personal consumption expenses
The Personal Consumption Expenditure Index (PCE) in December had an annual change of 5.0%. This is down from the November level of 5.5%. Looking at the Core PCE, which takes out energy and food and is the gauge, the Fed is keeping an eye on the inflation number, which looks even better with an annual growth rate of 4.4%. I hear people still using the CPI and saying that inflation is more than 3 times the Fed's 2.0% target. This is extremely misleading as Core PCE is not as high as CPI. Overall, we still have some work to do on inflation, but it's still slowing down at a good pace and I'm optimistic it will continue to improve as we move towards the end of 2023. My projection remains that we'll see one, maybe two. quarter-point increases from the Fed and then that rate would remain the same for the rest of the year. I don't see any rate cuts this year from the Federal Reserve as I believe the economy will be better than many fear.
Tesla reported earnings
Tesla reported earnings and they did pretty well. This sent the stock up as much as 11% on the trade. I've been against Tesla for years, not because it's a bad company, but because it's been overvalued. That is now changing, earnings for December 2024 are $5.79 with a share price around $150, giving a futures PE of 25.9. That's not great, but not as terrible as it has been in the past. When the stock was at the $102 low, it would have been a much more reasonable future PE of 17.6. I'm not saying Tesla is a buy, it still has more to lose or needs to see a bigger increase in earnings to be considered a value. Is it getting close, maybe a year or two from now it could turn into a purchase?
House price affordability
Even with the recent drops in house prices, there is still a significant affordability problem. In fact, looking at an affordability index from the National Association of Realtors (NAR) shows that we are still out of line with pre-pandemic levels. The index is based on house prices, median household income and mortgage rates. In the 12 months leading up to Covid, the index averaged 162 and the current estimate for January is a level of 106. The lower the number, the greater the affordability problem. There are a few ways the number could return to the pre-pandemic level of 162. First, the average mortgage rate would have to drop to around 2.6%. Then the household income would have to increase by 50%. Finally, house prices would need to fall another third. The most likely case is a combination of all 3 factors, but unfortunately I don't see rates getting anywhere near the 2.6% level or revenue getting anywhere near 50%. So I think there's even more downside to house prices going forward.
If you're wondering why the 10-year Treasury yield is falling, it's because they've stopped issuing notes since we hit the ceiling. We've just hit the debt ceiling, but the expectation of hitting that mark has put a lot of downward pressure on the yield as demand and purchases of 10-year Treasuries have increased in anticipation of the debt ceiling. Once the cap is raised, the government can go back to issuing more 10-year Treasuries, and I think the yield will go up.
layoffs and overcontracting
You've heard of some of the major tech companies doing massive layoffs of 10,000, maybe 20,000 people and you think, "Oh my gosh, that's huge." But if we go back a few years to 2019, you'll see that some companies may have hired too much. For example, metaplatforms in 2019 had 44,942 employees. Now, with data available for the third quarter of 2022, the total headcount was 87,314, an increase of 42,372 employees or more than 94% in just a few years. Alphabet also hired 118,899 employees in 2019, and in the third quarter of last year, it increased its headcount by 67,882 to 186,779. 2019. This increased by nearly 100% to 1,544,000 employees, an increase of 746,000 employees. You may hear about more layoffs in 2023 for some tech companies, but remember the 2019 numbers and remember that some companies have gotten their hiring policies out of control.
Companies that used stock-based compensation when their stock was rising made employers and employees happy. But what happens when the stock reverses? No one is happy and shareholders are the biggest losers. As the value of a share declines, employees want more shares to match what they were previously paid, and employers need to keep the game going. They're going to issue more shares, but what that does is further dilute future earnings. Be careful when investing in companies that abuse stock-based compensation, as stocks can remain unchanged for many years. Two companies that come to mind are Snap and Roku.
You may not know it, but the Federal Reserve has the ability to make a profit. In 2021, the Federal Reserve made $107.9 billion in profit, but in 2022 that profit was halved to $58.4 billion due to rising interest rates. You might be wondering where the profits go. The Fed can't keep them. They send all their profits to the US Treasury, and if the Fed loses money, they create a note on the balance sheet. This is known as a deferred asset. They will carry that promissory note until they make a profit again, and they will pay off that promissory note before sending more profit to the treasury.
Decreased attention span
In a recent research study from the University of California at Irvine, it came as no surprise to learn that the attention span of young and old has declined over the years. In 2004, people spent an average of 150 seconds on a screen before switching. It is now down to 47 seconds, a drop of over 2/3. The survey also found that, on average, people check their inboxes 77 times a day. I was surprised by that number, but it's an average. To restore our attention span, people need to be more disciplined about checking email and using social media. If you only check in on him at certain times of the day, his attention span will increase and his stress level will decrease. Try. Tell me what you think.
Working at home
Some work-from-home employees still live in the Covid years thinking they control the work-from-home narrative. I remember people saying this was the new way of doing business. I said no it will go back to the people going to the office. Those employees who say they would rather quit than go back to the office are preparing to be unemployed. These employees forget that if it's so easy to work from home and not go to the office, the employer can find someone overseas or elsewhere to do the same job remotely for maybe half the salary and without medical insurance or 401(k). I think over time we will see more employees returning to the office because, like it or not, a business exists to make a profit, not to provide a social service.
Offshore oil drilling
There is some long-term good news on the energy front. As of December 2022, approximately 600 rigs worldwide are available for lease for offshore oil drilling. It is estimated that approximately 90% are working or under contract to work in the future. Looking back just five years, that number was just 63%. Another silver lining, based on demand, is that contractors are now paid around $400,000 a day for renting their drillships, which is nearly double what it was just two years ago. This is very positive for the supply side of the oil equation.
PIB do 4T
The leading forward reading for Q4 GDP was 2.9%, which beat the 2.8% estimate. Consumption (adjusted for inflation) increased by 2.1%, adding 1.42% to the total, while goods increased by 1.1% and services by 2.6%. Residential investment was hit hard, falling 26.7% in the quarter and subtracting 1.29% from the total value. Overall, private investment had a gain of 0.27% over face value, as the change in private stocks added 1.46% and non-residential investment made a small positive contribution of 0.09%, mainly due to a 5.3% increase in intellectual property products. Net exports added 0.56% to the total, as imports fell 4.6% in the fourth quarter, but exports fell at a slower rate of 1.3%. Government consumption increased by 0.64%, with spending growing by 3.7%. Much of that came from non-defense federal spending, which grew 11.2% in the quarter. Overall, the report was mediocre and points to a slowdown in the economy.
Chevron announced a $75 billion share buyback from shareholders. I can already hear the government and others saying how dare they do this; they should take that money and invest it in oil production to drive down prices. First, shareholders take the risk of investing and should be rewarded when a company does well. The CEO's job is to produce a good product and generate profit for the company's owners, who are the shareholders. Why would a company invest billions of dollars in oil production when in the future we know demand will be lower as we see more electric vehicles on roads that don't use oil? This is the best strategy for a company with a long-term time horizon. Remember, the government added a 1% excise tax on share buybacks this year, which means the government will receive $750 million in additional taxes from Chevron upon completion of that buyback. Does that money go to something productive? Or is the government going to squander it and waste it as usual on some silly programs? If you don't like the company, don't buy its stock or gas.
I keep seeing the Peloton commercial that 92% of owners are still active in their Peloton. Given that the stock has now dropped to around $12-$13 a share from its all-time highs of around $170 a share, I'm curious how many people are still using their Peloton. I would still classify this stock as a sale and would like to see it turn into a profitable venture before investing.
One of my main concerns about the S&P 500 Index remains its valuation. At the end of 2022, the index was trading at a futures P/E of 16.65. That was down from recent highs of over 22x, but I still wouldn't consider it a compelling valuation as the 25-year average was 16.82. There are two ways for the S&P to grow. There may be earnings growth or the multiple may expand. For earnings growth, I've seen estimates of around 4-5% earnings growth, which I think might still be bullish. This means that if the multiple were to remain constant, the S&P would grow by around 4-5% this year. As for the multiple expansion, with interest rates going up and growth slowing, I don't see the case for a multiple increase. That's why I continue to believe that the right stocks will outperform the market in 2023.