Businesses should do well with reduced regulations going forward
Reducing regulations saves companies both time and money and time is always money. Starting in 2025, it is expected that for every new regulation that goes on the books, 10 regulations must be eliminated. I was unaware of what is known as the congressional review where a new President along with Congress can undo certain rules that the previous administration put on the books in the last few months. At this time, ...
Businesses should do well with reduced regulations going forward
Reducing regulations saves companies both time and money and time is always money. Starting in 2025, it is expected that for every new regulation that goes on the books, 10 regulations must be eliminated. I was unaware of what is known as the congressional review where a new President along with Congress can undo certain rules that the previous administration put on the books in the last few months. At this time, we’re not sure which ones will be eligible for elimination, but you will likely see some rules that perhaps made no sense to many people could be reversed in 2025. There could be a fight brewing between California and the federal government over some of these changes in regulations and California could lose their waiver and authority to ban the sale of new gasoline powered cars by 2035. The federal government wants control back over the auto industry, and does not want to allow states to come up with separate rules. That could ease pressure on both the auto companies and consumers as well. One that I’m not sure on is eliminating bank watchdogs like the FDIC. I like the idea of pulling back on the regulations, but maybe this is one that should be controlled not eliminated? Be prepared in 2025 for many changes in business, I believe most will be helpful.
History has proven in the recent past that tariffs can cause problems in the economy and the markets as well.
We have talked for the past month or so that we have been lightening up on our investments, which does not mean we went to 100% cash but a more reasonable level of around 20% in cash and 80% invested. A big reason for this is I believe currently the markets are incorrectly ignoring what the potential tariffs will do in the short term. It was only about six years ago when we had tariffs and that caused disruption in supply chains and rising manufacturing costs along with declining profits for some corporations. Our trading partners did not simply give in to the demands. Looking at China in particular, in September 2019, an additional $113 billion of tariffs were imposed on top of roughly $50 billion of tariffs that were already in effect. Each time the tariffs were raised, there was retaliation from China. This began to cause wild swings in the stock and bond markets. It is important as well for investors to understand when tariffs were imposed in 2018, the economy was doing well. That was because of recent tax cuts that reduced the corporate income tax from 35% down to 21%, which was a 40% decline. Now in 2025 there are no big tax cuts that the economy and businesses are benefitting from, which could hurt corporate profits in the short term. There is a potential tax relief bill that must go through Congress, but that would not be felt by anyone until the summer or late fall of this year. No one knows for certain how long it takes tariffs to benefit the economy because last time the world and trade fell apart as Covid changed everything. So for now, we will just have to wait and see how long it will take before the United States sees a benefit to tariffs, which I do believe long-term they are a good thing. With some potential short-term headwinds from these trade conversations, I think it’s important to not be overly aggressive with your portfolio and to make sure you’re holding strong businesses with low valuations that do not rely heavily on overseas trade.
Liquor sales are declining and the bourbon boom seems to have passed
It used to be investing in alcohol companies like Brown-Forman, who is famous for Jack Daniels, and other alcohol companies was a relatively safe investment over the long-term. But it appears that peoples liquor cabinets are still full from the Covid years when they over bought many types of booze for drinking at home and they still have a good amount of that alcohol left. No help to the industry is the anti- obesity drugs, the legal use of cannabis and some people switching to non-alcoholic drinks. The recent warning from the US Surgeon General recommending alcohol bottles should have a warning label on them about cancer could also hurt sales temporarily. We can’t forget about the tariffs that are coming as this will likely be another heavy weight on alcohol and bourbon sales and profits. While writing about the decline in bourbon sales, I thought I would go to my bar to see if I had any bourbon to try. I took a shot of it and it burned all the way down. I personally don’t know why Bourbon is so popular in the first place. With that said I guess maybe others are agreeing with me, US whiskey sales declined 1.2% in 2023, which was the first decline in 21 years. In the first nine months of 2024 there was additional drop of 4%. Your bigger distillers have the balance sheets to whether the storm, but your smaller craft distillery companies are beginning to close. I do believe this will probably change course maybe not in 2025, but perhaps come 2026 more distillers could quit the business, which will leave room for the big companies to pick up that slack and see their sales and profits increase.
What Really Matters when Getting a Mortgage
When getting a mortgage, everyone’s top priority is to get the best rate. However, it is equally as important to understand what it took to get that rate. When you get a mortgage, there are origination costs called points that you can buy to reduce your mortgage rate. In other words, you can buy down that rate for a cost, and this typically doesn’t get analyzed correctly. Let’s consider an example using current market rates. For a well-qualified buyer, the par rate is about 6.75%, meaning there are no added point costs. If the borrower wanted, they could pay a point, which costs 1% of the mortgage balance, in exchange for a lower rate of 6.375%. On a $600k loan, this point would cost $6,000. The question is, how long would it take for the interest savings from the lower rate to recoup the additional $6,000 point cost? In this example assuming a 30-year mortgage, it would take almost 3 years. That may not seem like a long time, but in the current interest rate environment, most experts agree that mortgage rates will be coming down at least slightly, especially within 3 years. This means if you forgo paying the point and accept the higher rate and higher accompanying monthly payment, as long as you are able to refinancing into a lower rate within 3 years, you will come out ahead. On the contrary by paying a point, you believe that right now mortgage rates are at their lowest point for the next 3 years, which is a strong stance to take. I believe there will be opportunities to refinance into lower rates, meaning the overall cheapest way to structure a mortgage now is with a higher interest rate. You can even take this a step further by accepting a rate above the par rate in exchange for credits from the lender that can be used to pay closing costs and some of the mortgage interest. In our $600k mortgage example, taking a rate of 7.125% would come with approximately $7,500 of credits. A rate of 7.125% might look expensive, but as long as you can refinance within 3 years, that rate option gives you the lowest overall cost of borrowing.
Companies Discussed: Costco Wholesale Corporation (COST), Oracle Corporation (ORCL), The Walt Disney Company (DIS) & General Dynamics Corporation (GD)
