have to find them. Don't be afraid to ask questions, ask for their qualifications, years of experience, performance history, education level and any certifications earned. If your not comfortable with their answers, look elsewhere. Any time you must hire someone to perform a task for you there is a cost. Car repairs, home repairs, yard maintenance, and money management. All are costly if you must hire it out. My point is simple, hire the best and monitor their performance to get the best "guy" for your money.