"Take it Easy"

"Take it Easy" was a song written by Jackson Browne in 1971 intended to be included in his own debut album but he just couldn't get around to finishing the song. Glen Frey, lead singer for the Eagles and a neighbor of Browne offered to finish the lyrics if he could record the song on the Eagles album. The rest is history. The song was released in 1972 as the opening track on the Eagles debut album and reached #12 on the Hot 100 chart in July of 1972. What makes the song unique is the banjo accompaniment played by Bernie Leadon. The song is listed as one of the Rock and Roll Hall of Fame's 500 that shaped Rock and Roll. There's good news and some not so good news going down in the investing world. The good news is that some things are getting easier. Starting with interest rates; Kevin Warsh was named as the new Chairman of the Federal Open Market Committee today. It is widely viewed that he will accomodate President Trump's demand that interest rates should be cut. In the near term that is a positive for the stock market and maybe a tail wind for the bond market. In the long term, cutting interest rates could reignite inflation which is bad for everyone. Easy money could cause the economy to run too hot in a world where supply chains are already thin due to trade tensions. At this time, there is confusion among analysts as to who will win the race to dominate the market for Artificial Intelligence. Recent market action suggests that the software companies such as Microsoft, SAS, Snowflake, Salesforce, and many others will suffer because AI will make coding so easy a kindergardener could do it. I believe the punishment is overdone because Enterprise Management Software is a very complex product and not easily replicated. Having used an Oracle system in a previous life, I was amazed at the amount of data the system held. I don't hold any of these software names and don't intend to buy until the dust settles. What is now easier to recognize is the probable winners in the AI world. Apple has avoided the massive capital spend that the hyperscalers have shelled out to date. Their wait and see approach has allowed them to pick and choose among AI platforms already developed by others. Apple is sitting on the delivery system for consumer artificial intelligence with a 2.5 billion worldwide installed user base. I still own some Apple and may add to my position. Another easy decision for me is to hang on the my stake in Alphabet, formerly known as Google. Unlike Apple, Google has a pretty decent AI offering on the Android phone which is Gemini. Many pundits believe that Gemini will end up on the Iphone. That saves Apple a ton of money and provides more revenue to Alphabet. It's not like Alphabet doesn't have a shortage of revenue streams because they own Youtube, Youtube tv, Google search, Waymo self driving, Calico life sciences, Android, Google Cloud, and many others. Alphabet has made over 260 acquisitions and has a market cap of 4 trillion dollars. I view their diverse holdings as a positive. Anyone who reads and listens to financial news know of the concept of "Universal Basic Income". This is the idea that when AI replaces the need for humans to work, somehow a check arrives every month {or direct deposit} for living expenses. No one has ever explained just who will send me the money, thats just a detail that need to be worked out in future. Elon Musk has enhanced this notion by calling it "Universal High Income". I like his idea better for obvious reasons. Until this happens, I'll still be looking for bargains in the stock market and other investments but when the U.H.I deposit hits, I plan to "Take it Easy".

"Addicted to Love"

           "Addicted to Love" was released by British songwriter Robert Palmer in 1986. It was the third song on Palmer's studio album "Riptide". The song topped the Billboard Hot 100 charts as well as the Billboard Top Rock Tracks in 1986. The song sold 500.000 copies in the U.S. and was made popular with the music video featuring fashion models dressed in black see-through dresses and wearing heavy make-up. The models were intended to look like mannequins and were reportedly served wine during the make-up session, making them tipsy for the video. The video was so popular that Palmer used the models in successive music videos

     Love isn't the only thing investors have become addicted to in recent years, 5% yields on money market funds were also very attractive. Unfortunately those days are over, at least for now. Money market yields are now slightly below 4% and are expected to drop even further in December and the new year. The current Fed Chairman (Jerome Powell) will be replaced next May by Donald Trump's choice for Chairman. It's no secret that the Donald wants lower interest rates and his choice will accommodate him. The reason lower rates are so important to the current administration is the heavy debt load the U.S. must carry ($38 trillion), means interest is $970 billion for 2025 and projected to top $1 trillion for 2026. This is money that could be spent on defense, social programs, tax cuts, or whatever the politicians decide.

     I personally don't like the idea of lowering the national debt on the backs of retired Americans who are living off their savings. Lower interest rates either lowers our standard of living or forces savers into riskier assets like stocks, bonds, REITS, or their proxies. Of coarse the alternative of controlling government spending is almost always out of the question. Lower rates at a time of rising prices for almost every consumer product is an especially cruel outcome. Tariffs are another hidden tax on the American consumer, even if they are reduced, prices seem to have a ratchet effect of staying high.

     So what's the answer to lower rates and lower personal income? In my opinion, its dividends. Unlike interest, dividends are taxed at the favorable capital gain rate if they are qualified (domestic) dividends. One doesn't have to buy individual stocks to generate decent yields, there are many diversified ETF's and mutual funds that will qualify. The main thing to remember is to keep costs low, there is no reason to pay over 1% of assets for an unmanaged dividend fund. For those who like to invest in tax free bonds, there are several ETF's that invest in muni bonds offered by Vanguard and Schwab. 

     We are one year into the new declining rate cycle and it could last for several more years so now is the time to start adjusting to it. An additional benefit to the dividend and muni strategies is that the rate cycle should benefit both asset classes in the form of potential capital gains. Addiction is a difficult thing to overcome so I recommend a  measured approach by not moving too much too fast and remember to always keep several months living expenses liquid. Hopefully these minor adjustments will cure your addiction without any symptoms of withdrawal.

Party like it's 1999

 Prince recorded the song "1999" in 1982 as the title track of an album of the same name. The song was inspired by a TV show which speculated on what could happen after the turn of the century. Prince thought that the planet as a whole would experience a rough time at the turn of the millennia but wanted the song to give people hope. The song, when initially released reached #44 on the Billboard Hot 100 chart and a later release moved up to #27. The song was to become the last top 40 hit for Prince before his death in 2016.

     Many pundits have made a case comparing todays market situation to the year 1999. For anyone who can't remember, the dot-com craze of 1999 resulted in a lot of newly formed companies crashing to earth under the weight of heavy debt and a stock based on little more than dreams. There was clearly a bubble created in the stock market where any company with a dot com in their name was bid up to irrational valuations. Most of these companies had no earnings or sales and could not really be valued by investors. They were initially financed by wealthy investors and off loaded to a naïve investing public at ridiculous prices. People bought the stocks mainly because they feared missing out of the next big thing which was the internet.

     Well, the internet WAS the next big thing but people still lost their money in companies that had a half-baked business plan if there was one at all. So what is the difference this time with the advent of AI and what could go wrong? For one thing, up until recently, most of the companies that are at the forefront of AI are profitable and have been for a long time. Microsoft, Amazon, Meta, Tesla, Alphabet, Nividia, and Broadcom all make money but they are spending massive amounts to build-out data centers. What disturbs me is that recently, many of these "hyperscalers" have committed most of their cash flows on the AI build. But now they are willing to take on debt to continue to out invest each other in what could be a race to the bottom. I appreciate the potential for AI to transform our economy but worry that the spend may not justify the payoff. Even more concerning is the circular financing that is occurring in the industry. It seems that the center of this financial circle is a company called Open AI, founded by Sam Altman. They have great potential but no earnings. Not to be left out of the party, Oracle has bet the farm on AI and raised lots of debt. Any failure in this chain could bring a crash.

     Currently, most of the spend on AI lands on the income statement of Nividia. They have the best GPU and everybody wants the latest iteration. However, AMD is hot on their heels to sell an alternative for the value minded hyperscaler. Other members of the Mag seven are trying to develop their own GPU's for future use. At this time Nividia still has command of the GPU market and will for the foreseeable future. The term "bubble" has been used recently by financial pundits which has caused weakness in the AI stocks but my take is that there is a long way to go in this space. At a PE of 52, I am not adding to my NVDA position but not selling either. In my opinion, they will be the last one to fall.

     The major constraint in the AI build-out is access to reliable electric energy to power these data centers. The electric grid is simply too outdated to meet the new demands of AI. Electric generation also has lagged because of clean energy initiatives. Companies like Corning Glass has stepped-up to build low cost wafers that go into solar panels, Cummins has diesel generators to provide back-up power on site, electric generation investment may best be done by buying an ETF like the XLU which has a basket of different utilities.

     Even though the hyperscalers's stocks have run into a soft patch lately, I believe the party has a long way to go before any major corrections. It is my belief that new money invested in the AI space should be directed to the companies that will be suppliers to support the industry. Anyone who wants to benefit financially should take the time to research just what goes into building an AI data center and who will benefit from the effort. In the words of Prince: "I was dreamin' when I wrote this so sue me if I go too fast but life is just a party and parties weren't meant to last,"  

     

"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 Billboard 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 Washington 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 platinum 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 tariffs recently announced by the Trump administration is a disruptive force in an already volatile market. Before the tariffs 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 tariffs 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 foreseeable future. Financial stocks like banks and insurance companies are relatively immune to tariffs 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 governance 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 tariffs 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 supersedes 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 forecasting 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 tariffs on China, Mexico, Canada, and European countries. The magnificent 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 that's 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 comparison 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 efficient 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, governments, 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 Nvidia'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 analysts 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 equipped with Nvidia's GPU's is rapidly draining cash from the seven major tech companies. Nvidia is the beneficiary 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 agonist 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 injectable 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'.