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.

Stuck in the Middle with You

This song was recorded in 1972 by a Scottish group named Stealers Wheel. It reached #50 on the Billboard Album chart that year. The song was written by Gerry Rafferty and Joe Eagan and released by A&M records. It was a parody describing how the musicians felt at a cocktail party surrounded by recording studio executives (clowns to the left, jokers the the right). The band was formed in 1972 and broke-up in 1975 but unsuccessfully tried to reform in 2008. The song is a little strange but the video is said to be downright weird. I also feel like I'm stuck in the middle in my investing activities. The recession so many analyists predicted for 2023 never did arrive, is it coming or not? Interest rates have peaked (so they say) so here we are waiting for a rate cut. The greatest thing since the PC is here in the form of AI (Artificial Intelligence) and I'm still waiting to see how it will change my life-what's left of it anyway. The electric vehicle revolution is upon us but here in Indiana I almost never see a Tesla or any charging stations. So what is an investor to do to make money this year? My take on the situation is that: 1. Interest rates have peaked at least for now; 2. AI is going to be a huge benefit to most if not all industries; 3. The much anticipated recession is on hold for now. Since the market believes rates will decline this year, banks and financial stocks rallied over 30% in the fourth quarter of 2023. Since the market believes that AI will transform the way we use computers, Nivedia, Intel, AMD, and other chip makers have skyrocketed, not to mention software companies like Salesforce, Microsoft and Meta. And since the market does not buy into the imminent recession story, the market rallied 11% in the fourth quarter of 2023. Because I feel like a tween (caught between child and teenager), I am struggling with my next move. Should I buy stocks that will benefit from lower rates and new technology or bide my time to see what plays out? Should I take some profits in tech stocks that have been strong lately or let them ride? Should I buy long duration bonds that will generate current income and possible capital gains if rates do come down as expected? I really don't know the answers to these questions so I will have to take my clues from recent market behavior. First of all, there's no hurry. With money market funds paying 5% on liquid cash, it's OK to just sit and enjoy a risk free return for a while. Secondly, the market needs a little time to cool off and settle into its valuation. There is a lot of cash on the sidelines just waiting for an entry point and earning a decent return too. When the time is right I plan to buy stocks that benefit from lower rates, new technology, and a strong economy. As long as CD's pay more than the rate of inflation, I will also maintain a healthy position there also. A cautious balanced approach is best in times like this. I will always have a portion of my assets in stocks but buying at market highs and not taking some money off the table will make me look like a clown down the road.

Fishin'

Elvin Bishop wrote and recorded this song in 1974 on the album "Let it Flow". Although it wasn't a huge commercial success, it's one of my all time favorite albums. I especially like the song "Fishin'" because it refers to my favorite activities: catching fish, eating fish, and drinking good whiskey. Even though the song is "tongue in cheek" it features some amazingly talented musicians such as Charley Daniels on fiddle, Dickey Betts on electric guitar, and Sly Stone on the organ. The album peaked at #100 on the Billboard 200 chart. Rolling Stone magazine described the album as "Too laid back for its own good". I never liked Rolling Stone magazine anyway. They are too arrogant for their own good. When fishing for stocks to add to my portfolio, I take a bottom fishing approach. I like to find out of favor stocks that yield a respectable dividend and trade at attractive valuations (P/E). So how do I find these potential buys? Almost every online brokerage has a stock screener feature. All you have to do is set your parameters and a list pops up of stocks that fit. I recently ran a screen of stocks with above four percent yields and under 10X P/E ratios. The results showed 169 stocks with these attributes. Not suprisingly, most stocks in the list were banks and financials. This sector has been declared as uninvestible by many analysts but I think there is opportunity there. One benefit of a high dividend yield is current income from an equity investment. Another benefit is that the dividends are tax advantaged when compared with interest income from bonds and CD's. I like the notion that I get paid to hold a stock until it returns to its historical valuation. The high interest rate environment has hammered regional and community banks hard. They have investment and loan portfolios that are yielding below current interest rates. To compound the problem, deposits are flying out the door in search of a higher yield. Banks also have to pay more for their deposits to halt the exodus. It's a difficult time for bankers. They need to make some tough decisions like selling assets at a loss and borrowing money from goverment agencies at a high interest rate. Why would I buy a stock in such a troubled industry? First, cheap valuation, second, high dividend yield, third, likelyhood of takeover activity, fourth, our goverment generally acts to prevent failures, and lastly, interest rates are at or near a peak. Lower rates will give most banks some breathing room and will stimulate loan demand. Banks aren't the only stocks I'm fishing for either. Disney is an interesting story also. The parks part of the company is going gangbusters but the media business is a drag on earnings. With the stock in the low 80's. I will be watching it to buy more. I believe Robert Iger will eventually get it right. If he can't do it nobody can. They currently don't pay a dividend so I will just nibble on this one. My stock screener list also included some energy stocks like Diamondback Energy and Northern Oil and Gas. There was also a pharmacuetical company in the mix which was surprising because of the buzz around weightloss drugs. Sometimes when a new product or technology is introduced to the market, some great companies suffer because they don't offer the latest like AI or GLP-1 agonists. This can result in some great fishing for under valued investments. By using a stock screener tool, investors can identify some great bargains lurking on the bottom of the pond. Value investing has always been a better style than Momentum investing for me. I look for long term stocks with great businesses and good dividends. Investing, just like fishing, is a laid back activity for me.

I Can See Clearly Now

Recorded and released by Johnny Nash in 1972 on the album of the same name, the song "I can see clearly now" reached #1 on the Billboard Hot 100 and Cash Box charts. Johnny was heavily influenced by Bob Marley and his reggae style. The song only took two weeks to vault from #20 to #1 and stayed there for four weeks. After a long career in the music industry, Johnny died in October of 2020. I am also beginning to see more clearly the path forward for my investing future. The dark clouds of the pandemic and rapid increases in interest rates are largely behind us. There are definitely some obstacles to worry about like: the ongoing war in Ukraine, the alliances of Russia with China and North Korea, a trade war with China, and more bank failures. With that being said, there are some positives things going on also, like: the coming end to current interest rate hikes, broadening breadth in stocks, slowing inflation, record low unemployment, wage gains for working people, and nice risk-free returns on cash. I believe the positives outweigh the negatives and puts investors on a more secure footing. Back when Johnny recorded this song, most investors adhered to the maxim of the 60/40 portfolio. This means that 60% of your money was in stocks and 40 was in bonds. This is called a balanced approach to investing. When stocks are going down or sideways, the bond component of your portfolio would still yield steady returns. After the financial crisis of 2008, interest rates started on a path very close to zero in the U.S., making bond investments unwise from a yield perspective. But now it starts to make sense again with 5% plus risk-free returns on treasuries and some CD's. Plus if bonds make-up a part of the portfolio, there may be some capital gains in bonds due to declining interest rates. Over the past few months, stocks have been sluggish except for a handful of technology stocks which had an offering in the AI (Artificial Intelligence} space. These few stocks were tagged as the "Magnificent Seven". More recently, money has flowed out of these seven and into the broader market like industrials, energy, old tech, and leisure and travel. The valuations of the AI related issues just got too crazy for most investors so they cashed-out near the top and went bargain hunting for more reasonable P/E's like you find in small caps. Since I missed the AI mania in stocks like Nvidia and Taiwan Semi, I will be watching these highflyers drop and try to get some at lower prices. I believe the real long term benefit from Artificial Intelligence will come from increased effeciency and higher productivity in many businesses. The AI story is still in the first or second inning so there is no need to rush into it. Another reason to be optimistic is the current mission to on-shore more manufacturing due to supply chain issues with China. Many billions of dollars are being spent to bring high tech jobs to the U.S. in the name of national security. Just the build-out of these chip foundries will add to our GNP. The conversion to Electric Vehicles will also bring jobs and cleaner air to our cities. Clean energy like solar and wind are also in the build-out stage and will goose our economy. Infrastructure spending is also in full swing, I can't help but notice all the road construction everywhere I go. Material suppliers like Vulcan Materials and equipment makers and leasors will benefit from these trends. In conclusion, things are looking up. Even the IPO market is starting to come alive with several new issues just this week. In his lyrics, Johnny Nash sings "It's gonna be a bright, bright sunshiny day". I will second that notion.

Don't Stop Believin'

In 1981 the American rock band Journey released this song on it's seventh album "Escape". The title of the song emanated from the band's keyboardist, Jonathon Cain's struggle to make it in the music industry. His father would often remind him to never stop believing in himself. The song lyrics refer to a young couple from different backgrounds who break away from their roots to start a new life together in a different setting. The song is noted for it's piano intro, strong vocals from Steve Perry and powerful rock chorus. Many sports teams have adopted the song as an anthem for their struggle to win fans and championships. "Don't Stop Believin'" reached number 8 on Billboard's Mainstream Rock Chart and number 9 on Billboard Hot 100 Chart. It also was the number one paid digital download song released in the twentieth century. Even though I have focused on fixed income for the first half of 2023, I have never given-up on stocks. A review of my monthly brokerage statements reveals that stocks also haven't given-up on me. Many individual stocks yield in the neighborhood of 5% just like the fixed income part of my portfolio, but the similairity ends there. With stocks, there is the potential for capital gains, the dividends are tax advantaged, and any gains can be held indefinitely without tax consequences until sold. With the fixed income, taxes are due in the year interest is paid without any chance of deferral. Its important to keep track of the annual income and make tax payments quarterly to avoid a nasty suprise next year at tax time. I believe a balanced approach to investing in the current interest rate cycle is the best strategy because of the attractive rates available in Treasuries and CDs. Since the highest interest rates have been on the shortest end of the rate curve (inverted yield curve) there will soon be a lot of capital looking for a new home as maturities come due. Some of the treasuries, certificates and bonds will be reinvested in fixed but I believe some will also find its way into the market. Many analysts are calling for two additional one quarter point rate hikes by the fed this year, so the party isn't over for fixed income just yet. When the fed feels like inflation is under control and the economy needs a little stimulus, rates will be cut to avoid a deep recession. Once rates decline, more money will flood into stocks, giving the market the fuel it needs to resume its bull run. The important thing to remember is that stocks tend to react about 6 months before any actual event so buying early will allow you to enjoy the first leg of any new bull market. The S&P 500 index has performed reasonably well so far in 2023 and the NASDAQ has done even better with 14.5% and 30% respective returns. The back story to both indices is that the best returns were in a relative few stocks in the technology space with AI (artificial intelligence) offerings, like Nvidia, Microsoft, Facebook (Meta) and Taiwan Semi. When the money starts to flow again I believe the breadth of the market will improve, allowing the laggards in other sectors to benefit. Some of the areas I like are banks, industrials, home builders, energy exploration and production, and drillers. I recently bought an offshore driller after sitting out the stock for 20 yrs. My thought is that the largest and cheapest sources of oil lay under the seabed and it will be exploited. I am also looking for companies that can use AI to increase productivity and profits. I think banks and industrials could benefit from this technology. Interest rates will go up and down over time and it is wise to take advantage of the higher rates at this time. I see this spike in rates as a gift to those who are hungry for yield with little risk. I do not see buying short term CD's as a long term strategy for wealth creation, just a chance to earn a little on my idle cash. Stocks are the place to be in the long run for yield and appreciation. This year is half over already so it's time to develop a list and find your entry point. Don"t stop believing in stocks.

NEV

Net Economic Value refers to the current market value of a bond portfolio. Virtually all banks and credit unions closely monitor this calculation as part of their risk management program. NEV is important because it reveals how much cash their retained earnings (capital) can generate in case of the need to raise money for necessary expenses. I am familiar with this because of my volunteer gig on the Board of Directors at a local credit union over the last 8 years. Banks and credit unions are deep in the red on their investment portfolio because of the recent unprecedented increase in interest rates over the last year. The implication is that if deposits decrease dramatically (and they have) then investments must be sold at a loss to raise money. Most fixed income investments held by banks are intended to be held to maturity, therefore, they were not overly worried about the NEV until deposits dried-up. To compound the problem, the banks' loan portfolio also holds lower yielding loans on the books which would also have to be sold at a loss. Bankers just hate to lose money but economic conditions have made life hard for CFO's recently. So where has all the money gone? As I've been saying for over a year now, investors are hungry for yield on their money. Local banks and other financial institutions have not satisfied the need for a return that compensates for inflation. Money has flowed into treasury bills like the inflation hedged I bond and the 2 year T bill. Some banks with low overhead have offered high yields on CD's to raise their deposits. Money has also flowed into money market funds that offer a better yield than the average bank savings account. The money left over from the stimulus payments has been withdrawn to fund living expenses which have increased due to inflation. All these factors have created a liquidity crunch for banks at a time when suprisingly, loan demand remains strong. Some banks have borrowed money to satisify new loan demand because deposits just won't keep up. Along with borrowings come future interest payments which increases costs for banks. There is currently a lot of blame being focused on banks, the fed, crypto currencies, the Biden administration, venture capital, and lenders in Silicon Valley. I think they are all to blame. The failure of Silicon Valley Bank has just revealed the dirty little secret that banks have known all along, their balance sheets are extremely stressed. The Fed has declared that it will raise interest rates until something breaks. Well, I think that has happened. The Biden administration's answer to this banking crisis is to increase regulation on banks even though insiders know that is part of the cause of the problem. Banks should not be invested in crypto currencies, at least with any of my money. Diversification is important for bank portfolio's just like for indivual's portfolios. Any bank that holds only risky loans of start-up companies is inherently risky. My feeling about banks and many credit unions is that their expenses are too high. The greed at the top does not trickle down to lower level employees. Directors are resigned to pay exorbitant salaries just to fill corner offices. Depositors also suffer due to below market interest rates for savings accounts. It's no wonder money is flowing out the door and into higher yields. If there is a silver lining to this banking crisis it is that, interest rates will probablly stabilize or decline, the stock market will respond favorbly to lower rates, banks will derisk their balance sheets, lower market rates will shore-up bank investment portfolios, and banks will realize that deposits are not all that "sticky".

WE ARE THE CHAMPIONS

The song "We are the Champions" was recorded by Queen in 1977 on their sixth album "News of the World". Written by lead singer Freddy Mercury, the song reached #2 on the UK singles chart and #4 on the Billboard Hot 100 chart. The song remains as an anthem for sports teams and is still one of the most recognizable rock songs of all time. The song is famous for being performed at the Live Aid Concert at Wembely Stadium in 1985. The song reminds me of the current global economic situation because of the cooling relations between the U.S. and China. Its no secret that the American economy and China's economy are deeply entwined. We have become very dependent on inexpensive Chinese imports of tens of thousands of categories of products. This helps to explain the low rate of inflation we enjoyed for many years prior to 2020. When then President Trump increased tariffs on some Chinese imports, retalitory tariffs were placed on American exports to China. Combine this with sanctions placed on Russian energy exports and a new global trading paradigm is forming. There will be winners and losers as a result of these changes in the flow of money and goods worldwide. The biggest loser will most likely be the American consumer who is used to the cheap and readily available imports from China. We will also continue to experience inflation despite the Feds effort to slow it by raising rates in a vain attempt to slow our economy. While the economy has slowed slightly, the Fed has targeted our labor market in an attempt to put people out of work, thereby decreasing demand of goods and services. I would argue that job creation here will remain strong to replace Chinese manufacturing for necessary goods. Chinese trade policy has been one sided for many years and I agree that action was necessary but we must recognize that a trade war will bring pain to the U.S. So who are the winners in this escalating trade war? I think Mexico will be the first to benefit from our sour relations with China. America is already utilizing cheap Mexican labor to make autos, electronics, and many other goods we need. Just this week, Tesla announced a 10 billion investment in Mexico. U.S. companies are looking for a source of cheap labor and loose regulation for their competitive advantage. Other third world countries with stable politics will surely lobby American companies for a piece of the economic action. Hopefully, American workers will also get a piece of the onshoring of good paying manufacturing jobs. It only makes sense to employ the best educated workforce in the world right here in our own markets. I recently took a look at my portfolio for any exposure to Chinese stocks and was suprised that my emerging market funds were almost exclusivily invested in China. I plan to divest these funds in the near future because of the political tension between us. I'm sure I'm not alone in feeling this way. With all the risk involved in investing, political risk is one I choose to avoid if possible. For the time being, I am satisified to keep my money invested right here at home in safe and sound CD's, Treasuries, and income generating stocks with limited foreign exposure. While it may be too early to tell who the new champions will be, someone will benefit from the decades of bad behavior by China.