Today is June 11. Don’t forget to pay your quarterly estimated taxes on or before June 15, which is next Tuesday. “Wait a minute! I thought my taxes aren’t due until April 15 next year”, you might think. That is correct, if you are a regular employee, someone who receives a Form W-2 at the end of the year. If you are a W-2 employee (as I call them), you likely don’t have to concern yourself with making quarterly estimated tax payments, unless you have a lucrative side gig. For most other people, however, making your quarterly estimated payments is an important thing. This includes gig workers, independent contractors, and anyone else who isn’t on a company’s payroll and who receives a Form 1099 at the end of the year. Although the 2020 tax return date was delayed until May 15, 2021, there has been no delay in the due date for 2021 taxes, so June 15 remains the next due date for quarterly estimates.
According to this posting in Forbes from a year ago, 28% of workers claim to be self-employed and 14% claim to be independent contractors. Earlier postings show the independent contractor percentage to be 8% to 10%. A lot of people signed up to be Uber drivers in the 2-3 years prior to 2020, and all of them are independent contractors. Both self-employed workers and independent contractors are subject to paying quarterly estimated taxes.
How much should you pay to avoid a penalty? The IRS provides a somewhat confusing (is there any other type for the IRS?) Safe Harbor rule, which is that you can avoid a penalty if you pay 100% of your tax bill from the prior year (in quarterly increments), or 110% if you made over $150,000. Your state will also have its own Safe Harbor rule that may or may not match up with the IRS’s rule. For instance, in California, where I live, the 100% rule is in place but the timing of the payments is accelerated such that 70% of the payment must be made by June 15. California penalties for underpayment are steep, so make sure you are aware of your own state’s rules – unless you live in a no state income tax state.
Paying a penalty is the pits, so please pay attention and make your estimated quarterly payment by next Tuesday if you are self employed or an independent contractor. Other links to read if you have time on your hands:
Back when there used to be plays and musicals on Broadway and elsewhere, one of my favorites was “Wicked”, which is the fun musical that is the “preqel” to The Wizard of Oz. One of the bring-down-the-house numbers in Wicked is titled “Popular”, in which Glinda, the Good Witch, tries to get Elphaba, the future Wicked Witch of the West, to accept and become what is popular. Good song; funny song, but to no avail as it turns out. When I watched a recent piece about what are called Meme Stocks, I made a mental connection with Wicked, and though I’m not from Boston, I see Meme Stocks as “wicked popular”. Perhaps this is a good connection in an artistic sense, but are Meme Stocks a good investment for you? In my opinion, no financial advisor worth their fees could in their right mind recommend that someone invest a substantial sum in Meme Stocks. Yet, part of the piece I saw (which aired on a “wicked popular” financial news network) described how companies are now trying to figure out how to become Meme Stocks. Why is that? Because Meme Stocks tend to go up and become unhitched from their fundamentals, which is all good for the management of Meme Stock companies.
What are Meme Stocks?
“Meme Stocks” is the term used to describe stocks that get caught up in discussions on Reddit, Stock Twits, or other social media forums and get substantially bought up by retail investors as a result. Gamestop was an early example of this phenomenon, followed by others such as AMC Entertainment, Bed Bath and Beyond (?!), and perhaps Tesla and Blackberry. Each of these has seen a significant upturn in ownership by retail investors, abetted by commission-free trading on platforms such as Robinhood, in addition to the Reddit discussion, which may or may not be a form of collusion. Combatants in the Meme Stock battle buy positions because they believe they are “sticking it to the man”; the man being perhaps a hedge fund, bank, or an otherwise wealthy character of despicable reputation who may have a short position in the stock. The hottest, most wicked popular meme stock right now is AMC, which owns movie theaters. AMC’s CEO, Adam Aron, has become a mini-celebrity as well as very wealthy as a result of the stock’s run-up this year. Good for him, but I think his good fortune has been a result of luck much more than skill.
Should You Play?
Let’s take AMC as an example. Before the Pandemic, AMC was a sleepy stock trading in the $10-range, and subject to significant headwinds. AMC needs people to go out to its theaters to make money, and even before the pandemic, this was becoming more troublesome because of aging demographics, alternative options for watching movies (think Netflix or other streaming services), and crappy offerings by the Hollywood studios. Not a great business model in my opinion, and investors agreed as AMC stock to stay above $10. Then the pandemic hit, forcing the complete closure of AMC theaters, which are struggling to reopen to this day. At the start of this year, AMC traded in the $2-range. Things looked bleak. Then, sometime in late January, AMC became wicked popular in chat rooms, and retail investors started to buy. AMC’s float was pretty weak (i.e., it was thinly-traded), and this played into the hands of the chat roomers. Now AMC is at $56. I ask you: Do you think the headwinds I described above are better or worse from AMC’s standpoint now that we are emerging from the pandemic as opposed to prior to the start of the pandemic? I’ll use the Socratic method here to give you my answer. Has our population gotten older or younger on balance as the pandemic has raged? (Sadly, perhaps it has gotten somewhat younger, but for the wrong reasons, as Covid deaths have been disproportionately among our elders). Do you think potential movie-goers are more or less inclined to go out and watch a film in the theater now with all of the other streaming options available? And do you think the shutdown of filming as a result of Covid will cause more or fewer movies to be produced? In short, I see AMC’s headwinds as much worse now. So what possible justification can I find to buy AMC at $56 when I didn’t like it at $10 or $2? Corporate reorganization aside, AMC is not an asset-rich company, and don’t see AMC being worth $56 under any scenario.
When a stock becomes a wicked popular Meme Stock, be very skeptical. True, retail investors can take advantage of a short or a low-float situation and cause a run-up in a thinly-traded stock. However, retail investors are fickle, and their attention spans can be quickly altered when the next great opportunity emerges. Though it is a growing segment, only a very small percentage of investors participate in chat rooms, and while their power may seem large when confined to a single stock, it is not broad enough to sustain any fundamental change in a company. Unless you really have money and time to waste, don’t play in the wicked popular Meme Stock carnival.
I just read through another “Best Places” list. This one was the Top 25 Tax-Friendly States to Retire, by Yahoo News. If you have too much time on your hands, you scroll though the article and envision yourself in one of these states. If your currently live in a high tax state (as I do in California, which is not on the Yahoo Top 25 list), you think, “Wow! I could drastically cut my tax bill and give myself a big raise if I moved to one of these states!” However, before you call your real estate broker to list your house and Bekins Moving to move your stuff, there are a lot of factors to consider aside from taxes when you decide where you want to live during retirement.
Should I Move?
The first consideration is whether you should move at all. If you have lived in the same house or the same community for many years and you have family nearby, to up and move away might save you some taxes but likely won’t make sense from a family or quality of life standpoint. Having deep roots is important and digging up those roots is not to be taken lightly. If you move to a new state, is it worth it to have to form a whole new social circle just to save some money on taxes? If you have family nearby, perhaps they can help you out in situations where you otherwise would have to pay out of pocket in a new community for that same help. Maybe your kids can help you paint a room or fix something broken, or even get groceries or take you to an appointment. Would you still see your grandchildren if you move a thousand miles away? All very important things.
Having lived in the Northeast while growing up, I get that cold winter weather is no fun and moving south makes sense if you are sick of shoveling snow. People have been “wintering” in the south for years, but although some people make the move permanent, others go the “snowbird” route and travel back and forth each year, seeking the best of both worlds (winter in the South, summer in the North). If you are a snowbird, where do you plant your flag as your “permanent” residence? Consider in which one you spend the most time. You may not be able just to pick the state that has the lower tax rate.
Your Current State
There are legal issues to consider. New York State, for instance, makes it very difficult for someone who is a current NYS resident to move out of state if they keep property or businesses or jobs in the state. You cannot, for instance, keep your job in New York but move to Florida and say you are working remotely and are now a Florida resident. The NYS Department of Taxation and Finance will track you down and you will have to prove to them that you are completely gone from NYS. I have read of other states (California!) starting to be more aggressive in tracking down state-tax avoiders. Check with your CPA before you make a decision.
Your Current Home
Is your current home or apartment conducive to living if you weren’t as healthy as you are now? Stairs become real obstacles as you get older and your joints creak more or you put on more weight. If you live in a split-level or a multi-story townhome now or if you live in an upper apartment that is lacking an elevator, you may need to move at some point because you can no longer manage the stairs. What about the size of your house or the maintenance needed for your yard? You may think you want to retire and devote more time to your garden, but consider if it is manageable or not as you get much older. A tip: keep it small.
You may be tired of living in a dense area, but denser areas tend to have better health care alternatives available to those who live there. Your need for quality health care will grow as you get older. Before you opt to move, make sure you are comfortable that you can go to good doctors in good facilities in your new community. You might save some money on taxes, but if you can’t get the cancer treatment (for instance), what is the point of having money on taxes?
Take Out Your Calculator
Ok, you want to avoid paying taxes, but you should at least calculate how much tax money you really will save. For instance, here in California we have Proposition 13 which restricts the amount my property taxes can be increased each year. For me to sell my house and buy another one in another state, I need to calculate how much I can pay for a house and keep my property taxes the same as they are now. The most likely case for me is that I will need to buy a less expensive house in a new state because its tax rate will be greater than my current Prop 13-advantage rate. Another issue is your income post-retirement. Don’t look at your current income while working and compare the tax rate on that vs. your tax rate on your retirement income. Instead, look at what money you plan to have coming in once retired, and calculate what taxes you would pay on that in your current state vs. your new state. Probably a CPA or a planner should help you out. You may conclude that you won’t really be saving that much and it isn’t worth it to move. Or maybe not!
Saving money on taxes or living in a new community and starting a new life once you retire has some romantic appeal but there are a lot of other things to consider when you think about moving to a lower tax state. I understand and sympathize with wanting to avoid state taxes, but you may be better off in the end if you pay a little more in taxes but are therefore able to call on family or long-standing friends to help you out in a pinch. I strongly recommend you work with your CPA or a financial planner such as me when you go to make such a big decision.
Let’s take a look once again at the strength of the US Dollar. As you can see from the chart, the value of the US Dollar (relative to other world currencies) has been declining since mid-March. From its high of about 93.25 in March, the Dollar index sits right at about 90. At 90, the Dollar is re-testing a support level it reached in early January 2021. Trading is showing some bottoming action, so we will see soon if the support holds or not.
Why has the Dollar been falling in value relative to other currencies? One reason is that US interest rates have stabilized during the same period and remain high relative to interest rates in other large world economies. For instance, from 1/1/21 to 3/31/21, which is the entire First Quarter, data from the Fed shows that the yield on the 10 Year US Treasury Note rose from 0.93% to 1.73%. However, since then, its yield has stabilized and dropped slightly to 1.58%, as I write this. Rising interest rates mean international money moves into the Dollar, which means the value of the dollar increases. When rates here are stable to falling, the opposite happens, and the Dollar falls in value. That is what has happened thus far during the Second Quarter.
What else happened as the Dollar has fallen in value? The stock market rose. Since 4/1, the S&P 500 Index has risen from about 4,000 to about 4,200, but if you go back 3 weeks to early March, the Index sat at 3,750. A weaker Dollar means that more of them are needed to buy assets, so each Dollar is not as valuable.
Another piece of data is that the April annualized inflation rate was 4.2%, the highest in many months. Did the higher inflation rate cause the Dollar to decline? Or did the Dollar decline cause the higher inflation rate? Probably a bit of both. Supply chain issues coming out of the Covid economy have caused inflation to spike. The Fed says this is transitory, but we will see if they are correct. Higher inflation and a weaker currency go hand in hand.
Don’t look for a return to rising interest rates to bail out the decline in the Dollar. Yields on similar-termed government bonds in Europe remain below 0%, and so international sovereign bond investors will continue to buy US Treasuries because at least their yield is positive. This will continue to hold US rates relatively low, and likely not to increase much if at all. This means I project the Dollar Index will stay low and perhaps break its support level of about 89.5. What might be the catalyst to break the current situation? If supply chain issues prove to be temporary and rectify themselves, thereby showing inflation to be relatively tame or at least within the Fed’s target. Lower inflation figures should cause the Dollar Index to at least stabilize. Perhaps what is behind the bottoming action of the past week or so is the thought that the reopening of the economy is going well and that inflation will not spike as much as April’s figure suggests it might.
The management of Colonial Pipeline reportedly paid a ransom of $5 million of cryptocurrency to the hackers of its computer systems. An artist named Beeple sold a piece of art that was embedded with a string of code called a Non Fungible Token (NFT) for $69 million. The value of one Bitcoin has risen from about $8,700 one year ago to over $37,000 now, with a stop at over $60,000 a month ago. Clearly the worlds of Bitcoin and other cryptocurrencies as well as the related world of NFTs is growing up and going more mainstream. Anecdotally, I have had a number of people ask me about cryptocurrency within the past couple of months, more than ever before. Interest is high, but involvement is still relatively low. Are you reading these stories and thinking about getting involved by investing in Bitcoin or other forms of crypto? If so, what is the best way to do so? I have my thoughts about that.
A Long Time
What strikes me about crypto and NFTs is that we are in the very early innings of this game and that it is going to take a long time for the real applications of these technologies to play out. Take this Wall Street Journal article by columnist (and former venture capitalist) Andy Kessler about an email conversation he had with entrepreneur Mark Cuban. Kessler and Cuban discuss the possible future of crypto and especially NFTs. Central to their discussion is the concept of “smart contracts”, which are transactions between two parties that are authenticated by virtue of blockchain code. The more business transactions become “smart”, the more useful and valuable blockchain becomes, and therefore the more valuable Bitcoin becomes, or so the thinking goes. This could all occur more or less as Kessler and Cuban surmise, but its adoption will take a long time.
If you see a trend that you think is going to take a long time to play out and you want to invest in that trend so that you will profit if your reading turns out to be correct, then you play that long-term hunch by buying something that you are going to hold for a long time. In the case of crypto, the way to play the crypto game is to buy and hold crypto. Set up a separate account for it (you kind of have to anyhow), buy it, and don’t look at it very often. Go to Coinbase or another reputable crypto house (and I am assuming Coinbase is reputable because it is public – no assurances that it is), buy some Bitcoin and/or Ethereum – most of the other cryptocurrencies out there including Dogecoin are “a hustle”, as Elon Musk stated – and sit back.
Another way to play crypto is to buy or sell Bitcoin futures. The Chicago Merc has offered futures trading in Bitcoin for over 3 years. As with other Futures instruments, each Bitcoin futures contract expires every 3 months. This means that you cannot own a futures contract for the long term. Futures are for short-term traders. If you want to try to time the market and profit from short-term fluctuations in the price of Bitcoin, then have at it with Bitcoin futures. However, if you believe as I do that Bitcoin is a long-term thing, then don’t play in the futures sandbox.
There are some Bitcoin ETFs out there offered by smaller, less-well capitalized shops. Stay away from these. However, some of the bigger ETF shops – such as potentially Fidelity and Blackrock – have filed to introduce Bitcoin or crypto ETFs. This will probably happen, if not this year then next. Some current crypto investors believe that ETFs will be game-changers for this market. They could be correct, and ETFs are a good alternative to holding actual crypto. Problem is, we don’t know what these reported ETFs look like yet, let alone what their asset mix will be. Also, the SEC is not on board yet. Until all of these details become evident, and even still with that development, I still like owning “hard” crypto over an ETF.
I think that the true value of cryptocurrencies will be realized only in the very long term. Years, if not decades, but not weeks or months. A long term time horizon means you should own a long term asset. Don’t try to trade it in the short term. I like investing in Futures for most other trends, but not this one. Be a buy and hold investor if you want to play the crypto phenomenon.
It’s bad out there and it seems to be getting worse. Computer hackers are attacking individuals and corporations alike. Nobody is immune. Colonial Pipeline is the most recent headline-worthy attack, but these attacks go on all day, every day. Do you receive robocalls or spam emails? Those are all attacks to hack into your personal accounts and to steal money from you. I recently attended a webinar about these cyberattacks and what each of us can do about them without resorting to extraordinary or expensive measures, and I will summarize and add my own suggestions here:
Two Factor Authentication
For any log-in that you have for any bank, savings, brokerage, insurance, or any other account you have that involves money, you should move to two-factor authentication. What is that? It’s another step you need to do after you input your user name and password but before you can access your account. There are many forms of two-factor authentication, some more effective than others. Here is a summary:
Secure code card from the financial institution: This is very safe. For my main brokerage account, I have a credit card-sized card with many alpha-numeric codes. When I try to log into my brokerage account, I am given numbers that correspond to the codes on my card, which is specific to my account. I look up the codes on the card, type them in, and I am now in to my account. This is very safe, but requires that you don’t lose your code card.
Face ID: For this same brokerage account, I could use Face ID through my phone, but I choose not to. I have used the Face ID method in the past but the code card works better for me. With the Face ID method, whether through an app on your phone or through your desktop or laptop, your account is linked to your phone number, and you open your phone so it sees your face, and you are in. Face ID is probably the preferred method of two-factor authentication if you are just using an app on your phone to access your account. Also very safe.
RSA Security Device: I have this for my checking account, specifically for my business account, although it could be used for a personal account. This is a variant on the code key card. With the RSA device, a 6-digit numeric code is provided and is updated every minute or two. When you log into your bank account, simply input the 6-digit code that appears on your device at that time, and you are in. Very safe, but you have to have your device with you when you log in. I assume there are companies or devices other than RSA that do the same thing.
SMS Text: Beware of this! This is the most common form of 2 factor authentication but is also the most easily hackable. We have all done this: An app or website sends you a text containing a 6 digit code that you then type in to gain access. Problem is, if the hackers already have access to your phone, then they can easily have access to your texts and thus the 6 digit code. Let me clarify: SMS Text is still better than no 2-factor authentication, but it’s not as good as other methods.
Authentication Apps: The leading players seem to be Twilio/Authy, Google Authenticator, and Microsoft Authenticator. I am not as familiar with these but plan to use them to see how they work, and will report what I find. Try one of them yourself and see what you think
The moderator of the webinar I attended spent a long time discussing how he comes up with unique passwords for each new log-in. We’ve all been there: You open a new app or website, and it asks you to create a password. Brain-lock ensues. You know that you really should not re-use passwords that you already have in play, but you are impatient to open the app, so you cave and re-use an old password. Don’t do this! The moderator suggested we use thought and word association related to that specific website or app in order to derive a new password. That’s fine, but the problem is most new passwords require combinations of small letters, capital letters, numbers, and special characters. They do this for your own safety but it makes it difficult to come up with a creative phrase. What I do sometimes to address this is to use alphanumeric strings from other sources, just to come up with something. The key, however, is to write down the user name and password in the Notes section of my Contacts app on my iPhone. That way, I always have access to each user name and password. My search engine on my computer (Google Chrome, mostly) will auto-generate passwords and would (or should) remember those passwords the next time you log in. That works, if you are lucky and the search engine works the way it is supposed to, but what if you use multiple computers and/or multiple search engines? I still think you need to write down your user names and passwords. Also, there are apps out there such as Dashlane that will auto-generate passwords. I used Dashlane for a while a few years ago, but then Dashlane crashed and took all of my passwords with it, so I have a bias against Dashlane. That’s my personal experience, although I expect (hope!) Dashlane has improved its performance.
RoboCalls and Spam
The moderator says there isn’t a lot we can do about these banes of existence as of now. He stated that the average person receives 20 robocalls per day, which seems high because that’s what I get on a bad day. However, even if the number is half that, it’s still too many. We’ve all heard that you aren’t supposed to answer the calls, but the only way to make the bloody phone stop ringing is to answer it. Recently, my iPhone has been providing a Decline button when a call comes in, but only on some calls but not others. I would like to see the phone company provide a Decline option for all calls, cellphone or land line. Anything to make the thing stop ringing. As for limiting robocalls all together, that will require government action, which means you should keep your hand where it’s warm.
As for email junk or spam, you can Unsubscribe, but that doesn’t necessarily prevent the junk emails from coming in. The moderator spent a lot of time also discussing various spam (and robocall) schemes that are out there. Basically, the message was don’t under any circumstances do what the scammers ask for you to do. The IRS will not call you or email you; they will send you a letter in the mail if they want to get in touch with you. If you get a call or email saying they are from Apple or Amazon and there is a problem with your account, then log into your accounts on those websites and see if there is a problem; likely there is not one. Be very skeptical and use common sense.
All of these recommendations require more time spent and more work by you, but none of them require expenditures. Do them for your own safety. You lock your car and your front door; you should also do what you can to lock your online selves. Think of these steps as your keys. By doing so, you will be your own cybersecurity engineer: another job title you probably didn’t think you would attain just a few years ago!
Interesting take in this article by Jonathan Lansner, longtime business columnist of the Orange County Register. Lansner uses data from the Federal Reserve and from Freddie Mac to show that April’s average 30-Year Mortgage rate of 3.1% was lower than April’s 4.2% annualized inflation rate. That’s not just a tad bit lower; that’s a lot lower, 1.1 percentage points lower. First time this has happened in over 40 years – August 1980, to be exact. Let me give you my thoughts on why this has occurred and what might happen in the future.
Why Mortgage Rates Remain Low
Mortgage rates are still in the low 3% range because US Treasury rates remain steadfastly low despite the uptick in inflation. Rates of 30 year mortgages are closely linked to 10 Year US Treasury yields because the average duration of 30 year mortgages is about 10 years (a little less, actually). Check out the chart of the 10 Year US Treasury. After rising from below 1% at the beginning of 2021 through mid-March, the yield on the 10 Year topped out at just over 1.7% during the 3rd week of March (coincidentally the 1 year anniversary of the nadir of the stock market in 2020). Since mid-March, however, Treasury buyers have rushed in and have kept yields below 1.7%. Why is this? Because 1.7% on “risk-free” US Treasuries looks like a great return to investors both in the US and in the rest of the world. As low as they are, rates on government debt in the US are higher and hence more attractive to international investors than are rates from other countries. As long as that remains the case, look for 10 Year rates and therefore mortgage rates to remain low. Unless inflation gets out of hand, which it might.
Is April’s 4.2% annualized inflation rate just an anomaly, or is it just the tip of the iceberg? Last week I wrote about the quadrupling of the price of lumber, which certainly contributed to April’s inflation in some way. Since I posted that article on lumber, its price has headed south, from $1,700 to just over $1,300, a drop of about 23% in a week. If lumber’s price remains subdued, so to speak, it speaks to the anomaly theory rather than the runaway inflation theory of the future. Supply chain disruption was and remains a big part of the world economy. The US economy seems to be recovering well but that’s not true of other geographies which export essential components so that the US economy can continue to roar forward. Perhaps the theory of a temporary period of disruption is another reason why US Treasury rates remain benign despite higher inflation numbers. The Federal Reserve itself believes inflation remains under control and that an annual rate of 2% or even slightly higher is acceptable, April’s figure notwithstanding. Do you believe or trust the Fed? If you don’t, proceed at your own peril because the Fed usually gets what it wants.
I believe the phenomenon of inflation rates greater than mortgage rates could remain a thing for several months hereafter. Anecdotally, gasoline is higher, the cost of going out to eat is higher, housing is higher, and so it stands to reason that we should get used to inflation rates of in excess of 2%. If supply chain disruptions are to blame, then I believe such disruptions will remain with us for at least a year, maybe more. Meanwhile, unless inflation really gets out of hand – say in excess of 5% for a sustained period, along with the perception that the Fed is out of touch and fighting the wrong battles – the demand for US Treasuries will remain strong and therefore Treasury rates will remain low. What does this mean for your investment outlook? Buy stocks, including and especially funds and/or ETFs that track stock performance.
If you believe, as the Federal Reserve does, that inflation is under control and will likely remain so for several quarters at least, then you might want to reconsider your belief after taking a look at the chart of Lumber Futures. Presented here is a Weekly chart of Lumber Futures that goes back to January 2019. You can see that it has gone almost straight up since October 2020.
Why has the price of lumber quadrupled, from about $400 per 1,000 board feet pre-Covid to over $1,600 per 1,000 board feet now? According to this article from Vox.com, there are are a number of factors involved, including the following:
Sawmills laid off workers when Covid hit.
Demand for lumber was forecasted to drop due to Covid. Instead, demand rose because people decided to work on their homes during the Covid shutdown.
Sawmills were slow to turn the switch back to On in the midst of the rise in demand.
Now sawmills are finding it hard to find workers, a labor shortage common to a number of industries that may have roots in the increased Covid relief and unemployment benefits paid to workers.
Beetle infestation in British Columbia is limiting the supply of lumber from that area.
Combined with sub-3% mortgage rates, the rising cost of lumber is causing the price of housing to increase. If you already own a home, then that doesn’t affect you. However, if you are a renter and/or you are in the market to purchase a home, then it will cost you more to do so. For sale home prices are not included in the Consumer Price Index measure of inflation, but “Owner’s equivalent rent of residence” is part of CPI. The rising cost of lumber will have an effect on CPI, whether directly or indirectly.
Another ramification is that people who may have been considering building a new home may reconsider once their project goes out to bid only to find out the cost of lumber has quadrupled. Same thing for homebuilders: how many tract home projects will no longer pencil with these much higher lumber costs? The result if that the already constrained supply of houses that are for sale will become even more constrained. With supply constrained while demand is increasing, home prices will likely continue to be strong, especially if mortgage rates continue to be low.
What To Do
Unless you live in a rent-controlled situation or other non-market factors are involved, then you don’t want to be a renter now. If you already own a house and plan to stay, then great! However, if you are looking to sell and move, then I advise that you make sure you have your new destination identified and under contract before listing your current house for sale. Buying the new home is the tougher of the two steps in this seller’s market. Don’t sell your current house and then have to move into a Residence Inn or other non-appealing temporary situation that will cost you a lot of money.
Home sales may not directly be a part of CPI, but if lumber remains high, the price of housing will reflect this new normal and will cause increased inflation, indirectly if not directly. If higher inflation numbers cause the Federal Reserve to rethink its stated positions on holding short-term interest rates low for at least a couple of years, then look for a rocky period in the stock market due to the prospect of higher interest rates.
Tilray gets a lot of press because of the industry it plays in: Cannabis. i.e. Marajuana. Tilray’s mission is “to build the world’s most trusted and valued cannabis and hemp company.” Fair enough. It is getting more press this week because its merger with Aphria, another cannabis seller, closed, wherein the former CEO of Aphria (Irwin Simon) became the CEO of the combined company, which will continue to be known as Tilray. Despite all of this press, Canada-based Tilray has continued to lose boatloads of money. Although cannabis legalization is moving forward in the USA (it is already legal in Canada), I believe Tilray faces a steep uphill battle to reach profitability. I would not invest in Tilray stock, nor of the stock of most any other cannabis stock. Read on to see why I believe so.
Check out Tilray’s most recent 10K for 2020. The report is long on the future prospects of cannabis and therefore on the company, as well as on the risks of being in this business. However, the financial results are not a highlight. You have to scroll all the way to Page 64 of the report to find a summary of their financial results. Page 64 shows a gross profit of $24.7 million on sales of $210.5 million (gross margin of 11.7%). Good enough, but Tilray’s combined selling, general and administrative expenses (sg&a) totaled $140.5 million, or 67% of gross sales. Then Tilray shows a write-off of $61 million, which is 29% of gross sales, for “impairment of assets”. Cannabis is an organic product that can go bad. Tough way to do business. My take is that this is a low-margin business with product that easily can go bad in the warehouse, and that sg&a expenses are extraordinarily high for the company’s sales. Said another way, Tilray’s gross sales will have to increase enormously in order to justify what they are spending now for sg&a, let alone what they would be spending in sg&a if their sales were to increase. I don’t see Tilray reaching profitability any time soon, even with the merger with Aphria (Aphria’s financials are not part of Tilray’s 2020 10K).
Low Barriers to Entry
My fundamental problem with investing in Tilray or any other publicly-traded cannabis company is that the barriers to entry into the cannabis business are low, and that the hardcore cannabis users are already invested in the “alternative” growers and suppliers, or they just grow their own. Anyone can grow their own marijuana in their own backyard or even in a pot in their apartment. Just acquire some seeds from a buddy and off you go. In fact, growing one’s own is a primary aspiration of many hardcore users. My sense is that the Tilray’s of the world will attract new cannabis users, at least for a while. I believe the appeal of growing one’s own is part of the allure of cannabis, and this points to the issue of low barriers to entry in the cannabis industry. It is hard to establish a footing when literally anyone can get into the business of growing marijuana.
Despite the new applications for cannabis – CBD creams, oils, gummies, and the like – I believe the demand for cannabis and its derivative products will prove to be overstated. I have tried CBD cream on various body aches (hey, it’s legal), and it does work, but not substantially more than non-CBD topical products such as Emu oil or traditional Ben Gay, all of which I have also tried. Moreover, CBD creams are much more expensive. I believe people will try CBD creams just to check it out, but given its relative cost, I don’t believe sales will be sustainable. Yes, there will always be the traditional market for consumption of cannabis, but with its health benefits are clearly debatable at best, I don’t view its sales growth as something we should promote. In short, I don’t see cannabis demand exploding to the extent Tilray needs it to in order to become consistently profitable.
The current advocates of cannabis products tout its health benefits. I agree that my CBD cream seems to work on my body aches. However, the problem is that all of these claims are word of mouth. Traditionally, if you have a substance or a chemical that you believe has health benefits, you test it with lab animals, then apply to the FDA to test it with humans, and then go through the FDA process to get the substance approved so you can sell it with the substantiated claims of health benefits. The problem is that cannabis is so widely available that it can’t be patented, and if it can’t be patented, a company such as Tilray cannot take it through the FDA approval process. As such, the health benefits of cannabis will always have to be word of mouth. Tilray will never be able to mark up the price of its cannabis because it doesn’t have an exclusive, patent-protected right to sell it or its health benefits. Consequently, the cannabis business will remain a relatively low-margin business, which will keep it a hard business to make money in.
As you can tell, I am not a proponent of Tilray or of any player in the cannabis business. The industry is a low-margin business with too may barriers to entry, with demand and health benefits I believe to be overstated. Tilray specifically has a bloated level of overhead that I don’t foresee it growing out of. Stay away.
If you are a fan of audiobooks, as I am, then I highly recommend you purchase economist and podcaster Malcolm Gladwell’s new offering, “The Bomber Mafia“. This is a new audiobook that was conceived and designed to be an audiobook, and not just someone reading a print book into a microphone. In the audiobook there are sound effects (such as exploding bombs), music, and recordings from the World War II era that is the subject of the book. Even if you aren’t that interested in the subject – bombing during WW II – you should still buy the book just to listen to the production, if you like audiobooks.
At the outset of “The Bomber Mafia”, Gladwell says he has come to the realization that he likes to write about people who are Obsessives. Obsessive people, Gladwell says, are those who are able to block out all of the external noise and distractions in order to move forward with an idea or a goal that they believe will change the world in some way. While obsessive people may accomplish a great deal, their accomplishments will likely be at the expense of interpersonal relationships. Obsessives typically aren’t great managers of people or even life partners because even the people closest to them can get in the way of their obsessions. People who are obsessive typically aren’t fully healthy, either mentally or in some other way.
Are You Obsessive?
Most people aren’t obsessive, and that is probably a good thing for greater society. Can you imagine what our society would be like if most people were obsessed about something? And what if those obsessions came in conflict with one another? I guess that’s how wars start. So, if you are lacking an obsession, that’s ok. However, you may want to look at the concept of obsession as a way to invest your money.
Entrepreneurs Are Obsessives
I would guess that many, but not all, successful companies are started and run by obsessive entrepreneurs who believe they can change the world and want to convince a pack of employees to engage in the quest to do so. Think about the mega-cap companies that are now the most valuable in the world. Do you agree that Bill Gates of Microsoft, Steve Jobs of Apple, Mark Zuckerberg of Facebook, Elon Musk of Tesla, and Bezos of Amazon are or were obsessives with their visions for their respective companies? Most, if not all, did not let interpersonal issues get in the way of their obsessions. Most were considered to be not very nice guys. However, the world wouldn’t be what it is today without any one of them, and our economy wouldn’t have gotten through the pandemic as well as it did without what they have contributed to our economy.
Look For Obsessives
With respect to your own investing, we have been taught by the Warren Buffetts of the world (another obsessive!) that we need to dig deep into the companies, their markets, and their financials in order to make a fundamental decision as to whether or not to invest in those companies. This is all well and good, but I would also add that you need also to look to see that the leadership of that company is obsessed about its mission. This is probably easier to do with larger companies because these larger companies tend to get more press coverage. However, if you like to dabble in mini-cap stocks or even in private equity or private companies, I would make sure that whoever is leading that company has a reasonable and healthy obsession with whatever that company is trying to accomplish. I would guess that most such entrepreneurs will be obsessed to some level. Now it is up to you, the investor, to determine if their obsession can be realized and monetized, and if that entrepreneur is the one who can lead that company to greatness. After all, there have been a lot of obsessed people who have failed either with their vision or their execution. You need to place your money not just with an obsessive, but with one who is able to bring their vision to fruition and make money for their investors in the process. This is what makes investing, or the allocation of capital, such an interesting endeavor.
You don’t have to be obsessive yourself in order to invest in people’s obsessions. If you look top-down at corporate management and determine whether their vision of their mission and their ability to execute it is within reason, then a good part of the battle for you as an investor is won. Building a successful company can be ugly at times but an intense focus on that building process is what is needed for that success. Look for those types of people when you invest your money.