September 14th, 2024 | Derivatives, Interest Rate Cuts, Health Insurance Premiums, Home Owning Tax Benefits, Topgolf Callaway Brands (MODG), United States Steel(X), McDonald's (MCD)

Smart Investing with Brent & Chase Wilsey

Another lesson on why investors should stay away from derivatives The well-known mutual fund company, Franklin Templeton, has a division known as Western Asset Management, WAM. Please do not confuse that with our investment firm, Wilsey Asset Management, also referred to as WAM. Western Asset Management received a Wells Notice from the Securities and Exchange Commission (SEC), which informed them that the agency was planning on enforcing some action against them. From the spring of 2021 through the autumn of 2022, the manager Ken Leech, who by the way has now taken a leave of absence, did 17,000 treasury derivative trades. The fund performance was horrendous and the three funds he managed lost as much as half of their assets as investors sold their shares. There is nothing proven yet, but if you hold these funds or other Franklin funds, I would definitely be selling my shares and looking elsewhere. I have known the Franklin funds for nearly 30 years and it is disappointing to see this type of news for that company. Full disclosure, we stopped using their funds well over 20 years ago and have zero dollars invested with them at this time Boring inflation report likely secures a 0.25% interest rate cut next week August headline CPI rose 2.5% compared to last year, which was below the estimate of 2.6% and marked the lowest reading since February 2021. The headline number benefitted from energy prices that were 4.0% lower than last year, largely thanks to a 10.3% decline in gasoline prices. The other normally volatile category, food, was also quite subdued as it showed an increase of just 2.1% compared to last August. Food at home showed a small increase of just 0.9%, while food away from home was up 4.0%. Core CPI, which excludes food and energy was up 3.2% compared to last year, which matched the reading in July. The lack of progress on core CPI is the main reason I believe a 0.25% cut will be preferred over a 0.50% cut at next week’s Federal Reserve meeting. Shelter really remains the key hurdle for core CPI as it increased 5.2% compared to last year and accounted for about 70% of the increase in core CPI. The shelter number is still puzzling to me considering the BLS New Tenant Rent Index actually fell 1% in the second quarter. At some point these shelter costs in the CPI will come down, I’m just shocked at how long that process is taking. Auto insurance continues to steal the show in terms of large gains as the category was up 16.5% compared to last year. A positive for the category as we move forward is both used cars & trucks (-10.4%) and new vehicles (-1.2%) saw declines compared to last year. While high, motor vehicle and maintenance (+5.1%) has cooled from earlier levels. This should all lead to more subdued auto insurance inflation next year. Diet drugs could cause health insurance premiums to skyrocket Weight loss drugs have become very popular as an easy way to lose weight, but who is going to pay for this more expensive option? Some of the drugs cost about $13,000 a year and there are now some discount versions that were recently announced that will still be around $6,000 to $7,000 a year if you’re willing to get a separate needle and vile to inject yourself, rather than using the autoinjector version. It is estimated that in 2024, Zepbound and Mounjaro combined sales will reach $18.3 billion. In 2025, it is estimated that the sales for these two drugs will hit $28.7 billion. What people do not realize is the strain this is beginning to put on the US healthcare system. Insurance companies make money by collecting insurance premiums from many people and calculating out what they will likely have to pay out in claims. It is obvious that if claims will be rising because of the high cost of these diet drugs paired with many people using them, the only solution is to increase insurance premiums. Some insurance plans and even Medicare won’t pay for the weight loss drugs to help with weight loss but ways around it include saying they reduce the risk of heart failure, sleep apnea, and stroke. I believe to help correct the situation, these drugs need more competition to bring more supply to the market and reduce prices. I know of a couple of other companies like Pfizer and Viking Therapeutics that are very close to releasing their own weight loss drugs. Hopefully these additions will dramatically reduce the cost of these drugs so that people can pay for them out of pocket and leave the insurance companies to cover the big expenses our healthcare system incurs. Tax benefit of owning a house Everyone likes to talk about the tax benefits of owning a home, but it’s important to understand what the true benefit is before deciding to purchase. When buying a home, the property taxes and mortgage interest are itemized deductions that can reduce taxable income for federal and state taxes. However, you need enough itemized deductions to exceed the standard deduction in order to receive any tax benefit. For married couples, the federal standard deduction is $29,200 and the California standard deduction is about $11,000. If you own a home but your total federal itemized deductions after paying your mortgage and property taxes are only $25,000, you won’t receive any federal tax benefit even though those expenses are technically deductible because you will still end up claiming the higher standard deduction. This situation is more common for people who have owned their home for a while because their property taxes are generally lower due to Prop 13 and they likely would have refinanced their mortgage when rates were lower which reduces the amount of interest they can claim. For people buying new homes, there are typically more expenses which can result in tax savings. On the federal side, the most common itemized deductions are mortgage interest on loans up to $750,000, state income and property taxes capped at $10,000, and charitable giving. In California mortgage interest is deductible on loans up to $1,000,000, property taxes but not state income taxes are deductible, and charitable gifts are deductible. If you are buying a $500k home, your tax savings will likely be between $4,000 and $6,000 per year; with a $1 million home, it’s likely between $10,000 and $12,000 per year; and with a $2 million home, it’s likely between $15,000 and $20,000 per year. The actual tax savings will vary based on the value of the home, the loan balance, the interest rate, and your tax bracket. It’s always great to reduce taxes, but this means you are paying anywhere from $40,000 to upwards of $100,000 in interest and taxes to get those levels of tax savings. Also keep in mind that taxes are likely to change in 2026 which will largely increase the tax benefit of owning a home. As with any financial decision, it is important to understand the whole picture when buying a home, not just the potential tax benefits. Companies Discussed: Topgolf Callaway Brands (MODG), United States Steel(X), McDonald's (MCD)