Jobs Report Illusion, Job Openings, Apple Goes F1, ETF Income Trap, Pension Payout Choice, Meta’s Warning Signs, Falling Home Equity & Casual Dining Shift

The June jobs number looks stronger than it really are

I want to be clear; I wouldn’t say this was a bad report, but the headline number that showed an addition of 147,000 jobs in the month of June doesn’t show the full picture. The number did come in well above the estimate for 110,000 jobs and it follows upward revisions in the months of April and May that have totaled 16,000 jobs, but the concerning part I saw was government accounted for 73,000 new jobs in the month of June. This did not come from the federal government as that actually saw a decline of 7,000 jobs, but rather it was state and local governments that added a combined 80,000 jobs in the month, most of which came from education.

The speculation is that this had something to do with seasonal adjustments and that obviously gains of that magnitude will not continue moving forward. Other areas that were strong included healthcare and social assistance, which was up 58,600, leisure and hospitality, which was up 20,000, and construction, which was up 15,000. Many of the other areas in the report were quite muted and manufacturing and professional and business services actually saw a decline of 7,000 jobs each in the month. There was good news on the unemployment rate as it ticked down to 4.1%, which was the lowest level since February and came in below the expectation for 4.3%.

Unfortunately, this largely came due to the decline in the labor force participation rate, which dropped to 62.3%. This was the lowest level since late 2022. The problem here is the working age population continues to shrink, while the retirement population continues to grow. In fact the prime working age participation rate was recently near a record high of 83%. A potential problem to future job growth is the fact that we are running low on workers in their prime.

This report largely erased any chance of a Fed rate cut in July, but I would say there was more positive news on the inflation front as average hourly earnings saw a manageable year over year increase of 3.7%. As I said, this wasn’t a bad report and in fact I would say it continues to show that the labor market is in a good spot for the most part, but it definitely wasn’t an overly strong report in my opinion. 

Job openings remain strong

The Job Openings and Labor Turnover Survey, also known as the JOLTs report, showed job openings rose 374,000 in the month of May to 7.769 million. This easily topped the estimate of 7.3 million and it also comes during a month where layoffs declined 188,000 to 1.601 million. While this is positive for the economy and shows the labor market remains resilient, it does hurt the chances of a July cut from the Federal Reserve.

Fed chair Powell during a panel said, ““In effect, we went on hold when we saw the size of the tariffs and essentially all inflation forecasts for the United States went up materially as a consequence of the tariffs.” With the labor market staying strong and many Fed members likely waiting for more data on how tariffs are impacting inflation, I would be surprised to see a cut in July.

Although there have been a couple members saying a cut in July is possible, I still believe it would come as a surprise as many other members have expressed their desire to remain patient. I can see the case for a July cut, but I believe it is more likely we will see one in a couple months at the next meeting in September, if inflation remains in check. 

Why did Apple produce the new movie F1?

Apple is obviously known for the iPhone, the iPad and the Mac, but a top producer of mega hit movies, not so much. Since 2019 they have tried to produce big hit movies like Killers of the Flower Moon in 2023 that starred Leonardo DiCaprio and Robert DeNiro, but the world box office receipts were only $159 million. Another hit movie they tried for that ended up as their top movie in 2023 was Napoleon with $221 million in box office receipts.

So why did Apple agree to spend almost $250 million more to produce F1, which stars Brad Pitt? No one seems to understand. Brad Pitt will be paid $20 million for this movie and will get a cut of the films revenue if it’s a hit. It does have some chance for success since it was directed by Joe Kosinski and produced by Jerry Buckheimer, who were successful with Top Gun Maverick as that movie grossed $1.5billion in 2022. This past weekend F1 was the top box office hit with $55.6 million, but it appears to be struggling with the mass audience as most viewers were older men like myself who love cars and racing. I have not seen the movie yet but would like to soon.

Apple seems to struggle in this space as it is spending billions of dollars annually but continues to lose on the development of hit movies. Apple TV+ only has roughly 27,000,000 subscribers and is known for subscribers canceling their subscription after watching a particular show or movie. Netflix has a 2% cancellation rate while Apple’s is 6% in any given month. It’s also interesting to note that the big movie production house Warner Brothers is responsible for distributing F1 and will receive a percentage of box office revenue that increases as ticket sales rise.

There is some concern that in less than two weeks, Warner Brothers will be releasing their hit movie Superman and that could override the promotion of F1. If you want to see the movie F1 and you have Apple Pay you can get a discount on the tickets, which is something Apple has never done before. I won’t make any judgments on the movie till I see it myself, but I don’t see this boosting the lagging stock price of Apple and I do not understand why they’re in the movie business.

Don’t be fooled by ultra-high-income ETF’s 

I wouldn’t think I would have to warn people that if you’re being offered a yield of 100% or more on a fund, the risk has to be extremely high and there is probably a good chance for loss. However, with that said this year alone $6.4 billion of new money has been placed into these high-risk funds that I assume are unsuspecting buyers who don’t really understand how these funds work.

Regulatory filings show that at least 95% of these ETFs are held by individual investors or small financial advisors. The way they generate this high income is by trading options contracts on a single stock. It is misleading how they come up with those ultra-high yields of 100% plus as they take the ETF’s payout from option trading in the most recent month then multiply it by 12 and divide it by the fund’s net asset value. As an example, we can go back to November 2022 when a fund called the YieldMax TSLA Option Income Strategy ETF (TSLY) sold options on Tesla stock and promoted the yield was 62.8%.

The fund has now dropped down to under $9 a share, roughly a 80% drop in the fund. This is somewhat surprising to most since during that timeframe Tesla stock is up around 70%. Sometimes people think just because there’s income or a nice yield that the fund is safer, but investors should remember that in most cases, the higher the yield the higher the risk. 

Financial Planning: Pension lump sum vs monthly income?

When deciding between taking a pension benefit as a lump sum or monthly payments, it's helpful to compare the guaranteed income stream to the return you'd need on the lump sum to generate the same income yourself. Monthly payments offer steady, reliable income for life, essentially acting like a personal pension annuity, but most pensions do not include inflation adjustments, meaning the purchasing power of those payments may decline over time. Additionally, choosing a joint life annuity to continue payments to a surviving spouse will offer a lower monthly amount compared to a single life annuity.

Since Social Security income drops when the first spouse passes, a joint annuity is usually more appropriate than a single life annuity to help maintain household income for the surviving spouse. In contrast, rolling over the lump sum into a retirement account gives you full control and the potential for growth. It also provides flexibility to structure income in a tax-efficient way allowing you to manage taxable distributions around other income sources, perform Roth conversions, or plan for inheritances and legacy goals.

To make an apples-to-apples comparison, it is helpful to calculate the internal rate of return (IRR) you'd need to earn on the lump sum to replicate the monthly pension payments over your expected lifetime. For example, if your lump sum is $500,000 and your pension offers $3,000/month for life, you'd need to earn a little over 5% on the lump sum to match that income. Keep in mind, the lump sum is also an income source and this return calculation can help clarify whether the guaranteed income or potential flexibility and growth better align with your overall financial plan.

Could there be problems ahead for Meta?

Meta, which owns Instagram, Facebook, and WhatsApp, has been extremely successful in the advertising space. As a user of these platforms though I have been increasingly concerned with the number of spam messages and comments I received from what I believe are fake accounts. It led me to question how many of these fake accounts are out there? I was shocked to see from a simple Google search that while the exact number is unknown, some sources indicate that as much as 10% of Instagram accounts could be fake.

I was then even more surprised by comments from a Meta executive that said as much as 40% of all activity on Instagram was “fake.” This statement came from an email exchange in 2018 between Instagram’s current boss Adam Mosseri and an executive that was worried the social-media app had “mis-prioritized and under-funded integrity efforts.” My concern with the advancement in AI is that these numbers could even be worse in today’s world.

From an investment standpoint, this would concern me as I do believe further regulation may be justified in this space, which could increase costs and limit growth. Also, from an advertising standpoint it would bother me that I was paying for advertising that could be going to fake accounts. If that problem continued to grow it could cause reputational damage, I know I won’t be advertising on Meta at this point in time. 

Home equity is dropping for some homeowners

I knew it was just a matter of time before the overheated real estate market took a break and that appears to be happening in certain areas around the country. Overall, I’m not too worried for most of the homeowners who still have trillions and trillions of dollars in equity across the country, but there are some who paid too high of a price for the home they bought and they are now underwater. Some areas in Texas and Florida seem to be in the worst shape as it is estimated 4 to 7% of homes have negative equity.

There’s no need to panic at this point because as long as we have a strong job market and people can afford to pay their mortgage, they will continue to do so because it makes sense. If we were to see a weak job market, which we do not see in the near future, that could become problematic because people would start falling behind on their mortgage payments and perhaps go into foreclosure or sell their house for a very low price.

Also, we have to remember that banks and mortgage companies have had very stringent lending standards unlike what we saw in the years prior to 2008. One downside for some homeowners is if rates were to fall, they might not be able refinance their home to take advantage of a lower rate because of that negative equity. At this time, there is no need to hit the panic button, but it is important to be aware of the overall real estate market and to remember that is important to be patient during the home buying process to make sure you are making a good, informed decision. 

Do you eat at casual dining restaurants?

I ask because they’re trying to make a comeback in this difficult competitive market. Many restaurants are spending millions of dollars to update their menus, remodel the dining rooms, and place a priority on good service over gimmicks to give you a good dining experience for a reasonable price. Excluding the pandemic in 2020, US restaurant bankruptcies have hit their highest level in decades.

Names you may recognize would be TGI Friday’s, Rubio‘s Coastal Grill and Red Lobster. Other well-known names such as Denny’s, Applebee’s and Hooters have closed slow performing locations to improve their profitability. Chili’s and Texas Roadhouse seem to be doing well attracting new customers by offering good quality service and a fun atmosphere. Many other restaurants are struggling as they try to attract new, younger customers without offending their older loyal customers. When it comes to investing in these restaurants, there could be something there, but be careful with what you pay for their stocks because it is currently not an easy economy to run a profitable restaurant.