Big brokerage firms fighting for your investment accounts, Can Travis Kelce turn around Six Flags? Markets declined after the Fed rate cut, When does a Solar System Make Sense? & More

The big brokerage firms are fighting for your investment accounts

Our investment advisory firm over the years has never been a favorite of the big brokerage firms because we generally only do three, maybe four trades on average per year. But the big brokerage firms are now acting like the casinos in Las Vegas and are doing everything they can to get you on their platform. They will give you all kinds of tools and seminars, so you’ll take higher risk and do more trading. In the meantime, they're downplaying the risk of trading.

You see also like the casinos in Las Vegas, there are now stories of them giving away free rooms for the big players and they are giving you free software and free education on how to trade. Robinhood even invited 1000 people to Las Vegas and took them go kart racing and provided classes with their new trade platform. Schwab and Fidelity are doing similar types of events to get you to use more of their services. Once they get you in the door, they can show you how to use margin debt, which by the way hit a new record of $1.13 trillion in September, along with option trading and other exciting ways to make you think you can make a lot of money. Doesn't that sound like the casinos in Las Vegas that try and get you to hit the gambling tables?

Unfortunately, it seems to be working somewhat because the percentage of investors who now have self-directed accounts is 33%, which is a big increase from 24% just five years ago. My problem with this, as you can tell, is I don’t believe they’re teaching people how to invest but more on how to gamble and how exciting it can be. Going back 100 years it's still the same with Wall Street, they will make some big profits, and the small investors will lose most if not all of their nest egg.

Can Travis Kelce turn around Six Flags?

If you’re not sure who Travis Kelce is, he is a tight end for the Kansas City Chiefs and engaged to the well-known singer Taylor Swift. Six Flags, which is a public company that trades under the symbol FUN, has received an investment of $200 million from the activist investment company JANA Partners. It was not disclosed how much investment Travis has of the $200 million, but he does like to invest in companies both public and private. He has investments in over 30 companies that include manufacturing, distribution, consumer goods, entertainment, and a beer company. He is pretty excited about his investment because as a kid he used to love the roller coasters, Dippin' Dots and him and his brother have great memories at Six Flags. He has suggested that they do a roller coaster with a 300 foot drop where riders feet dangle from beneath. Investing in Six Flags seems to be an uphill battle.

Year to date the stock is down roughly 45%, the company is losing money and has a market capitalization of $2.6 billion. Travis does have a long-term perspective on all his investments likes we do. He is OK investing in a company losing money in hopes it could be turned around. Our philosophy at our firm is we will not invest in companies that do not have earnings. One benefit he does have is obviously his name and I’m sure if him and his fiancé, Taylor Swift, would start showing up at Six Flags, you can bet that they will be all over the news giving the company some nice free advertising.

Markets actually declined after the Fed rate cut 

On Wednesday, the Fed announced they would lower their benchmark overnight borrowing rate by 0.25% to a range of 3.75%-4%. This marked the second consecutive cut of 0.25% and there is still one meeting left this year where we could see another rate cut. The keyword here is could and the lack of conviction around another cut is likely what spooked the market. Powell said a December rate cut isn’t a “foregone conclusion” and while recently appointed Fed Governor Stephen Miran again dissented in favor of a 0.5% cut, there was also a hawkish dissent with Kansas City Fed President Jeffrey Schmid voting for no decrease. Schmid's vote and Powell's language was likely what sent the market lower after the announcement as many essentially had the December rate cut factored in as a sure thing.

Powell also added that there is “a growing chorus” among the 19 Fed officials to “at least wait a cycle” before cutting again. This resulted in traders lowering the odds for a December cut to 67% from 90% the day prior. Given the lack of data and an economy that still appears to be in an alright position, I do believe the Fed needs to be careful cutting too quickly especially since they are taking another accommodative stance with the announcement that they would be ending the reduction of its asset purchases – a process known as quantitative tightening – on Dec 1. This in theory will stimulate the Treasury and mortgage-backed securities markets, which should help with longer dated debt instruments, as the Fed was allowing these assets to just roll off the balance sheet and now will need to step in and buy new debt to replace the securities as they mature.

While QT shaved off around $2.3 trillion from the Fed's balance sheet, Covid led to a major expansion from just over $4 trillion to close to $9 trillion. The question is with the rapid expansion just a few years ago, was enough removed from the balance sheet to put it at a more normalized level. Like with the Fed cuts, I do believe if monetary policy eases too much, we risk a return of inflation and a further increase in many speculative assets that could cause problems down the road.

Financial Planning: When does a Solar System Make Sense?

Buying a solar system generally makes the most sense if you use a lot of electricity and plan to stay in your home long term. Installing by the end of 2025 allows you to capture the 30% federal tax credit, which significantly shortens the payback period. If the system is financed with a mortgage or home equity line of credit (HELOC), the interest may be tax-deductible, allowing for little or no upfront cash outlay and after-tax loan payments that can be lower than the monthly electricity savings. Owned solar panels usually increase home value, though not always enough to fully offset the system’s cost, which is why longer-term ownership is important to recoup the investment.

In California, including a battery is almost always recommended so you can store power generated during the day for use at night, reducing the need to buy expensive electricity from the grid. Leasing can be attractive for shorter-term homeowners if lease payments are well below current utility costs, but leases generally don’t increase home value and don’t qualify for tax credits. The main advantage is immediate monthly savings without an upfront investment, though leased panels can complicate a future home sale. In some cases, it may be best not to install solar at all—for example, if you don’t plan to stay in the home long term, or if your electricity usage and potential savings are too low to justify the hassle and possible roof wear from installation.

Don't ignore the concentration risk in the indexes!

I've talked about this before, but the S&P 500 is not as diversified as you think. The Mag Seven, which consists of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla now accounts for nearly 35% of the entire index. If you look at the QQQ, or the Nasdaq 100, the concentration is even more problematic with the Mag Seven accounting for nearly 45% of that index. If you include Broadcom in the mix, those companies would account for nearly 40% of the S&P 500 and 50% of the QQQ. While the indexes continue to climb, people continue to have the false belief that they have a sound diversified portfolio.

It is when the music stops that people will come to realize how over reliant they were on the tech sector. Congratulations if you have consistently held these indexes, but the more I read, the more concerned I am that we are heading towards something similar to the Tech Bust that occurred more than 25 years ago. 

Maybe we will see a decline in the federal deficit next year

I have said before that at this point, the federal debt is not a huge problem, but it’s something that needs to be taken care of before it does get too far out of hand. There only seems to be two ways to reduce the federal debt, one is to reduce spending, which would hurt the economy, or two is to increase taxes, which would probably hurt the economy even more. I recently read something in the Wall Street Journal that gave me a glimmer of hope that there’s another way that maybe we can reduce the federal debt.

In one of the articles it mentioned that at the NATO summit in June, President Trump achieved something that has not been possible by every other president since Richard Nixon was in office over 50 years ago in the early 70s. Somehow President Trump convinced the Europeans to make a commitment to increase their defense spending from 2% to 5% of their GDP. This means they’ll be taking care of themselves and that’s less money that the United States has to spend to defend them.

In addition to that, President Trump has also pretty much ended most aid to Ukraine and instead offered to sell Tomahawk missiles to the Europeans, which they can give to Kyiv if they want. That would make a lot more sense for the Europeans, and it would save the United States billions and billions of dollars, which should help reduce our spending and generate some revenue to add to our GDP. The tariffs are also generating billions and billions of dollars of revenue for the federal government.

I think we could see maybe more ways to reduce spending and increase revenue that no one has thought of. What all this means is, we could see a slightly lower federal deficit by the end of 2026. Let’s keep our fingers crossed as this debt needs to be addressed before it becomes out of control. 

The much anticipated meeting between Trump & Xi ended with little news

I would say it was positive that Trump and Xi finally met, but the meeting ended in what looks like a trade truce instead of a trade deal. Trump agreed to cut fentanyl tariffs on China to 10%, which brings the overall levy on Chinese imports to 47% from 57%. This also means the 100% tarriffs Trump threatened to go into effect on Nov. 1st over rare earths will not occur.

The US also agreed to postpone a rule announced on Sept. 29th that blacklisted majority-owned subsidiaries of Chinese companies on an entity list. Beijing said it will work to stop fentanyl coming into the U.S. and buy American-grown soybeans along with other agricultural goods. China also agreed to pause for one year the export controls on rare earths that were announced on Oct. 9th, but China’s rare earths restrictions announced in early April remain in place. The two countries also agreed to suspend fees for one year on ships that dock at each other’s ports. A big problem here according to Trump, the rare earths deal will need to be negotiated every year.

I'm concerned by this because there could be a major difference in philosophy with the next administration. Another negative was details were quite light after the meeting and it wasn't really clear what China agreed to in terms of agriculture and energy purchases and their cooperation on fentanyl trafficking. Treasury Secretary, Scott Bessent, said China will buy 25 million metric tons of soybeans annually over the next three years, but all China said was the two sides agreed to expand agricultural trade without providing specifics.

Other major points of contention including TikTok and chip exports from Nvidia appeared to go unresolved. Moving forward, Trump said he plans to visit China in April and Xi will come to the U.S., either Palm Beach, Florida or Washington, D.C., at a later date. 

If we lower interest rates, it is possible we may never be able to raise them again

I know that seems strange, but you have to realize that the United States is now nearly at its 1946 peak of indebtedness relative to the size of the economy. It's important to remember 1946 was just after World War II and the country was paying off all the debt that was run up during the war. I do believe going forward, if the economy can maintain or continue to grow and the plans from the current administration generate more revenue, I think we will be fine. However, if they don’t work and the debt continues to rise, it would be hard to raise rates as it could scare current owners of treasury debt as interest expense would climb dramatically, which would make it difficult to recover. This is one problem that Japan is already faced with. Their large amount of debt to GDP and the debt itself cannot keep going up forever as people will eventually become scared and begin selling their treasury bills, notes, and bonds.

The average interest rate on US debt is around 3.4%, which is not too excessive and could be paid off overtime. Increasing interest rates in the future would be a problem because as debt matures, it could have to be refinanced at much higher levels than the 3.4%. I believe the best way out of this situation is to maintain the current debt but increase the GDP, which would then in the long term generate more revenue to not only service the debt but also potentially be in a spot to begin paying the debt down.

Some states are thinking of putting price caps on insurance companies, bad idea!

Illinois is considering a ban on insurance companies being able to increase rates because of catastrophes in other states. At first thought this sounds like a great idea, but the problem is it makes the pool of insurance much smaller and if Illinois would have a catastrophe of their own with a smaller pool to cover the losses, insurance premiums could skyrocket perhaps even double. Louisiana gave its regulator the power to reverse excessive premiums. New York and Michigan are looking at imposing reductions on insurance premiums on both homes and cars. These states need to review what happened in California when the state refused to let insurance companies increase their premiums.

Many insurance companies said we will lose money if we stay so we are pulling out of California. After a while California realized their mistake and allowed double digit increases insurance premiums and the insurance companies came back. People, regulators and the government forget that in many places home prices in just a few years more than doubled, which is ironic since people loved to brag about it. The reason this is important is when thinking about insuring an asset, if your house went from $400,000 to $800,000, would it not make sense to have your insurance premium increase 100% as well?

States need to think more like Utah that has 130 insurers in their market. This gives consumers the ability to shop for lower prices and in order to compete insurance companies will have to figure out how to keep their rates competitive. I also don’t believe that people in government understand how rigorous the actual analysis insurance companies do to figure out how to cover the losses is and that they still need to make a profit for their shareholders. If someone thinks profit is a bad word, just think about that the next time you look at your pension plan or the growth in your 401(k). If companies were not making profits, the value of your pension plan or 401(k) would never grow.

Small business owners may not be putting your deposits into your 401(k)

I was surprised to see this, but apparently there are some small businesses that deduct the money from your paycheck but then fail to make the deposit into your 401(k) account. Part of the reason could be retirement plans with less than 100 participants are exempt from an annual audit that the federal law requires. The Labor Department has retrieved almost $24 million in missing 401K loan payments and contributions over the last 10 years through 3,100 civil investigations. The agency has also recouped $14 million through 115 criminal cases involving theft of 401(k) money.

What is more staggering is that on top of that, there was roughly $260 million that was voluntarily returned to employees after the companies got caught. They often said the mistake was due to confusion around the rules. A former Principal Deputy Assistant Secretary at the Labor Department’s Employee Benefits Security Administration, which regulates 401(k)'s, says when small companies are facing financial difficulties, they tend to use those deposits as a short-term loan with the intention of paying them back quickly. But unfortunately, that doesn’t always happen and in the meantime, it is possible that your 401K account is missing gains because the money is not invested.

If you work for a small company, I recommend at least once a quarter looking at your 401(k) not to see how well it’s doing, but to verify that the deductions from your paycheck are actually going into your account. I would guess roughly 99% of small businesses withdraw the money and put it into your 401(k), but for those 1% that is not happening for it is something you want to be on top of and make sure the money is coming out from your paycheck and going into your 401(k) account. If you find that is not the case, I recommend stopping your 401(k) contributions as soon as possible. If it goes on too long, there are companies that just close the doors, leaving the employees with little help of getting their money back.