March 2025 Client Letter

Recently, our family boarded the Norwegian Cruise Line ship Encore, sailing to the Eastern Caribbean. One port of call was in Puerto Plata, where we had planned an adventurous day exploring the Damajagua Waterfalls. This involved hiking our way into the rainforest and then jumping or sliding our way down the falls.

Unfortunately, due to heavy rains, only a handful of the 27 waterfalls were open. To make up for the shortened excursion, our tour included a visit to a local coffee roasting shop and wood carving demonstration. Wandering through the coffee shop and art gallery, I wondered how they expected tourists to make purchases. We traveled light, with no wallets or credit cards, anticipating an afternoon in the jungle and in rushing waters. I figured most of our group probably did the same. Then I noticed something that answered my question: a piece of paper in a sheet protector thumbnailed to the wall. It announced: Apple Pay Accepted Here.

The Apple Pay sign reinforced two of my favored themes. First, I believe many U.S. companies traditionally designated as technology companies can now be considered consumer staples. Consumer staples are essential products, integral to daily life, that people regularly purchase and use, regardless of economic conditions. In today’s world, this category might include Amazon’s e-commerce platform, Apple’s devices, Google’s search engine; and Microsoft’s operating system, Office Suite and cloud services (Azure).

Second, Big Tech is one of America’s most successful exports. Whether you’re walking down a street in any country or needing to buy a pound of Caribbean coffee in a Dominican tropical forest, the presence of technologies like Apple Pay is often ubiquitous.

United States Big Tech companies, including Apple, Microsoft, Amazon, Alphabet (Google), and Meta are dominant in the global economy. In 2023, the U.S. reported high-technology exports worth approximately $208.5 billion, according to Trading Economics.

Apple’s global sales of iPhones, iPads, and MacBooks generate billions of this figure. Microsoft’s software and cloud services, Amazon’s e-commerce and AWS, Alphabet’s digital services, and Meta’s social networking platforms play crucial roles in driving these export numbers.

U.S. Big Tech contributes significantly to the U.S. economy by creating jobs, driving innovation, and generating substantial revenue from international markets. Their technological advancements and global operations also demonstrate the United States’ innovation leadership and why stocks of these companies can play a role in diversified investment portfolios.

The Year Ahead: Physical AI and AI Agents

As U.S. Big Tech continues to dominate global markets and our daily lives, these companies are also helping to drive the next wave of innovation. Looking beyond traditional software and digital services, here is a look at emerging technologies that will shape the future in 2025 and beyond. 

Physical AI is a newer form of AI designed to interact with the real world, bridging the gap between digital intelligence and physical execution. Unlike traditional AI, which excels in digital problem-solving, physical AI integrates principles of physics, enabling systems to operate effectively in real-world environments.

The advancements in physical intelligence represent a significant leap forward for AI, promising to enhance the capabilities of machines in real-world scenarios. In 2025, physical AI advancements will include autonomous vehicles, humanoid robots, knowledge robots, industrial robots, and personal assistants. These technologies will contribute to urban navigation, healthcare, manufacturing, and daily life, driven by improved AI algorithms and sensors for instant decision-making and interaction with the physical world.

Moravec’s Paradox: The Human-Machine Intelligence Gap

While the potential of physical AI is immense, robotic developers have faced a fundamental challenge in replicating human abilities that we take for granted—a phenomenon known as Moravec’s paradox. 

Moravec’s paradox is the observation that tasks that are easy for humans, such as perception and mobility, are extremely difficult for machines, while tasks that are challenging for humans, like complex calculations or playing chess, are relatively easy for machines. 

This paradox, named after roboticist Hans Moravec, highlights the complexity of human sensory and motor skills, which have evolved over millions of years. It shows the challenge in replicating these seemingly simple tasks in robots despite their proficiency in more abstract, high-level reasoning tasks. Advances in AI are helping robots overcome Moravec’s paradox and to perform more human-like tasks. 

Nvidia CEO Jensen Huang envisions a future where robotics and AI are integral to everyday life. In a recent interview, Huang boldly claimed that “everything that moves will be robotic someday,” referring to the rapid advancements in AI and robotics. Huang noted that
the next decade will focus on applying AI to various fields, such as digital biology, climate technology, agriculture, and transportation.

Nvidia’s Omniverse and Cosmos platforms play a crucial role in this vision by enabling robots to learn through digital simulations rather than real-world experiences, which accelerates their development. This shift from AI science to its practical applications marks a significant step towards a robot-forward world, with Nvidia positioned as a key player in this transformation. Other companies involved in robotics include Apple, Amazon, Broadcom, Google, Meta, and Qualcomm.

AI Agents: Autonomous Software Transforming Industries

AI agents are smart software programs that work independently to complete tasks or make choices based on information and set guidelines. 

Agents can perceive their environment through sensors, process information, and take actions to achieve specific goals. Examples of AI agents include: Chatbots such as Siri, Alexa, and Google Assistant that interact with users through natural language; algorithms used by Netflix and Amazon to suggest content based on user preferences; and self-driving cars that navigate and make driving decisions. 

Recently, Oracle introduced its latest AI agents, designed to enhance supply chain operations. These AI agents are part of Oracle’s Fusion Cloud Supply Chain and Manufacturing platform and aim to streamline workflows, automate routine tasks, and improve decision-making processes. 

The new AI agents are tailored to support various roles within the supply chain, from procurement to sustainability. They independently or semi-independently perform tasks across multiple applications, reducing the administrative burden on supply chain professionals. This innovation is expected to lead to greater accuracy, efficiency, and agility in supply chain management.

Artificial Intelligence: The New Internet Revolution

For many of us it seems as if this technology has come from nowhere. The speed of newer innovation is quick. One gets the feeling the progress being made today is just getting started and the pace will only hasten from here. To me, it feels as if artificial intelligence is the new internet. 

By example, consider this from MIT Technology Review regarding internet search: 

We are at a new inflection point. The biggest change to the way search engines have delivered information to us since the 1990s is happening right now. No more keyword searching. No more sorting through links to click. Instead, we’re entering an era of conversational search. Which means instead of keywords, you use real questions, expressed in natural language. And instead of links, you’ll increasingly be met with answers, written by generative AI and based on live information from all across the internet, delivered the same way.

How We Got Here: From CPU Computing to GPU-Powered AI

The way Nvidia explains it, for decades, Software 1.0 was used, which was code written by programmers, and ran on general-purpose central processing units (CPUs). Think of a CPU as the brain of your computer. It’s designed to handle a wide range of tasks, but it does them one at a time (or a few at a time with multiple cores). It’s great for tasks that require a lot of different operations, like running your operating system, browsing the web, or using office applications.

Then came Software 2.0, which uses machine learning and neural networks running on graphics processing units (GPUs).
Machine learning teaches computers to learn from experience. Instead of programming the computer with specific instructions, you give it lots of data and let it find patterns and make decisions on its own. 

Neural networks are a type of machine learning inspired by the human brain. They consist of layers of interconnected nodes (like neurons) that process information and learn to recognize patterns, such as identifying objects in images or understanding speech.

The GPU is like a supercharged assistant to the CPU, designed to handle many tasks at once. It’s enhanced for tasks that can be done in parallel, like rendering images and videos or processing large amounts of data quickly. This makes it ideal for gaming, video editing, and artificial intelligence.

This shift from Software 1.0 and CPUs to Software 2.0 and GPUs led to the rise of generative AI, which can learn and create almost anything and paved the way for physical AI and agents. 

Investing in AI: Navigating the Six Levels of AI Value Chain

When investing in the AI space, I reference a white paper by McKinsey & Company, which identifies the six levels of the AI value chain. Each level represents a critical component of the AI ecosystem.

I think it can be beneficial to diversify across various AI levels, attempting to capture the wide range of potential opportunities and innovations driving the industry. This approach could also help mitigate risks associated with any single segment. 

McKinsey & Company’s six levels of the AI value chain, with examples of companies within each level, are as follows:

• Hardware: Nvidia, Broadcom
• Cloud providers: Microsoft, Alphabet, Amazon
• LLM model developers: Alphabet, Meta
• Model hubs and MLOps: Google Vertex AI, Microsoft Azure ML
• Applications: Meta, Alphabet, Oracle
• Services: IBM, Microsoft, Oracle

Market Volatility

For the week ending February 21st, we saw some volatility back in the market with the Dow and Nasdaq down over 2% and the S&P 500 down 1.6%. Many of the stocks highlighted in this letter were down more: AMZN -5.2%, AVGO -4.19%, NVDA -5.3%, and QCOM -4.5%.

To offset these down periods, it can be helpful to own stocks that might zig while the rest of the market zags. Traditionally, this could mean owning dividend-paying stocks from defensive sectors including utilities and consumer staples. Two examples of these type of stocks are The Southern Company and Coca-Cola.

Southern Company: Generating Consistent Dividend Growth

Dividend investors may look to Southern Company (SO) due to the company’s consistent track record of returning cash to shareholders. The company, with a current dividend yield of 3.28%, has paid a dividend since 1948 and raised its dividend for 23 consecutive years. SO has also increased its total revenues to 26.7B in 2024 from 17.4B in 2015 while increasing net income to 4.4B from 2.3B during the same time period. 

Southern Company, headquartered in Atlanta, Georgia, is a leading energy company serving nearly 9 million electric and gas utility customers. Southern Company’s energy mix is diverse, including nuclear, natural gas, coal, hydro, solar, and battery storage facilities. The company manages nearly 77,000 miles of natural gas pipeline, operates 14 storage facilities with a capacity of 150 billion cubic feet, and provides digital wireless communications and fiber optics services through Southern Linc. 

Looking ahead, SO could benefit from increased electrical demand due to overall economic growth in the regions it serves. In a January blogpost, Amazon announced plans to invest $11 billion to expand its infrastructure in Georgia to support cloud computing and AI technologies. 

Coca-Cola: Brand Power Beyond Soda

Coca-Cola (KO) has long been an investment destination for dividend investors given that KO has had 62 years of consecutive dividend growth. The global beverage company operates in 200 countries and over the years has expanded its brands to include water, sports drinks, coffee, tea, and, believe it or not, milk.

Are you familiar with Fairlife milk? The brand has emerged as a standout choice in the crowded dairy market. Making Fairlife unique is its innovative ultra-filtration process, which enhances the protein and calcium content while reducing sugar and removing lactose. This is a winning formula for health-conscious individuals, fitness enthusiasts, and those sensitive to dairy.

A significant contributor to Coca-Cola’s growth has been its investment in Fairlife. Originally launched in 2012 as a joint venture with Select Milk Producers, Fairlife was fully acquired by Coca-Cola in 2020 for $980 million. By 2022, Fairlife’s sales surpassed $1 billion, driven by its Core Power protein shakes.

Aside from its dividend, investors like KO for its brand awareness, as it’s one of the most recognized brands in the world. This helps the company with pricing power as loyal customers are willing to pay a premium for its namesake product. And KO is profitable. Earnings per share increased 12% year over year in the fourth quarter and minus a tax-related decrease, KO generated $10.8 billion in free cash flow, which helps pay its dividend.

Maintaining a Diversified Portfolio

The rapid advancement in technology is reshaping the global economy and investment landscape. As innovation accelerates, companies positioned at the forefront of these transformations—whether in AI, cloud computing, or robotics—are likely to offer opportunities to investors. At the same time, maintaining a diversified and balanced portfolio with defensive sectors, including consumer staples and utilities, may provide stability during market fluctuations.

Have a good month. As always, please call us at (800) 843-7273 if your financial situation has changed or if you have questions about your investment portfolio.

Warm regards, 

Matthew A. Young
President and Chief Executive Officer 

P.S.  Cybercrime continues to grow in both number and complexity. Protecting your financial accounts from unauthorized activity is a group effort. You have an important role to play. Implement multi-factor authentication (MFA) on your financial accounts. Also, do not save the login information (user identification and password) to your financial accounts on your electronic devices.

December 2024 Client Letter

Many investors are anticipating positive developments for the U.S. economy and markets from Trump 2.0. Key expectations include the continuation of tax cuts and deregulation. Lower corporate taxes and reduced regulatory burdens are often seen as catalysts for economic growth, potentially boosting corporate profits and encouraging investment.

Additionally, Trump’s focus on infrastructure spending is expected to create opportunities in construction, manufacturing, and related industries. This could lead to job creation and further economic expansion. Despite concerns about excessive tariffs and mass deportation, the overall sentiment among investors appears to be generally positive, with many viewing Trump’s policies as conducive to economic growth.

Infrastructure is an investment theme I favor. In June, I titled my letter to you “Irreplaceable Infrastructure,” discussing essential elements such as functioning highways and energy pipelines as critical to the U.S. economy. 

Digital Infrastructure: The Unseen Economic Backbone

Unlike traditional infrastructure such as highways and pipelines, digital infrastructure often goes unnoticed but has a significant economic and societal impact. Hyperscalers and data centers are central to the U.S. technological infrastructure, supporting cloud services while helping to drive economic growth. They provide the backbone for data storage, processing, and management, enabling rapid business innovation and scalability. This expansion underscores the need for robust digital infrastructure to maintain the U.S. economy’s competitive edge.

Hyperscalers like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud power much of the internet and cloud services. These facilities handle vast amounts of data and computing tasks, expanding quickly to meet demand. Built for scalability and flexibility, they host thousands of servers and manage enormous data quantities. Advances in energy efficiency, cooling, and server density have driven their development. Initially, for tech giants, hyperscalers are now vital for online services.

Hyperscalers support global connectivity and critical applications, ensuring high availability and reliability for uninterrupted digital services. AWS, Microsoft Azure, and Google Cloud are essential for social media, streaming, cloud storage, and enterprise applications.

The Accelerating AI Revolution 

Hyperscale data centers provide the massive computational power and storage capacity needed to run AI applications efficiently. The adoption of artificial intelligence (AI), particularly generative AI, is happening much faster than the adoption of the internet and personal computers (PCs) did.

This rapid uptake is driven by the accessibility and versatility of AI tools, which are used across various industries and job roles. Unlike the early days of PCs and the internet, AI tools are more readily available and often free, facilitating quicker integration into daily life and work. AI is used in management, business, and blue-collar jobs, highlighting its broad applicability.

Bill Gates has emphasized AI’s transformative impact, stating, “The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone.” AI’s adoption is occurring at an unprecedented pace. For example, Netflix took 3.5 years to reach one million users and Facebook took ten months, while newer AI platforms and social media platforms like Threads are reaching one million users within hours.

AI applications are diverse and impactful. In healthcare, AI assists in diagnosing diseases and personalizing treatments. In finance, AI detects fraud and automates trading. In retail, AI enhances customer experiences through personalized recommendations. Autonomous vehicles and personalized education are other examples of AI’s transformative potential.

Gates said AI’s rapid advancements will make the pre-AI era seem as distant as the early days of computing: “Soon the pre-AI period will seem as distant as the days when using a computer meant typing at a C:> prompt rather than tapping on a screen.”

Strategic Technological Partnerships

Amazon, Google, Microsoft, and Meta are driving data center growth through partnerships with companies including IonQ, Rigetti, and Nvidia. These collaborations help meet the rising demand for data center capacity as AI and cloud services expand.
Amazon’s Braket service provides access to quantum computing resources from IonQ and Rigetti, helping researchers and developers design and test quantum algorithms. Amazon’s Center for Quantum Computing (CUA-Q) advances quantum technologies and integrates them into cloud services.

Google Cloud and Microsoft Azure are also investing in quantum computing and AI. Google collaborates with quantum hardware providers to enhance its cloud services, while Microsoft Azure offers Azure Quantum, a platform for quantum computing resources and tools.
Meta, with its extensive data center infrastructure, explores quantum computing and AI to enhance its services. Nvidia provides advanced GPU technology essential for AI and machine learning, integrated into the infrastructure of these hyperscalers to handle massive computational demands efficiently.

GPUs: Powering the Digital Transformation

Advanced GPUs (graphics processing units) offer significant benefits, particularly in AI, machine learning, and data centers. They provide high computational power and faster data processing, essential for training AI models and running data-intensive applications. GPUs enhance performance through parallel processing, leading to quicker insights and faster decision-making. They are also energy-efficient, reducing power consumption while maintaining high performance. GPUs are scalable and versatile and support advanced technologies like neural networks and real-time data analytics. In consumer applications, they improve user experiences in video games and virtual reality. These benefits make advanced GPUs crucial for modern data centers, enabling hyperscalers to handle extraordinary computational demands.

Meta Platforms: Beyond Social Media

Many investors primarily recognize Meta Platforms Inc. (META) as a social media giant, with teenagers frequently using Instagram and adults using Facebook to stay connected with friends and family. However, Meta’s scope extends beyond social media. As a major player in the telecommunications sector of the S&P 500, Meta serves approximately three billion users daily and four billion monthly, nearly half of the global population of eight billion. This extensive user base highlights Meta’s influence and reach. 

In addition to its social media dominance, Meta is making meaningful investments in global infrastructure. The company is reportedly planning to build a nearly 25,000-mile subsea cable network, estimated to cost over $10 billion. This ambitious project aims to enhance global data connectivity, reflecting Meta’s commitment to expanding its technological capabilities and infrastructure. The subsea cable, spanning over 40,000 kilometers, will be one of the longest and most expensive of its kind. It is designed to circle the globe, connecting the East Coast of the U.S. to India via South Africa and then looping back to the West Coast of the U.S. through Australia. 

This project is not just about expanding Meta’s reach but also about ensuring the reliability and speed of internet access for its vast user base. The cable will provide Meta with a dedicated pipeline for data traffic, significantly boosting its capacity to handle the immense volume of data generated by its platforms. The initiative is still in its early stages, with plans to start with a budget of $2 billion, eventually scaling up to over $10 billion as the project progresses.

Digital Advertising: The New Frontier of Marketing

The digital advertising landscape is growing rapidly, driven by the shift from traditional to digital media, technological advancements, and data-driven marketing. As consumers spend more time online, advertisers are allocating larger budgets to digital channels, leading to a 10% annual growth in digital-ad spending. Technological innovations like programmatic advertising, AI, and machine learning enhance targeting and personalization, resulting in higher engagement and better results for advertisers. Companies like Amazon, Alphabet (Google), and Meta (Facebook) leverage their vast data resources and advanced technologies to command the market. 

Amazon’s advertising business has grown rapidly, leveraging its e-commerce platform and extensive customer data to offer targeted advertising solutions. Alphabet, through its Google and YouTube platforms, continues to dominate the search and video advertising markets, driven by its advanced algorithms and vast user base. Meta, with its Facebook and Instagram platforms, remains a leader in social media advertising, capitalizing on its large user base and sophisticated ad targeting capabilities. 

Data-driven marketing is increasingly important, allowing advertisers to optimize ad spend and maximize its impact through real-time user behavior analysis. Amazon, Alphabet, and Meta are well-positioned due to their extensive data ecosystems and analytics capabilities.

The global digital advertising market is set to grow. According to a forecast by GroupM, global ad revenue is expected to reach $989.8 billion in 2024 and surpass $1 trillion in 2025. Amazon, Alphabet, and Meta are prepared to capitalize on these trends and drive continued growth in the sector.

The Taiwan Semiconductor Risk

Geopolitical risks surrounding Taiwan are significant due to the country’s role as home to Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest and most advanced semiconductor producer. TSMC dominates high-end chip manufacturing, producing over 90% of the global supply, essential for products ranging from smartphones to military systems. 

Apple, Nvidia, and Qualcomm depend heavily on TSMC, highlighting a critical link between American innovation and Taiwan’s manufacturing excellence. Any disruption to TSMC’s operations, such as from a Chinese invasion, would severely impact industries, causing chip shortages, production delays, and economic losses, particularly in the automotive and tech sectors. 

With no viable alternatives to TSMC’s capabilities, replicating its technological and manufacturing prowess would take years. Such dependency also poses national security risks, as advanced semiconductors are vital for modern defense systems. A disruption would have far-reaching economic and strategic consequences, not only for the U.S. but globally.

TSMC is actively developing semiconductor manufacturing facilities outside of Taiwan to diversify its operations and reduce risks. In the United States, TSMC is building a $40-billion facility in Phoenix, Arizona. This plant will produce advanced four-nanometer and three-nanometer chips, aligning with the U.S. CHIPS Act, which promotes domestic semiconductor production to reduce foreign dependency. In Japan, TSMC is constructing a facility in Kumamoto in collaboration with Sony and other partners. This plant will focus on older-generation chips used in cars and consumer electronics. 

While these efforts can help diversify risk, they do not fully eliminate vulnerabilities associated with a potential Chinese invasion of Taiwan. Establishing facilities outside Taiwan reduces dependence on a single geographic location, but the new plants will take years to match TSMC’s current production scale and technological sophistication. Taiwan will remain the hub for TSMC’s most advanced chip manufacturing for the foreseeable future. Furthermore, TSMC’s core operations, research and development, and cutting-edge production remain tied to Taiwan, meaning a conflict could still severely disrupt global supply chains.

Our Investment Strategy

In an era of rapid technological transformation, our investment strategy remains focused on understanding the fundamental shifts driving economic growth. From the potential policy impacts of Trump 2.0 to the revolutionary advances in AI, digital infrastructure, and semiconductor technologies, we are committed to navigating and understanding these evolving landscapes. By focusing on companies at the forefront of innovation—those building critical infrastructure, leveraging advanced technologies, and adapting to changing market dynamics—we aim to position our clients’ portfolios to capture the opportunities presented by these technological and economic developments.

Warm regards, 

Matthew A. Young
President and Chief Executive Officer

AI Being Used to Run World’s First Indoor Vertical Berry Farm | Fox News

As reported in Fox News, the world’s first indoor vertical berry farm has opened in Virginia, using advanced artificial intelligence (AI) to revolutionize agriculture. Aiming to produce four million pounds of berries annually, the farm leverages AI to optimize growing conditions and maximize yield. AI systems monitor and control light, temperature, humidity, and nutrient levels, ensuring ideal conditions for growth. This precision farming approach enhances productivity and reduces resource consumption, making the process more sustainable. 

AI allows for continuous data collection and real-time adjustments to the growing environment through machine-learning algorithms. Advanced robotics are used for planting, tending, and harvesting, increasing efficiency and reducing manual labor.

This AI-driven farming represents a significant advancement in agricultural technology, offering a glimpse into the future of food production. By integrating AI and robotics, the farm operates year-round, independent of weather conditions, and produces high-quality berries with minimal environmental impact. This innovation addresses traditional farming challenges and sets a new standard for sustainable agriculture.

Algorithmic Warfare

Project Maven, officially known as the Algorithmic Warfare Cross-Functional Team, is a Pentagon initiative launched in 2017 to integrate AI and machine learning into military operations. The project aims to enhance the analysis of vast amounts of data from various sources, such as drone footage, to identify potential targets and improve decision-making processes.

Several large publicly traded companies have been involved in Project Maven. Amazon Web Services (AWS) provides cloud computing infrastructure, while Microsoft contributes with its Azure cloud services. Palantir Technologies supplies data fusion platforms, and L3Harris Technologies offers advanced defense solutions. These partnerships are crucial for leveraging cutting-edge AI technologies to enhance the U.S. Department of Defense’s capabilities.

CNBC and Barron’s

In the sixth-annual CNBC FA 100 ranking (2024), Richard C. Young & Co., Ltd. was again acknowledged for its excellence in guiding clients through their financial journeys. Additionally, Barron’s annually ranks the nation’s top independent advisors, and Richard C. Young & Co., Ltd. has proudly secured a spot on this prestigious list for 12 consecutive years.

Investing involves risk, including loss of principal. International and sector investments may involve additional risks, including non-diversification risk, currency risk, political risk, and geopolitical risk. Carefully consider your investment objectives, risk tolerance, and costs before investing. The information appearing above does not serve as the receipt of, or a substitute for, personal investment advice from Richard C. Young & Co., Ltd. or any other investment professional. Past performance is not a guarantee of future results.

Rankings by unaffiliated ratings services and publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Richard C. Young & Co., Ltd. is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized advisor. Rankings are generally limited to participating advisors and should not be construed as a current or past endorsement of Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. has never paid a fee to be considered for any rankings but does pay a license fee to utilize them. Richard C. Young & Co., Ltd. has been recognized by Barron’s as a Top 100 Independent Advisor each year for the period 2012 through 2024. Barron’s is a trademark of Dow Jones & Company, Inc. All rights reserved.

November 2024 Client Letter

In the world of advertising, few campaigns have been as iconic as the 1975 ad created by David Ogilvy of Ogilvy & Mather for American Express, featuring the memorable tagline, “Don’t leave home without it.” This slogan resonated deeply, emphasizing the indispensability of the American Express card. Since that ad was created 50 years ago, the economic, financial, and technological landscape has transformed dramatically. Included in this change is the advent of mobile payments services such as Apple Pay. We can now leave home without our physical American Express cards, relying instead on the convenience of our smartphones.

This evolution in technology highlights a broader trend: Companies like Apple and Microsoft, categorized within the tech sector of the S&P 500, have become so integral to our daily lives that, in my view, they can be considered consumer staples. These tech giants and others like them are woven into the fabric of our economy and personal routines. Consider this: How many of us would willingly leave the house without our iPhones? Given the choice between going a week without toothpaste or without my iPhone and Microsoft Office 365, I would find it far more challenging to forgo the latter. These technology tools are essential to me in managing client investment accounts and personal tasks such as juggling the logistics of guiding children under the age of 22.

In today’s digital age, the iPhone has transcended its original purpose as a mere communication device. It has evolved into a necessary tool, integrating seamlessly into various aspects of daily life. Far from being just a phone, the iPhone serves as your boarding pass, allowing you to breeze through airport security with ease. Here in Southwest Florida, it’s our personal weather center, providing real-time updates on hurricanes and other weather conditions. Need to get somewhere? The iPhone is your gateway to hailing a ride. It’s your digital wallet, allowing contactless payment at the grocery store and for making online purchases without fumbling and possibly dropping a credit card. This indispensability illustrates why I believe these companies should hold enduring value in portfolios and remain critical drivers of economic growth.

Digital Wallets: A Growing Trend with Investment Potential

According to McKinsey & Company, over 90% of Americans used some form of digital payment in 2023, with 20% anticipating using three or more digital wallets. Justin Passalaqua, Country Director of Worldline, one of the world’s largest digital payment providers, describes digital wallets as “virtual storage systems” that securely store payment information and enable transactions without the need to provide physical cards or payment details.

Despite their benefits, digital wallets are not without risks. If users are careless with security measures—such as using weak passwords, neglecting updates, or conducting transactions over public networks—their information could be compromised. Additionally, losing a device without proper protection could expose stored data to hackers.

To mitigate these risks, users should follow the best practices of safety. This includes enabling multi-factor authentication, using strong and unique passwords, and ensuring devices and wallet apps are updated. Avoiding public networks for transactions, practicing email safety, and setting up alerts for wallet activity are also important steps.

While digital wallets present risks, they are generally safer than physical cards due to their layered security measures, such as facial recognition and encryption. Sean Salter, a finance professor, notes that, unlike physical cards, digital wallets cannot be skimmed, and their authentication requirements protect users from unauthorized access. Passalaqua highlights that with proper precautions, digital wallets are a secure and efficient payment method, empowering users to transact with confidence both online and offline. Digital wallets using services like Apple Pay demonstrate the shift toward cashless economies, a trend that could strengthen the revenue of tech leaders like Apple and show the growing role of secure payment technologies in our daily lives.

Of course, when using your iPhone, you are not just using Apple products. Texas Instruments, by example, also contributes to the iPhone’s functionality, primarily through its analog and embedded semiconductor products. These components help manage power; sense and transmit data; and provide core control- or processing-functions. While the specific parts manufactured by Texas Instruments used in iPhones are not always detailed, their broad portfolio includes products that support various electronic systems, including personal electronics like smartphones.

NVIDIA does not directly supply hardware components for iPhones. However, NVIDIA’s influence can be seen in the iPhone’s capabilities. For instance, the iPhone 15 Pro features advanced graphics capabilities like ray tracing and upscaling, which are technologies NVIDIA has pioneered in the PC gaming world. While these features are implemented through Apple’s own A17 Pro chip, they reflect NVIDIA’s impact on the broader tech landscape.

Additionally, NVIDIA’s GeForce NOW streaming service is available on iOS devices, allowing users to stream PC games directly to their iPhones via Safari. This service leverages NVIDIA’s powerful cloud gaming infrastructure, bringing high-quality gaming experiences to iPhone users without requiring NVIDIA hardware inside the device.

NVIDIA: A New Dow Jones Member and AI Powerhouse

NVIDIA was added to the Dow Jones Industrial Average (DJIA) on November 8, 2024. This decision reflects NVIDIA’s importance in the tech sector, particularly in artificial intelligence, the data-center markets, and shaping the future of the information highway. Like Apple and Microsoft, NVIDIA’s products are becoming essential to modern life, reinforcing its role in the economy and investment portfolios.

Broadcom and VMware: The Quiet Giant

While companies like Apple and NVIDIA dominate headlines, Broadcom quietly stands as the eighth-largest U.S. company by market capitalization. Best known as a semiconductor powerhouse, Broadcom’s influence extends far beyond chips. Its acquisition of VMware in 2023 solidified its leadership in cloud computing and enterprise software.

VMware helps businesses simplify and improve how they use computers and technology. Its main focus is virtualization, a process that allows a single physical computer or server to act like many individual machines. For example, instead of needing multiple physical servers for different tasks, businesses can use VMware’s software to run multiple “virtual machines” on a single server. This saves money, reduces hardware needs, and improves efficiency.

VMware allows businesses to store and access their data over the internet instead of relying solely on physical computers. This flexibility makes it easier for companies to scale up or down based on their needs. VMware’s tools also make sure this data is secure, which is especially important in today’s world, where cyberattacks are a growing concern.

For most of us, VMware’s technology is not something we interact with directly, but it powers many services we use, like banking, shopping online, or using apps that require secure and reliable data storage. It also supports remote work by enabling employees to access their work computers or files securely from anywhere.

Dividend investors will like the fact that Broadcom, along with Apple and Microsoft, have raised their dividends for at least ten consecutive years.

A Rapidly Evolving Trend

“Sovereign AI” refers to a nation’s capability to develop and control its own artificial intelligence infrastructure, data, workforce, and business networks. Countries recognize the strategic importance of AI in driving economic growth, enhancing national security, and maintaining technological independence.

The concept of sovereign AI has evolved rapidly over the past few years. Initially, it was driven by the need for countries to control their data and AI capabilities to safeguard against external dependencies and potential threats. Today, sovereign AI includes a broad range of goals, including the development of local AI infrastructure, the creation of AI factories, and the training of AI models on domestic data to reflect local dialects, cultures, and practices. This evolution is marked by significant investments in AI infrastructure and capabilities, with countries like Japan, Canada, and France leading the way.

NVIDIA has been a key player in the sovereign AI landscape, providing the necessary hardware and software to support these national initiatives. Nvidia is projecting $10 billion in revenue from governments’ sovereign AI investments in 2024, up from zero last year.

NVIDIA’s partnership with Oracle is a pivotal development in the sovereign AI space. Announced in March 2024, this collaboration aims to deliver sovereign AI solutions worldwide by combining Oracle’s distributed cloud and AI infrastructure with NVIDIA’s accelerated computing and generative AI software. This partnership enables governments and enterprises to deploy AI factories that can operate within secure premises, supporting their sovereign goals of economic growth and data protection.

For investors, the rise of sovereign AI should present opportunities. The increasing investments in AI infrastructure by governments worldwide indicate a strong and growing market for AI technologies. Companies like NVIDIA and Oracle, which are at the forefront of this trend, are positioned to benefit from these investments. The partnership between NVIDIA and Oracle shows the potential for collaborative efforts to drive innovation and meet the specific needs of different countries.

Presidential Terms

I started in the investment business when George H. W. Bush was president. That means when Donald Trump takes office, it will mark the 10th presidential term during which I have been working for investment clients. One thing I recall during many presidential terms is that, regardless of who is president, we can usually find analysts and economists predicting how the current or upcoming president will be terrible for the economy or the stock market.

However, looking back over the last nine terms, most have resulted in a positive outcome for stocks. There were only two down terms during this period, and one of them, George W. Bush’s first term, was a slight decline of -6.6%, or -1.7% on an annualized basis.

Historically, the stock market has shown resilience and growth across various administrations, regardless of the political party in power. I think the reason for this is because many factors affecting the stock market are outside of the president’s control. Global economic trends, geopolitical events, central bank policies, and technological advancements often have a more significant and immediate impact on the markets than domestic political outcomes.

For the last several months we’ve been reading about the Trump trade versus the Harris trade and which person would be better for the market. I put these types of narratives in the noise category and do not spend much energy on the topic.

Instead, I look at various indicators which could provide clues as to what type of environment we could be facing in the future. These include GDP growth and, specifically, business investment components of GDP, corporate earnings growth, the rate of inflation, bank loan growth, and money supply growth.

While political headlines often create market noise, history shows that long-term investment strategies usually prevail regardless of the administration in power.

As we navigate these transformative times in technology, politics, and the markets, I remain committed to helping you achieve your long-term financial goals. If you found the insights in this letter valuable—particularly our discussion of technology’s evolution from growth engine to modern necessity—I welcome the opportunity to explore these themes in greater detail. Please don’t hesitate to call me at 888-456-5444 to discuss how these trends might affect your portfolio. Additionally, if you know someone who might benefit from this type of analysis and personalized investment approach, I’m always happy to offer them the same careful attention I provide to you. Thank you for your continued trust in managing your investments.

Warm regards,

Matt Young 
President and Chief Executive Officer

Nuclear Power

Southern Company has made substantial investments in nuclear facilities, particularly with the Plant Vogtle project in Georgia. The total cost of the Vogtle Units 3 and 4 projects exceeded $30 billion, up from the expected cost of $14 billion.

Plant Vogtle is now the largest generator of clean energy in the United States, providing carbon-free electricity to over a million homes and businesses. According to the U.S. Energy Information Administration, the United States has the largest nuclear generating fleet of any country. Electricity generation from nuclear reactors doesn’t produce CO2 emissions and can provide baseload power that would otherwise largely come from coal- and natural gas-fired plants. Although a number of nuclear reactors have retired in recent years, interest in nuclear power as an energy resource to help reduce the carbon footprint of the U.S. is on the rise.

Mobility Checklist

Wendy, a seasoned Pilates instructor at our fitness center, focuses on pain management and mobility. Two of my favorite quotes of hers are these: “If you don’t have your feet, you don’t have the rest of your body.” (We do a lot of footwork.) Regarding the aging process, she says, “You can’t stop the tide from rising, but you can slow it down.”

My mom, who has practiced yoga for 40 years, recently sent me an article that aligns with Wendy’s classes. It highlights the importance of longevity fitness, which isn’t just about adding years to life, but about living well in those years. One key takeaway is the value of periodic mobility tests to assess and improve our ability to age gracefully.

For more insights, check out the article “15 Mobility Tests to Check If You’re Aging Gracefully” on InsideHook.

A Country of Geniuses in Data Centers

Dario Amodei’s October essay, “Machines of Loving Grace,” explains the transformative potential of artificial intelligence while acknowledging the associated risks. Amodei, CEO of AI safety research company Anthropic, outlines five key areas where AI could have a profound impact: biology and physical health, neuroscience and mental health, economic development and poverty, peace and governance, and work and meaning. AI could revolutionize healthcare, enhance our understanding of the brain, boost economic growth, contribute to effective governance, and enhance human capabilities.

Amodei also delves into the concept of superintelligence, where AI surpasses human intelligence, and the profound implications this could have. He envisions a future where superintelligent AI has access to whatever it needs, including robots, laboratories, and means of production, to solve complex problems. This superintelligence could control existing physical tools and even design new robots or equipment for itself. Amodei highlights the importance of ensuring that these superintelligent AI systems are aligned with human values and safety so as to prevent negative outcomes. This is crucial as we move towards a future where AI could potentially become a “country of geniuses in data centers,” vastly outperforming human cognitive abilities and transforming society in unprecedented ways.

Amodei predicts that many of these advancements could begin to materialize as early as 2026, while acknowledging it could take longer. However, he stresses the importance of addressing the risks associated with AI, such as ethical concerns, potential misuse, and the need for robust safety measures. By focusing on these risks, says Amodei, we can unlock the full potential of AI and create a future where technology serves humanity’s best interests.

 October 2024 Client Letter 

In early October, 45,000 dockworkers went on strike at multiple ports along the U.S. East Coast and Gulf Coast, causing the largest port shutdown in 50 years. While the strike was primarily portrayed as a push for higher wages, what interests me most is the workers’ concerns about automation. They are seeking assurances for a ban on AI-powered robotic automation for loading, unloading, and handling freight.

While I understand the desire to protect jobs, automation is inevitable. The benefits of robotics—efficiency and reliability—are too significant to ignore. The integration of AI and robotics in port operations isn’t a question of if, but when.

In my view, automating our ports is critical for national interests. The COVID-19 pandemic exposed vulnerabilities in our supply chain due to labor shortages and lockdowns. Automated ports could have mitigated these impacts, allowing operations to continue with fewer health-related disruptions.

Failing to automate puts the U.S. economy at a competitive disadvantage. Global competitors like China, whose ports in Shanghai and Ningbo are highly automated, process goods faster and more efficiently. U.S. ports that lag in automation will struggle to keep up with increasing global trade demands. Automation offers reduced costs, increased speed, and advanced AI-powered logistics, making it essential for future growth.

Robots Don’t Go On Strike

The global robotics market is projected to grow significantly, from $71.51 billion in 2023 to $319.24 billion by 2030, with a compounded annual growth rate of 23.83%, according to Research and Markets. As investors, this presents an opportunity. Robotics and AI will transform industries much like the personal computer, the internet, and smartphones did. Companies that fail to adapt risk becoming obsolete. Robots, unlike humans, don’t take breaks, don’t need vacations, and don’t go on strike.

Automation and Robotics Trends 

One of the reasons I favor Amazon in our equity portfolios is its industry-leading focus on innovation. With over 750,000 robots deployed across its global facilities, Amazon has integrated robotics to enhance efficiency. These robots collaborate with human employees to perform repetitive tasks, streamlining operations. For example, in 2022, Amazon’s “Robin” robotic handling system sorted one billion packages, accounting for one-eighth of all orders delivered worldwide.

Amazon continues to innovate in the field of robotics and is not only a major user of industrial robots but also one of the largest manufacturers. This vertical integration allows Amazon to tailor its robotic solutions to its specific needs, driving further efficiencies and advancements.

Amazon’s leadership in robotics and automation provides a significant competitive advantage. The ability to efficiently manage and fulfil orders at scale is crucial in the highly competitive e-commerce market. The use of robots reduces operational costs by minimizing the need for human labor in repetitive tasks. Amazon’s robotic systems are highly scalable, allowing the company to quickly adapt to changes in demand. This scalability is particularly important during peak shopping seasons, such as Black Friday and the holiday season, allowing Amazon to meet customer expectations without compromising on service quality.

Technology Leaders in Focus 

When it comes to internet search, Google is a name that needs no introduction. The company has become so synonymous with search that to “Google it” is now a verb in everyday language, highlighting the company’s success and influence. However, Google’s parent company, Alphabet Inc., extends far beyond search engines. Alphabet’s diverse portfolio includes ventures in artificial intelligence, cloud computing, YouTube, autonomous vehicles through Waymo, healthcare innovations with Verily, and ambitious projects in robotics.

Google’s robotics program is a comprehensive and ambitious initiative that integrates advanced robotics technology with cutting-edge machine learning. At the heart of this program is Google Research, which focuses on enhancing robotics through unsupervised learning, skill acquisition, and reinforcement learning. This approach allows robots to learn and adapt in real-world environments, making them more versatile and capable. Google fosters close collaborations between machine-learning researchers and roboticists, regularly publishing research on topics such as robotic skill acquisition, vision-language models, and mechanical search. These efforts are aimed at pushing the boundaries of what robots can achieve, making them more autonomous and efficient.

A significant part of Google’s robotics efforts is driven by DeepMind, a subsidiary known for its AI research. DeepMind has developed models like RT-2, a vision-language-action model that helps robots understand and perform tasks in both familiar and new situations. This model exemplifies Google’s vision of creating robots that can seamlessly integrate into various environments and perform complex tasks with minimal human intervention. DeepMind’s research is crucial in advancing the capabilities of robots, making them more intelligent and adaptable.

Other companies we own for clients are also making contributions to the robotics industry through their advanced technologies and platforms. Nvidia provides powerful AI and computing platforms, such as Nvidia Isaac, which are used by leading robot manufacturers to develop, train, and build advanced robots. Broadcom, while primarily known for its semiconductor solutions, plays an important role in AI and connectivity technologies essential for modern robotics.

Qualcomm offers integrated platforms specifically designed for robotics, like the Qualcomm Robotics RB3 and RB6 platforms, providing advanced AI and connectivity solutions for autonomous robots. Texas Instruments (TI) supports advanced robot system development, particularly in industrial automation, with its wide range of integrated circuit products. Their technologies enable perceptive sensing, precise motor control, and real-time communication, enhancing the capabilities of industrial robots.

Gold’s Strategic Role 

Over the past year, the price of gold has risen 38% as it reached a record high in October of $2,700 per troy ounce. I feel the rise in gold prices has been somewhat overshadowed by the buzz around artificial intelligence, data centers, nuclear energy, and the U.S. elections. Despite these dominating headlines, gold’s performance has been noteworthy, and to me, a little surprising. With inflation trending downwards and the Federal Reserve beginning to cut interest rates, one might have expected gold to struggle. However, geopolitical tensions, including the conflicts in Ukraine and the Middle East, have played a role, even if these events have remained largely regional. The resilience of gold in today’s climate is a reason some investors view the position as a hedge against uncertainty.

A recent article in The Economist titled, What the surging price of gold says about a dangerous world,” noted that family offices, which manage the wealth of the privately wealthy, have seen their assets under management grow from $3.3 trillion in 2019 to $5.5 trillion today. These investors may be turning to gold to protect their wealth from potential economic downturns and currency devaluation. Gold’s relatively fixed supply, unchanging physical characteristics, and historical significance are thought to make it an attractive hedge against inflation, poor economic policies, and periods of unrest. According to Campden Wealth, a data provider, over two-thirds of family offices invest in gold, with significant demand coming from Asia, particularly China and India.

According to The Economist, central banks have also been significant drivers of the recent rally in gold prices. Historically, gold’s share of central-bank reserves declined from almost 40% in 1970 to just 6% in 2008. However, this trend has reversed, with gold now making up 11% of central-bank reserves, the highest level in over 20 years. The invasion of Ukraine by Russia and the subsequent freezing of its foreign-currency reserves highlighted the risks of relying on assets denominated in Western currencies. As a result, central banks in countries like China, Turkey, and India have significantly increased their gold holdings. Since the start of 2022, these countries have purchased 316, 198, and 95 tons of gold, respectively.

Not all central banks increasing their gold reserves have contentious relationships with the West. For example, the Monetary Authority of Singapore and the National Bank of Poland have also been accumulating gold. Poland’s central bank aims to keep 20% of its reserves in gold, viewing it as a strategic hedge with low correlations to other asset classes. Central-bank demand for gold is expected to remain strong, with a survey by Invesco Asset Management indicating that none of the 51 central banks surveyed plan to reduce their gold allocation in the next three years, and 37% expect to increase it.

For clients, we gain exposure to gold through exchange-traded funds GLD and GLDM. These ETFs are a low-cost way to gain exposure to the gold market without having to physically own the metal. The funds hold gold bars in secure vaults, primarily in London, and their values are based on the spot price of gold, minus expenses and liabilities.

Must-Own (MO)

When it comes to topping the list of dividend stocks to own, Altria Group (MO) is often a consideration. Formerly Phillip Morris, the American manufacturing company specializes in the manufacturing and production of cigarettes, tobacco, and other nicotine products. Regardless of your stance on smoking, the tobacco industry has historically enjoyed steady profits thanks to the persistent smoking habits of individuals. And while there has been a long-term decline in smoking rates in the U.S., the industry has strong pricing power, which has helped sustain its cash flow.

Altria is a prime example of a blue-chip stock known for its consistent dividend payments and increases over the years. Altria has a long history of paying dividends, dating back decades, a hallmark of blue-chip stocks, providing investors with reliable income. The company has a strong track record of increasing its dividend, having raised its dividend for 54 consecutive years. This demonstrates Altria’s commitment to returning capital to shareholders and its ability to generate steady cash flow. The company’s financial health supports its dividend policy, with strong cash flow and profitability enabling it to maintain and grow its dividend payments.

While it’s unclear if the term “must own” has been coined for Altria Group (MO), its current yield of 8.17%—one of the highest in the S&P 500—makes it an attractive option investors might find too good to pass up.

Investment Landscape: Balancing Innovation and Security

As we look across today’s investment landscape, three key themes emerge, in our view. First, the robotics and AI revolution, led by companies like Amazon and Google, represents a transformative force reshaping industries from shipping ports to warehouses. This technological disruption creates both challenges and opportunities, which is why we maintain exposure to companies we believe are at the forefront of this change.

Second, the increase in gold prices and increasing central bank purchases remind us of the importance of defensive positioning in uncertain times. While technology drives growth, gold has historically been seen as a store of value, particularly as geopolitical tensions persist.

Finally, steady-income generators like Altria demonstrate that, even in a rapidly changing world, investors can still benefit from traditional dividend-focused investments that provide reliable cash flow. This three-pronged approach—embracing technological innovation, maintaining defensive positions, and securing reliable income streams—reflects our commitment to building portfolios suited for today’s dynamic environment.

Have a good month. As always, please call us at (800) 843-7273 if your financial situation has changed or if you have questions about your investment portfolio.

Warm regards, 

Matthew A. Young 
President and Chief Executive Officer

Health

How Healthy Is Broccoli? The New York Times, 10/14/2024

Most of us inherently know to eat our broccoli, but reminders are always welcome when it comes to our health. Broccoli is a nutritional powerhouse, packed with vitamins, minerals, and phytochemicals that offer numerous health benefits. According to Emily Ho, a nutrition expert, broccoli is a “multitasking vegetable” that can help boost your body’s defenses. One of its standout compounds is sulforaphane, an antioxidant known for its cancer-fighting properties and ability to help the body expel toxins like air pollution and cigarette smoke. Additionally, broccoli supports heart health by aiding in blood circulation and lowering blood pressure and cholesterol levels. It’s also high in fiber, which is beneficial for digestive health and may contribute to bone strength. For optimal benefits, it’s recommended to consume about one cup of chopped raw broccoli daily, preferably steamed to retain its crunch and nutrients.

Due Diligence

That 5% CD Is a Great Deal—Until the Bank Calls It Back, The Wall Street Journal, 10/1/2024

The WSJ reports the allure and potential drawbacks of high-yield certificates of deposit (CDs). While these CDs can offer attractive returns, especially when interest rates are high, they can come with features that can impact their overall value. One such feature is the callable option, which allows banks to terminate the CD before its maturity date, returning the principal and accrued interest to the investor.

Before the Federal Reserve began cutting rates in September, banks offered certificates of deposit promising high yields for locking up cash years into the future. The highest-yielding ones, with returns in excess of 5%, had features allowing the bank to ‘call’ them before they mature, handing back the cash and accrued interest. Those features got little attention when rates were rising because banks weren’t about to call their CDs and borrow money at even higher rates. Now, banks … are calling back more high-yielding CDs before they mature to save on interest as rates begin to fall, according to people familiar with the matter.

This situation is an example that high yields may not always be the “great deal” they appear to be. Investors should be cautious and conduct due diligence before committing to many financial products. As the saying goes, there is rarely any free lunch in finance, and understanding the terms and conditions of high-yield CDs is helpful to avoid unexpected outcomes.

Microsoft Going Nuclear

Microsoft, Three Mile Island Deal Delivers a Blow to Wind and Solar Power, RealClearEnergy, 10/14/2024

Microsoft has entered into a significant 20-year agreement with Constellation Energy to power its data centers using nuclear energy from the Three Mile Island plant in Pennsylvania. This deal involves reviving a reactor that has been shut down since 2019, which was not affected by the infamous 1979 partial meltdown.

This strategic move by Microsoft is aimed at securing a reliable and low-carbon energy source for its AI-driven data centers. By opting for nuclear power, Microsoft aims to reduce its reliance on intermittent renewable energy sources like wind and solar power. The deal highlights Microsoft’s commitment to sustainability and its efforts to meet the growing energy demands of its cloud computing and AI operations with a stable and environmentally friendly energy source.

The revival of the Three Mile Island reactor is expected to deliver a blow to wind and solar power, as it demonstrates the potential of nuclear energy to provide consistent and large-scale power generation. This initiative aligns with Microsoft’s broader strategy to enhance the efficiency and sustainability of its operations, ensuring a steady supply of clean energy for its data centers.

September 2024 Client Letter

I became more familiar with physicist Richard Feynman after my dad wrote about him in the July 2003 issue of Richard C. Young’s Intelligence Report. My dad’s interest in Chaos Theory led him to James Gleick’s national bestseller, Genius, a book about the life and science of Feynman. Genius provides a comprehensive look into the renowned physicist’s career, including his work on the Manhattan Project at Los Alamos, where he was one of the youngest group leaders. It also covers his significant contributions to quantum electrodynamics, the field of physics that describes how light and matter interact, which eventually led to his Nobel Prize in physics in 1965. Additionally, the book details his appointment to the Rogers Commission to investigate the Space Shuttle Challenger disaster in 1986. Feynman’s famous demonstration of the O-ring’s susceptibility to cold temperatures became a defining moment in the investigation.

I’ve had Genius and Surely You’re Joking, Mr. Feynman! on my office bookshelf for years but had not paid them much attention until more recently. As quantum computing has become a hot topic over the last few years, I found myself reintroduced to Feynman. In doing research on IBM, I learned of Feynman’s groundbreaking talk at the 1981 IBM-sponsored conference on the physics of computation, held at MIT. In this talk, Feynman proposed the idea of quantum computers, arguing that classical computers are inefficient for simulating quantum mechanical systems because they operate under classical physics principles. These principles do not adequately capture quantum phenomena such as superposition and entanglement.

Full disclosure: I had no idea what superposition and entanglement were, but if Richard Feynman feels they are important that’s all I need to know. For help understanding the topic I watched a Ted Talk video called “Quantum Computers Aren’t What You Think—They’re Cooler,” by Hartmut Neven. Hartmut Neven is a prominent scientist known for his work in quantum computing, computer vision, robotics, and computational neuroscience. He is currently the vice president of engineering at Google, where he leads the Quantum Artificial Intelligence Lab that he founded in 2012.

Neven presents that superposition allows quantum bits (qubits) to exist in multiple states simultaneously, rather than strictly as 0 or 1 like classical bits. This means a quantum computer can process a vast number of possibilities at once. Quantum entanglement further enhances this capability by linking qubits in such a way that the state of one qubit can depend on the state of another, no matter the distance between them.

As an example, imagine you have a large file cabinet with many drawers and you need to find a specific document. With a traditional computer, you’d have to open each drawer one by one, potentially checking every drawer to find the document. This process is time-consuming. Now consider using an algorithm with a quantum computer. Instead of checking each drawer individually, the quantum computer uses superposition to open and check multiple drawers simultaneously. This means it can explore many possibilities at once. Additionally, quantum entanglement allows the drawers to be interconnected in such a way that the state of one drawer can influence the state of another.

In essence, the quantum computer transforms the tedious task of sequentially searching through each drawer into a much quicker process by leveraging the unique properties of quantum mechanics. This makes quantum computers incredibly powerful for search tasks in large datasets.

The implications of quantum computing are profound, particularly in how it could reshape our workforce and redefine productivity. As quantum capabilities accelerate, the potential to achieve more with less becomes a reality. Tasks that once required extensive resources and manpower can now be executed much more efficiently. This transformation will not only optimize operations but could also create new opportunities across industry sectors, driving growth and innovation at an unprecedented pace.

In The Quant Space: Amazon, Google, and Microsoft

A significant number of companies across various sectors are actively working on quantum computing, each contributing to different aspects of the technology. These companies range from the smaller, lesser-known companies including IonQ Inc., Rigetti Computing Inc., and D-Wave Quantum Inc. to the larger more established companies such as Google, Microsoft, and Amazon.

Google is a leading company in the field of quantum computing, with several notable achievements and ongoing initiatives. Google’s Quantum AI division is focused on advancing quantum computing by building quantum processors and developing new quantum algorithms. In 2019, Google announced a major milestone with its 54-qubit quantum processor named Sycamore. They claimed to have achieved “quantum supremacy,” after Sycamore successfully performed a specific calculation faster than the most powerful classical supercomputers at the time. This event marked a significant moment in quantum computing history. Google claimed that Sycamore completed this task in approximately 200 seconds (a little over three minutes). They estimated the most powerful classical supercomputer at the time, called Summit, might take around 47 years to achieve the same result. Today, Google collaborates with universities, research institutions, and other technology companies to further quantum research. Their partnerships often focus on developing quantum algorithms that could have practical applications in fields like chemistry, material science, and machine learning.

Microsoft is deeply invested in quantum computing, focusing on creating a comprehensive quantum ecosystem that spans hardware, software, and cloud-based solutions. Azure Quantum is Microsoft’s cloud-based quantum computing platform. It offers access to a range of quantum hardware from different providers, as well as quantum simulators, all through the Azure cloud. Developers and researchers can use Azure Quantum to run quantum algorithms, test them on real quantum processors, and simulate them on classical hardware. Unlike many other companies working with quantum computing, Microsoft is focused on developing topological qubits. These qubits are expected to be more stable and less prone to errors than other types of qubits. While still in the research phase, Microsoft believes that topological qubits could be key to building scalable and reliable quantum computers. Microsoft’s approach to quantum computing is unique due to its focus on topological qubits and its comprehensive integration of quantum computing with its existing cloud services. This strategy aims to make quantum computing accessible and practical for a wide range of applications, from scientific research to commercial use.

Amazon also has a significant presence in the quantum computing space, primarily through its cloud platform, Amazon Web Services (AWS). Amazon Braket is the central hub for Amazon’s quantum computing efforts. It’s a fully managed service allowing researchers, scientists, and developers to explore and build quantum computing applications. Amazon is also investing in quantum networking and quantum communications. This involves research into the development of quantum networks that could securely transmit quantum information over long distances, potentially leading to new forms of secure communication systems. Amazon’s vision for quantum computing involves not just providing access to quantum hardware but also integrating quantum computing into the broader cloud ecosystem, making it easier for businesses and researchers to harness the power of quantum computing for practical applications. Through Amazon Braket and their various research initiatives, Amazon is potentially positioning itself as a key player in the quantum computing space, focusing on making quantum technology accessible and useful for a wide range of industries.

Living on the Edge

While quantum computing is still in its early stages, edge computing has been around for decades.

Edge computing is a technological approach bringing data-processing closer to the location where the data is generated, rather than sending it to a centralized cloud or data center. In traditional cloud computing, data from devices or sensors is sent to a central server, often located far away, where it is processed and then sent back. In contrast, edge computing processes data locally, either on the device itself or on a nearby server, which is often referred to as “the edge.”

The “edge” refers to the geographic location where data is collected, such as factories, vehicles, or smart devices. By processing data closer to its source, edge computing reduces the time it takes for the data to be analyzed and acted upon, improving the performance and speed of applications and devices that rely on real-time data.

The Edge, AI, and Toothpaste

Colgate-Palmolive is a company familiar to many. The maker of toothpaste, soap, and Speedstick was founded in New York City in 1806 under the name William Colgate & Company. Colgate stock is often popular in dividend-oriented portfolios in part because of its 61 total years of dividend growth. While the company may be perceived as stodgy, Colgate-Palmolive has been integrating edge computing and AI to enhance manufacturing efficiency across its 49 plants.

By leveraging sensors, robotics, and digital tools, Colgate-Palmolive has significantly improved quality control and operational efficiency. These technologies ensure that products like toothpaste tubes are properly aligned, sealed, and printed and that the packaging matches the product. Additionally, analytical testing for Hill’s pet food uses robotics to ensure the food meets the desired formulation.

The implementation of edge computing and AI has led to increased efficiency by streamlining manufacturing processes. Automation and AI allow for faster and more accurate quality-checks, reducing downtime and increasing production speed. Continuous monitoring and real-time data analysis help maintain high product-quality standards, minimizing defects and ensuring consistency across all products.

With less reliance on manual checks, the likelihood of human error is significantly reduced. Employees can focus more on overseeing operations rather than performing repetitive tasks. This shift not only enhances productivity but also allows for better utilization of human resources.

The technology also allows Colgate-Palmolive the adaptability to quickly respond to changes in consumer demand and market conditions. This flexibility is crucial for maintaining a competitive edge in the fast-paced consumer goods industry. By improving efficiency and quality control, Colgate-Palmolive can produce more products in less time, effectively meeting consumer demands.

Monster Returns

It might surprise some to learn that Monster Beverage is one of the best-performing S&P 500 stocks over the last three decades. Since its August 1995 IPO, Monster has generated a total return of 164,539%. I do not own the stock and have not purchased it for clients either. Also, I have never consumed an energy drink, so this stock has truly been under the radar for me. But do you know whose radar it has not been under? Coca-Cola’s. In 2015, Monster struck a deal with Coca-Cola in which Coca-Cola took a 16.7% ownership stake in Monster in return for Coca-Cola becoming Monster’s primary global distributor.

Coke’s $1-Billion Partnership

Coke, which has paid a dividend for 61 consecutive years, has also made a deal with Microsoft. For $1.1 billion, Coke entered a significant five-year strategic partnership to leverage Microsoft’s cloud computing and artificial intelligence services. This collaboration aims to accelerate Coca-Cola’s digital transformation by integrating advanced technologies across its operations, enhancing efficiency, and fostering innovation.

The partnership will see Coca-Cola utilizing Microsoft’s Azure, Dynamics 365, and Microsoft 365 platforms to replace its fragmented systems with a unified, scalable system. Azure, Microsoft’s cloud computing service, will be the backbone of this transformation, providing robust infrastructure and AI capabilities. One of the standout technologies being adopted is the Azure OpenAI Service, which Coca-Cola has already been using to innovate in areas such as marketing, manufacturing, and supply chain management. This service allows Coca-Cola to harness generative AI to create new marketing strategies, optimize production processes, and streamline supply chain operations.

Additionally, Coca-Cola will explore the use of Copilot for Microsoft 365, a generative AI-powered digital assistant designed to improve workplace productivity. This tool will aim to help employees by automating routine tasks, providing real-time insights, and facilitating better decision-making. The integration of Microsoft Teams and Power Platform will further enhance collaboration and data analysis capabilities, enabling Coca-Cola’s workforce to operate more efficiently and effectively.

Coke hopes to reap many benefits from the Microsoft partnership. By migrating all its applications to Microsoft Azure, Coca-Cola ensures a more reliable and secure IT infrastructure, which is crucial for maintaining business continuity and protecting sensitive data. The use of AI-driven insights from Dynamics 365 will provide Coca-Cola with a comprehensive view of its operations, allowing for more informed decision-making and proactive management of business processes. This approach to data management and analysis should enable Coca-Cola to identify trends, predict outcomes, and respond swiftly to market changes.

Have a good month. As always, please call us at (800) 843-7273 if your financial situation has changed or if you have questions about your investment portfolio.

Warm regards,

Matthew A. Young
President and Chief Executive Officer

Fraud and Theft
For security, stop picking up the phone. | TechCrunch

TechCrunch recently produced a good review on the growing risks of phone-based scams, particularly those enhanced by voice AI tools that can clone voices, leading to potential fraud. In one instance, a Ferrari executive nearly fell victim to a scam where an imposter, using a voice clone of Ferrari’s CEO, attempted to commit fraud. The executive, suspicious, asked a personal question only the real CEO would know, causing the imposter to hang up.

Phone scams have existed for decades, but technology has made them more sophisticated. AI-generated “deepfake” voices and spoofed phone numbers now make it easier for scammers to impersonate people, evoking emotional responses by pretending to be a familiar figure, often in distress. Scammers rely on tactics that create urgency and pressure, making their targets act hastily without verifying information.

Common scams include phone calls from fake authorities, like the police or federal agents, demanding payment to resolve fictitious legal issues. Others involve impostors of healthcare providers making fraudulent claims regarding bills. Scammers impersonating banks, workplaces, or tech companies may also call, asking for, under false pretenses, sensitive information like security codes or passwords.

To combat these scams, avoid phone conversations with unknown callers or let such calls go to voicemail. When in doubt, verify the caller’s identity. For example, if someone claims to be from a bank, hang up and call the official number on the bank’s website or card. Similarly, if a company asks for sensitive information, don’t rely on Google search results for contact numbers; scammers can manipulate search engines to display fake support lines.

Health and Wellness

“By 2027, approximately 50% of all knee procedures will be robotic, up from 11% in 2019,” says Dr. Douglas Unis, a board-certified attending orthopedic surgeon for the Mount Sinai Health System and chief of quality improvement for Mount Sinai West. Building upon an interest in robotics that began at Case Western Reserve University School of Medicine, Unis founded Monogram Orthopedics with the goal of using robotics, 3D printing, and artificial intelligence to enable safer, more efficient, longer-lasting joint replacements. Mount Sinai supports Monogram through its BioDesign incubator program.

Travel

Global 2023 cruise passenger volumes reached 31.7 million in 2023, surpassing pre-pandemic 2019 figures by 7%, according to data released by industry body CLIA. In its 2024 State of the Cruise Industry report, the association found the U.S. was the largest source market in 2023, with 18.1 million passengers, followed by Europe with 8.2 million. The top reasons given by customers as to why they like to cruise were 1) the ability to visit multiple destinations and 2) value for money. Global cruise capacity is forecast to grow by at least 10% in the next four years, from 677,000 berths in 2024 to 745,000 in 2028, as at least 56 more ships are scheduled to come online, costing $38 billion.

August 2024 Client Letter

Occasionally, I get anxious before travel. A few of my trips have coincided with some unfortunate crises. In March, several years back, we took a family ski vacation. We’re from Florida and don’t really ski, so heading to Utah was a big deal. Zero problems with the flight, rental car, and accommodations. One snag, however, was that people around the world started getting sick. COVID-19 had begun. As I was starting to settle into mountain life, the stock markets were going bananas, and there were rumors of an economic shutdown. A global dilemma was unfolding, and I was stuck in a ski village. Not cool.

Years after our pandemic vacation, we kept things local and took our first cruise on the Celebrity Beyond. We set sail from Fort Lauderdale, an easy two-hour drive from Naples. Once again, no travel problems. Boarding the ship was a piece of cake, and complimentary champagne was in hand before we set sail. The next morning, I woke up to read that Silicon Valley Bank had failed after a bank run and would be placed under receivership. The third-largest bank failure in U.S. history was underway as I was trapped on a ship with spotty Wi-Fi service. Also, not cool.

This June, we took a trip to Newport, RI. Thankfully, the world cooperated. Stock markets trended higher. A Fed rate cut was not imminent, meaning yields on our money market funds would remain near 5%. U.S. election headlines were relatively tame. No major crisis developed. Very cool and mentally relaxing.
But the tone has changed since we left Rhode Island. The election cycle is in full swing, with significant events occurring in both the Republican and Democrat parties. Expectations for a Fed cut have moved to 100% in the September meeting. Concerns of a U.S. recession have resurfaced. And the stock market has been volatile. For the week ending August 9th, by example, the S&P 500 and the Nasdaq recorded four down-weeks in a row.

Nervous investors are reminded that pullbacks and corrections are normal. A pullback, defined by a decline between -5% and -9.99%, happens on average three to four times a year. A correction, defined by a decline between -10% and -19.99%, happens on average about once a year. Pullbacks and corrections even happen during bull markets. Does that make you feel any better? Me neither. Despite what history tells us, I’m not a fan of seeing red on my account.

But just because I do not like the look of my statement at any given time does not mean I worry. To begin with, stock market volatility is par for the course. You can’t expect to receive a return on investment exceeding the rate of a risk-free U.S. Treasury security and not have risk. With risk comes the potential for reward but also the potential for volatility. No way around it.
More importantly, when volatility happens, it’s good to revisit whether you believe that the economic and investment environment has significantly changed from prior to the onset of the volatility. Let’s look at some indicators for August.

During early August, the labor market slowed, as evidenced in the recent jobs report; but the U.S. economy has still been adding jobs. Full employment is typically considered to be an unemployment rate between 4% and 5%. Unemployment is currently 4.3%. Not a terrible situation.

Second-quarter GDP came in above expectations at 2.8%. Most of the growth was attributed to an increase in consumer spending, which grew at a rate of 2.3%. Given that consumer spending accounts for about 2/3 of our economy, this was welcome news. However, I do not get too excited about consumer spending. Isn’t most of our spending on things we consume regularly regardless of the economy’s health? Mortgage payments, cable and cell phone bills, food, childcare, and utilities are all consistent monthly outlay items for us, no matter where the economy stands. I view healthy consumer spending as a positive, but there are other GDP components that are probably more meaningful such as business investment. 

Business investment is considered a forward-looking economic indicator, reflecting companies’ expectations about future economic conditions. When businesses invest in new equipment, buildings, technology, and other capital goods, it typically signals confidence in future demand and economic growth. Business investment often precedes increases in employment as companies expand capacity and require more labor to operate new facilities and equipment.

The GDP report showed an increase in business investment of 5.2%, with an increase in equipment growing at an 11.6% pace. This is good news. Yes, this is only one quarter of data, and one quarter does not equal a trend. But based on this reading, businesses are not yet acting in a recessionary manner.

How about corporate earnings growth? According to FactSet, as of 8/9/24, for Q2 2024, the blended (year-over-year) earnings growth rate for the S&P 500 is 10.8%. If 10.8% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q4 2021 (31.4%). Forward-looking analysts project earnings growth for Q3 of 5.4%, Q4 of 15.7%, and 14.5% in the first quarter of 2025.

Another item to keep in mind during periods of volatility is the composition of your investment account. The investing universe is broad, with dozens of styles and strategies. Some strategies are high risk, while others are lower risk. Within the equity space, I would consider our strategy to be one of higher quality, which can mean lower risk.

You may recall that we mostly focus on a diversified portfolio of companies that pay dividends and which intend to raise those dividends regularly. Investors typically find comfort in investing in the stocks of big, well-established blue-chip companies that have a record of consistently pay dividends year after year. These companies often have strong financial foundations and stable earnings, which can provide a sense of security even during periods of market volatility. The regular dividend payments serve as a reliable source of income, potentially helping to cushion the impact of market downturns and offering reassurance that the company remains financially healthy. As a result, these stocks can give investors greater confidence to weather more turbulent times in the market.

Almost a King

One of those companies is Automatic Data Processing (ADP). ADP may not be quite the household name as others in your portfolio, but the company is a dividend powerhouse. Founded in 1949 by Henry Taub as a manual payroll-processing service, the company started as Automatic Payrolls, Inc. in Paterson, New Jersey, and later became Automatic Data Processing, Inc., reflecting its expansion into broader data-processing services. ADP is one year away from becoming a “dividend king,” (i.e., with 50 consecutive years of dividend growth).

ADP provides cloud-based human capital management (HCM) solutions. Human capital management is a comprehensive approach to managing an organization’s workforce. ADP is a leader in HCM, with more than 1 million clients in 140 nations. ADP, a Fortune 500 company, is consistently ranked among the top companies in the industry. In recent years, ADP has generated annual revenues exceeding $14 billion, making it one of the largest providers of business outsourcing services globally.

According to ADP, the HCM space is a $150 billion market growing by 5%–6% annually. ADP believes it has unmatched service and expertise and continues to invest in new technologies. At an annual JPMorgan Global Technology, Media, and Communications Conference, ADP referenced its heavy investment in generative AI and other advanced technologies.
ADP has been at the forefront of technological advancements in payroll and HR. It was one of the first companies to offer outsourced payroll services and later introduced online payroll processing, cloud-based HCM solutions, and mobile apps for HR management.

Despite economic fluctuations, ADP has demonstrated resilience by continuing to grow and innovate. Its services are often considered essential for businesses, helping it maintain stability even during challenging economic times.

A Defense Dividend Favorite

L3Harris was formed in 2019 through the merger of L3 Technologies and Harris Corporation, creating one of the largest defense contractors in the United States. L3Harris operates in more than 100 countries and has approximately 50,000 employees worldwide.

Since the merger, the company has engaged in a series of divestitures and acquisitions to create one of NATO’s largest defense contractors with exposure in all key defense segments: space and airborne systems; communication systems; integrated mission systems; and Aerojet Rocketdyne.

The U.S. Department of Defense is one of L3Harris’s largest customers, along with other branches of the U.S. government, allied nations, and commercial clients. The company’s technology is used in various defense systems, including aircraft, ships, satellites, and ground vehicles. L3Harris invests heavily in research and development to maintain its competitive edge. The company focuses on developing innovative solutions in areas such as artificial intelligence, cyber defense, and space exploration. 

L3Harris, with 22 years of dividend growth, has a 10-year dividend growth rate of 14.67%.

SaaS

Software as a Service (SaaS) is a cloud-based software delivery model that has revolutionized how businesses and individuals access and use software.

SaaS applications are hosted on the cloud and accessed over the internet, allowing users to access software from anywhere with an internet connection. This eliminates the need for physical installation and maintenance on local devices. SaaS typically operates on a subscription-based model, where users pay a recurring fee (monthly or annually) to access the software. This model is cost-effective for users, as it reduces the upfront costs associated with purchasing software licenses.

One key advantage of SaaS is that updates and new features are automatically rolled out by the service provider without requiring any action from the user. This ensures that users always have access to the latest version of the software.

SaaS solutions are highly scalable, making it easy for businesses to adjust their usage based on their needs. Whether a company is growing or downsizing, it can scale its SaaS subscriptions up or down.

SaaS and Oracle

Oracle Corporation is one of the world’s largest and most influential technology companies, known for its database software, cloud solutions, and enterprise software products.
Oracle offers one of the most comprehensive SaaS portfolios in the market, covering various business functions. Its cloud applications are integrated, allowing businesses to connect their data and processes across different departments seamlessly.

Oracle has integrated artificial intelligence (AI) and machine-learning capabilities into its SaaS applications, offering features like predictive analytics, personalized user experiences, and automated workflows to enhance productivity and decision-making.

Oracle’s product portfolio spans databases, enterprise resource planning (ERP) software, customer relationship management (CRM) systems, supply chain management (SCM) solutions, HCM software, and more.

Oracle, with 13 years of dividend growth, has a 10-year dividend growth rate of 20.27%.

The Trump Trade vs. the Harris Trade

In speaking with many of you, I know the U.S. election cycle is a source of stress and fatigue. The constant barrage of campaign ads (now being texted to me, which is very annoying), debates, and political commentary can wear down even the most engaged individual. Moreover, dissatisfaction with the available candidates often leads to a sense of disillusionment, where voters feel forced to choose between the lesser of two evils. As a result, many have opted to distance themselves from the political process, avoiding political television and reading less about politics than they used to. Compounding this is the realization that much of what is promised on the campaign trail often fails to materialize into actual policy, further deepening cynicism and disengagement.

Personally, I spend little time getting into the weeds of the current campaign yak. When campaigning, the candidate has only one goal. To get elected. This means maximizing votes in swing states such as Arizona, Georgia, Michigan, Nevada, Pennsylvania, and Wisconsin and addressing the most pressing issues in those states. It’s a hustle to get 270 electoral votes, so the process has become a gigantic marketing blitz.

So, how do we handle the election season and the upcoming inauguration as it relates to our investment portfolio and outlook on the markets and the U.S. economy? I try to have a broad perspective and concentrate on a handful of factors.

1. Limited presidential power: The president does not have unilateral control over economic policy. The U.S. government operates with a system of checks and balances, which includes the legislative branch (Congress). If the president’s party does not control both the House and the Senate, passing major economic reforms or policies can be difficult. This often leads to compromises or gridlock, which is what we have had this year and last.

2. Policy uncertainty: Even when a president does have party control of Congress, proposed policies often undergo significant negotiation and changes before they are implemented. Initial reactions to campaign promises or proposals can be exaggerated, as the final versions of policies may be different from what was originally proposed. This means that market fears or optimism based on campaign rhetoric can be misplaced. By example, Barack Obama campaigned on the idea of rolling back the George W. Bush tax cuts only to then make most of them permanent when president. Or, how about candidate George H. W. Bush proclaiming, “Read my lips: no new taxes.” Once in office, “no new taxes” became “new taxes,” contributing to him being a one-term president.

3. Market resilience: Historically, the stock market has shown resilience regardless of which party holds the presidency. Markets are influenced by a wide array of factors beyond presidential policies, including global economic conditions, interest rates, corporate earnings, technological innovation, and consumer behavior. The stock market tends to adapt and find equilibrium over time, regardless of the political environment.

4. Long-term focus: Always a helpful mindset. I encourage you to maintain a long-term perspective rather than reacting to short-term political events. Market volatility around elections is typically short-lived and, over the long term, market performance is more closely tied to economic fundamentals than to the specific party in power.

5. Diversification of influence: Many factors affecting the stock market are outside of the president’s control. Global economic trends, geopolitical events, central bank policies, and technological advancements often have a more significant and immediate impact on the markets than do domestic political outcomes.

While presidential elections can introduce uncertainty and short-term volatility, the long-term impact on the stock market is usually less pronounced than many fear. Obviously, the compounding of bad political policies can significantly damage our economy and standard of living. However, as far as the balance of 2024 and the beginning of 2025 is concerned, I don’t think the economy will fall off the cliff. Once the elections are over and we see how our government is organized, and we’ve collected another four months of economic data, then we can begin to assess how next year may play out.

Have a good month. As always, please call us at (800) 843-7273 if your financial situation has changed or if you have questions about your investment portfolio.

Warm regards,

Matthew A. Young
President and Chief Executive Officer

P.S. Royal Caribbean recently announced the next three months have more cabins booked than normal and the company is making more money because people are willing to pay higher prices. During an earnings call, Royal Caribbean CEO Jason Liberty said, “All the yield improvement that you’re seeing in Q3 and Q4 is really being driven by price. I think it’s a really strong indication that [sic] not only the willingness to pay more, but these prices continue to increase as we build and manage demand.” The cruise industry is not considered an economic bellwether, but as we have seen over the last several years, the consumer appears to have confidence in their financial situation.

P.P.S. Pig Butchering Online Scams Are Proliferating. Here’s Why They Work So Well. The WSJ interviewed cybersecurity experts on an online scam in the form of text messages. Always good to be vigilant on these issues, either for yourself or a family member. The gist of the scam is that fraudsters look to establish some type of relationship with a victim by sending an initial text. If the victim does not recognize the number, he may respond with, “You have the wrong number.” The scammer texts back, apologizing, and sends more texts trying to establish a dialog. The end goal is to gain access to the victim’s money, which, believe it or not, they are able to do in some instances. As the article notes,

“Until a collective strategy is put together, you need to be aware of the red flags. And the first one is unsolicited contact. We’ve all gotten that text message, ‘hi.’ That message has a fundamentally different feeling to somebody who is elderly and widowed and lonely. When they see ‘hi,’ that has a profound impact on them. If you get an unsolicited contact, ask questions. If they want you to invest in cryptocurrency, do a little research on the site.”

P.P.P.S. Quote of the month: “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” – Mark Twain

July 2024 Client Letter

In a recent investor presentation given by Kinder Morgan, the company described its network of natural gas and refined product pipelines and terminals as “irreplaceable infrastructure.” That’s a theme that you’ll find holds true for a number of the companies owned in your account. These businesses own rights of way and infrastructure that can’t be easily duplicated. We favor infrastructure as an investment. After all, how can an economy operate without functioning highways, energy pipelines, electricity, and so on?

In Goldman Sachs’s May 2022 letter on “Stagflation Risk and What Investors Can Do About It,” the letter’s author, Simona Gambarini, said, “Investors may want to consider increasing exposure to real assets such as commodities, real estate and infrastructure, which may have the best chance of outperforming in an inflationary or stagflationary environment.”

Kinder Morgan’s infrastructure assets include 66,000 miles of natural gas pipelines that move around 40% of America’s natural gas production… as well as:

• 702-billion cubic feet of working natural gas storage capacity, or about 15% of total U.S. capacity,
• Around 9,500 miles of refined product and crude oil pipelines,
• 139 terminals,
• 16 Jones Act–compliant vessels,
• 135-million barrels of total liquids storage, and
• around 1,500 miles of CO² pipelines that can move 1.5-billion cubic feet per day.

According to Wood Mackenzie, since 2015, demand for natural gas in the United States has grown from 78-billion cubic feet per day to 108-billion cubic feet per day. By 2030, demand is projected to rise to 128-billion cubic feet per day. Most natural gas demand in the United States comes from the power generation industry. With the expansion of cloud computing and artificial intelligence, the number of data centers in the United States is growing rapidly. The power-hungry data centers need supply. Demand for natural gas power generation could increase as much as 3- to 10-billion cubic feet of gas per day according to projections from BCG, McKinsey, Berstein, and Wells Fargo.

Kinder Morgan has worked to develop predictable cash flows, 68% of which are derived from take-or-pay or hedged contracts. In January, Fitch Ratings described Kinder Morgan’s contract structure:

Largely Fixed-Fee-Based, Mostly Take-or-Pay: KMI generates roughly 60%-65% of total segment EBDA (management term) from take-or-pay-type contracts. A further approximately 25% comes from fixed-fee but volume-exposed arrangements. KMI adheres to a five-year laddered hedging plan for directly commodity-price-exposed businesses. Collectively these provide a level of cashflow stability that is supportive of KMI’s credit profile.

Kinder Morgan shares yield 5.84% today. 

MAP: Kinder Morgan’s Assets

Build America

Another company with a nearly irreplaceable portfolio of infrastructure assets across America is Union Pacific. Founded in 1862 when Abraham Lincoln signed the Pacific Railway Act, Union Pacific has been and remains one of America’s largest railroads. Today, Union Pacific operates nearly 33,000 route miles of track spread over 23 states with the slogan “Building America.” The tracks include 7 international border crossing points, 30,000 railroad crossings, and nearly 17,000 bridges. Along with nearly 33,000 employees, Union Pacific uses over 7,000 locomotives to move over 8,000,000 carloads a year. Imagine trying to build all that from scratch today?

Union Pacific is positioned to potentially benefit from some current market trends. As state and federal governments demand tighter emissions standards, rail could become more attractive as a shipping alternative when compared to trucks. Converting cargo shipments from truck to rail can reduce emissions by 75%. Trains are also great at reducing congestion on highways. One freight train can replace 300 trucks.

Alongside Burlington Northern Santa Fe, Union Pacific operates a duopoly that accounts for most of the freight rail traffic in the Western half of the United States. After the Trump administration’s efforts to lessen reliance on Chinese manufacturing, Trump’s renegotiation of NAFTA into the USMCA, and the pandemic-driven desires to shorten supply chains, Mexico has become a destination for manufacturers looking to near-shore their operations. According to the Brookings Institute:

The USMCA, along with nearshoring, have significantly influenced North America’s trade and investment dynamics, which have been particularly key for Mexico’s growth, industrial evolution, and job creation. The shift in global trade patterns, especially in the context of the U.S.-China trade war, the “China+1” diversification strategy, and the Biden administration’s nearshoring strategies, has positioned Mexico as the U.S.’ number one trading partner and a crucial investment hub within North America.

Union Pacific is the leading rail provider between the U.S. and Mexico and the only railroad that serves all six major gateways between the two countries. Union Pacific shares yield 2.32% today.

Building Things That Build Things

A company that builds the things that build infrastructure is Caterpillar, the world’s leading manufacturer of construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. Caterpillar was founded in 1925 with the merger of the Holt Manufacturing Company and the C.L. Best Tractor Co. The first new machine created by the merged company was the Model Twenty, designed by a young engineer named Harmon Eberhard, who had joined as part of Holt Manufacturing. Eberhard went on to become the chairman of Caterpillar’s board of directors, retiring from the company in 1966 after a 50-year career at the company. Eberhard attributed Caterpillar’s success to putting the customer first.

Today, Caterpillar has been in business for nearly 100 years, and in 2023 more than four million Caterpillar products were operating worldwide. Caterpillar has corporate operations in 25 countries, including around 150 locations. Its independent dealer network includes 156 dealers serving around 190 countries. Undoubtedly you have seen Caterpillar equipment at construction sites and road work projects throughout America and the world. In 2023, Interbrand ranked Caterpillar’s brand as the 83^rd most valuable in the world, worth an estimated $8.065 billion. That’s just the brand name and logo.

The future of Caterpillar includes all the earth-moving equipment you’ve seen, but Caterpillar is about more than just dirt and ore. The massive engines Caterpillar builds can produce a lot of energy, and the rapidly growing number of commercial data centers in the world need reliable backup power. Caterpillar has been building engines and electric power systems for over 80 years, and power-hungry data centers around the globe are adopting them as alternative sources for the electricity they need. The company’s generators were even installed at the tallest data center in the world in New York City owned by Sabey Corporation.

The market for data center generators was valued at $7.49 billion in 2022 and projected to grow at a compound annual growth rate of 7.3% until 2030, according to Grand View Research. An analysis from the Electric Power Research Institute (EPRI) found that internet searches using artificial intelligence will require 10 times the electricity that traditional internet searches have used. By 2030, data centers could consume 9% of America’s electricity generation capacity. Data centers are one of the world’s fastest growing industries. Between 2017 and 2021, Meta, Amazon, Microsoft, and Google (owned by Alphabet) more than doubled their electricity usage. Maintaining the constant uptime required by these data centers requires, according to EPRI, “robust backup power solutions.”

In 2023, Caterpillar’s operations generated sales and revenues of over $67 billion, and profit per share reached $20.12, a 59% increase compared to 2022. In 2023, Caterpillar increased its dividend by 8.2%, returning $5 per share to shareholders. Today, shares of Caterpillar yield 1.73%, and the board has raised the dividend each year for the last 29 years.

Big Energy Future

This Spring, Vermont became the first state in the United States to attempt to hold fossil fuel companies liable for climate change damages. The state envisions funds coming from oil companies for flood and weather damages. There will most likely be legal challenges to Vermont’s new law that seeks to retroactively penalize fossil fuel companies for participating in what was, at the time, legal activity.

But despite efforts like those in Vermont, oil use is not going away. In fact, global oil consumption, which briefly fell during the pandemic response, has increased to its highest levels ever.

As explained by Andrea Guerzoni in Fortune, climate activism and legislation like that enacted in Vermont is making it difficult for smaller oil and gas companies to find funding. Those difficulties have led to consolidation in the oil industry, with bigger, better-funded companies buying smaller companies that can’t afford to pursue their own opportunities. Guerzoni writes, “It is becoming clear that global capital markets are restricting their funding of new oil and gas projects. With higher costs of capital to fund new projects from a smaller capital base, it will be left to larger players to develop the still-needed resources necessary to manage the net-zero transition.”

Some of you own ExxonMobil in your accounts. Exxon, America’s largest energy company, made a major acquisition over the last year, announcing a merger with Pioneer Natural Resources last October. The purchase of Pioneer more than doubled Exxon’s footprint in the oil-rich Permian Basin to an estimated 16-billion barrels of oil equivalent resources. By 2027, Exxon plans to produce 2-million barrels of oil equivalent per day from the Permian. Exxon is a Mergent Dividend Achiever, and the board of directors has raised the dividend each year for the last 40 years. Today Exxon shares yield 3.31%.

Election Year Boost?

As America works its way through another election year, the stock market has once again been strong. Of the 24 election years since 1928, only four saw negative performance for the S&P 500 stock index.

This year Americans will presumably be choosing between Republican Donald Trump and Democrat Joe Biden, with independent Robert F. Kennedy, Jr., on the ballot in many states as well. Polls suggest the race will be very close, with Trump maintaining a 1-point margin in the RealClearPolitics Polling Average.

The outcome of the election could have major impacts on investors and retirees. The tax plans proposed by the major party candidates are very different in their treatment of wealth, IRAs, capital gains, and income. We’ll be keeping an eye on these proposals as the election nears.  

Have a good month. As always, please call us at (800) 843-7273 if your financial situation has changed or if you have questions about your investment portfolio.

Warm regards,

Matthew A. Young
President and Chief Executive Officer

April 2024 Client Letter

The Rolling Stones will tour again this summer. This is not breaking news. It’s been six decades since their first U.S. tour. The Stones always seem to be on the road. What is a little surprising, however, is what Mick Jagger is doing at his age. He’s not in his 50s or 60s or 70s. The rock-’n’-roller is 80 and appears to have little interest in slowing down. The concerts are not being held at small venues like the Orpheum Theatre in downtown Boston, with a capacity of 2,700. They are at Gillette Stadium, with a capacity of 64,000. Big stadiums mean big stages offering Sir Mick lots of room to run, dance, and shimmy during each gig. How much ground does Mick cover during a show? He has said, “It’s something like 8 and 12 (miles), depending on how energetic I feel.”

Mick is a force of nature. Exercise has been a constant in his life, and he was encouraged from a young age by his father, who was a physical education teacher. His fitness regime is an intense and diversified program that includes running, cycling, and kickboxing. It also includes workouts focusing on posture, balance, and flexibility. Over the years, he has brought yoga, pilates, and ballet lessons into the mix.

Jagger’s tireless spirit is not just a testament to his vitality but also symbolizes a broader trend in our economy: the active aging-population.

More Americans are turning 65 than at any previous time in history. According to The Wall Street Journal:

About 4.1 million Americans will reach 65 years old this year, reaching a surge that will continue through 2027, according to an analysis by Jason Fichtner, executive director of the Retirement Income Institute and chief economist at the Bipartisan Policy Center. That is about 11,200 a day, compared with the 10,000 daily average from the previous decade, he says.

This dynamic segment of the population is on the go, traveling more, indulging in cruises, splurging on Rolling Stones concert tickets, and embracing an array of physical activities. Far from the outdated image of retirement as a time of slowing down, today’s seniors are more vibrantly contributing to the economy than ever.

As noted in The Wall Street Journal, today’s 65-year-olds are wealthier than their predecessors. While significant disparities exist, the median net worth of those 65 to 74 was $410,000 in 2022, up from $282,270 in 2010 in inflation-adjusted 2022 dollars, according to the Federal Reserve’s Survey of Consumer Finances.

“This is one of the untold success stories of the modern economy: There is a lot more wealth as people enter retirement,” says Ben Harris, director of the Retirement Security Project at The Brookings Institution and former chief economist at the U.S. Treasury Department.

From an investing perspective, the healthcare sector may be a potential beneficiary of an affluent aging population as more people live longer and continue to consume healthcare products. One company we recently took a position in is AbbVie Inc (ABBV).

AbbVie

AbbVie is primarily engaged in the discovery, development, manufacture, and sale of pharmaceuticals worldwide. The company’s main revenue sources include:

• Humira: A therapy administered as an injection for autoimmune and intestinal diseases;
• Skyrizi: Used to treat moderate to severe plaque psoriasis, psoriatic disease, and Crohn’s disease;
• Rinvoq: For treating rheumatoid and psoriatic arthritis, ankylosing spondylitis, atopic dermatitis, and more;
• Imbruvica: A treatment for adult patients with blood cancers; and
• Epkinly: For lymphoma treatment.

AbbVie has a yield of 3.46% and has had a 10-year dividend growth rate of 13.43%.

Equity Additions

In addition to AbbVie, we recently purchased other new equities in many accounts. Below, you can read about some new companies you may find in your account, though not necessarily all of them.

Broadcom

Broadcom (AVGO) is a global infrastructure technology leader focusing on semiconductor and software solutions. Broadcom’s automative-grade wireless chips, by example, feature the latest in 5G WiFi and Bluetooth Smart technology, enabling car makers and tier-one integrators the ability to keep pace with the speed and growth of consumer electronics and the Internet of Things (IoT) industry. Broadcom has a yield of 1.56% and a 10-year dividend growth rate of 39.40%.

Subsea Cables 

You may have first become familiar with Microsoft using Word or Excel. But do you know Microsoft is involved in laying undersea cables globally? A notable project is the MAREA subsea cable, which Microsoft, Meta, and Telxius completed together. This high-capacity subsea cable crosses the Atlantic and is part of the global network, providing customers with access to internet and cloud technology. These undersea networks play a critical role in enabling various tasks, from simple activities like uploading photos and searching webpages to complex operations like conducting banking transactions and managing air-travel logistics. The involvement of Microsoft in such projects underscores the importance of these cables in supporting global connectivity and the company’s commitment to advancing internet infrastructure.

We recently purchased Microsoft and favor its diverse revenue streams, which include: 

1. Office productivity tools: Revenue from the Office suite of productivity software, including both Office 365 subscriptions and traditional Office software sales. This includes products for both consumers and enterprises.
2. Windows: Revenue from licensing the Windows operating system to PC manufacturers and direct sales of Windows to consumers and businesses.
3. Cloud services: Significant revenue comes from Microsoft’s Azure cloud services, which offer a wide range of cloud computing services. Azure’s growth has been a major revenue driver in recent years.
4. LinkedIn: Revenue from LinkedIn services, including subscriptions for professional networking, learning, and talent solutions.
5. Gaming: Revenue from Xbox hardware and software, Xbox Game Pass subscriptions, and other gaming services.
6. Server products and cloud services: Revenue from server products, including Windows Server, SQL Server, and enterprise services.
7. Search advertising: Revenue from Bing and associated search advertising services.
8. Device sales: Revenue from the sale of Surface devices and other hardware.

Microsoft’s dividend slowly but surely continues to rise. It has had 18 years of dividend growth and a 10-year growth rate of 11.83%.

Data Is the New Oil

In 2006, Clive Humby, a British mathematician and data science entrepreneur, said, “Data is the new oil. It’s valuable, but if unrefined, it cannot really be used. It has to be changed into gas, plastic, chemicals, etc. to create a valuable entity that drives profitable activity; so data must be broken down, analyzed for it to have value.”

Futurist author Bernard Marr has written, “No list of the top big data businesses would be complete without mentioning the still-undisputed king of search. Google [known now as Alphabet]. The company has turned data collection and analysis into a business model by providing a service ostensibly for free, then selling on information it gathers about us by monitoring the way we use that service.”

Like Microsoft, Alphabet is involved with undersea cables and the broader internet infrastructure. The company has invested in undersea cable projects to improve internet connectivity and speed around the world. These cables are critical for handling the massive amount of data traffic that Google services generate, including search, cloud computing, and video streaming via YouTube.

These investments reflect Alphabet’s broader strategy to control more of the internet’s backbone, reducing its reliance on telecom companies and ensuring that it has the necessary infrastructure to support its growing array of services. Alphabet’s involvement in undersea cables is part of its commitment to expanding internet access and capabilities, which in turn supports its core business and future growth.

Some fun facts from Broadbandnow:

• Alphabet owns major shares of 63,605 miles of submarine cables.
• Alphabet is the sole owner of Curie, a private subsea cable connecting the U.S. to Chile and Panama.
• Alphabet holds partial ownership of 8.5% of submarine cables worldwide.
• Alphabet holds sole ownership of 1.4% of submarine cables worldwide.

Alphabet is dominant in many of the markets it competes in. According to StatCounter, as of February of this year Alphabet’s Google search platform maintained a global market share of 91.61%, its Android operating system was also the world’s most popular, with 43.72% of the market, and its Chrome web browser led its competitors with a market share of 65.3%. Another jewel in Alphabet’s crown is YouTube, which boasts over 100 million subscribers and recently surpassed Twitter to become the world’s fourth-largest social media site.

In 2023, Alphabet generated over $101 billion in cash flow from operating activities, and in the words of Bloomberg’s Subrat Patnaik, “is facing a new and, by most accounts, welcome problem—how to spend its rapidly expanding pile of cash.” Alphabet doesn’t yet pay a dividend, but it has expanded its efforts to return value to shareholders with buybacks, authorizing an additional $70 billion of share buybacks in April. Alphabet’s current blended forward price to earnings ratio (BF P/E) is 18.5, a discount of -23% to comparable companies, according to Bloomberg.

At the end of 2023, Alphabet was sitting on a mountain of cash, cash equivalents, and marketable securities of over $110 billion. That’s nearly enough to pay off all the company’s liabilities without even dipping into other current assets.

Amazon.com

We recently sold FedEx and UPS and purchased Amazon.com with the proceeds. In 2020, Amazon delivered more packages in the U.S. than FedEx for the first time. In 2022, Amazon surpassed UPS in U.S. package delivery. In 2023, Amazon delivered more than seven billion packages, including four billion in the U.S. and two billion in Europe. UPS and FedEx are good businesses, but we feel Amazon delivers shareholders a more diverse portfolio of leading businesses in addition to global parcel delivery.

Amazon’s portfolio of businesses includes but isn’t limited to:

• Amazon’s leading e-commerce platform: In 2023, Amazon’s e-commerce platform was visited 108.3 billion times, up 33.81% compared to five years before.
• Amazon Web Services: AWS operates the most extensive global cloud computing infrastructure, with more services and features than any other cloud provider. In 2023, AWS alone had revenue of over $90 billion.
• Amazon’s advertising business, its fastest growing segment, has grown to hold 7.3% of the online ad market.
• Amazon’s Echo dominates U.S. market share, representing 65% of American smart speaker ownership.
• Amazon has a growing healthcare business, with new partnerships with Meridian Health, and CommonSpirit Health’s Virginia Mason Franciscan Health.

Amazon does not pay a dividend, but there has been talk that it will introduce one in 2024.

JPMorgan Chase

We also recently purchased JPMorgan Chase in many accounts. JPMorgan is one of the world’s largest financial institutions, with operations in over 100 countries and $2.6 trillion in assets. The company is organized into two brands. The first is J.P. Morgan, which operates asset management, commercial banking, payments, private banking, and wealth management businesses. The second is Chase, which caters to U.S. consumer and commercial banking customers.

JPMorgan Chase traces its roots back to 1799 when its earliest predecessor company, The Manhattan Company, was founded by early Americans, including Alexander Hamilton and Aaron Burr. While things didn’t work out too well for Hamilton and Burr, the bank has grown into America’s largest chartered commercial bank by assets and by number of branches, which stood at 4,905 on December 31, 2023. JPMorgan Chase has increased its dividend for 12 consecutive years, and its board has increased the dividend on average by 13.28% for the last 10 years.

Have a good month. As always, please call us at (800) 843-7273 if your financial situation has changed or if you have questions about your investment portfolio.

Warm regards,

Matthew A. Young
President and Chief Executive Officer

P.S. We recently updated Part 2A and Part 2B of our Form ADV as part of our annual filing with the SEC. This document provides information about the qualifications and business practices of Richard C. Young & Co., Ltd. If you would like a free copy of the updated document, please contact us at (401) 849-2137 or email us at cstack@younginvestments.com. Since the last annual update of the document in March 2023, Jeremy Jones, a senior member of the management team of the firm, voluntarily left to pursue a new career opportunity.

P.P.S. Each year, Barron’s* ranks the nation’s top independent advisors. Richard C. Young & Co., Ltd. has been recognized on this list for 12 consecutive years (2012–23).

*Rankings by unaffiliated ratings services and publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Richard C. Young & Co., Ltd. is engaged or continues to be engaged to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized advisor. Rankings are generally limited to participating advisors and should not be construed as a current or past endorsement of Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. has never paid a fee to be considered for any rankings but does pay a license fee to utilize them. Barron’s is a trademark of Dow Jones & Company, Inc. All rights reserved.

August 2023 Client Letter

In March I wrote about the arithmetic of portfolio losses. With the more speculative indices, such as the Nasdaq 100, delivering impressive returns so far in 2023, it is worth revisiting this concept. Year to date, the Nasdaq 100 index is up 36%. Compare that to the Dow Jones Industrial Average, which is up 4.2%, or the FTSE High Dividend Yield Index, which is down slightly on the year.

Investors who don’t have portfolios concentrated in the big-technology stocks driving the Nasdaq 100 (and even broader-based indices) this year may fear missing out. A flat portfolio in the face of 30%-plus returns can be frustrating, but focusing on this year’s gains without putting them in the context of last year’s losses is not at all constructive.

By example, in 2022 the Nasdaq 100 was down 32.4%, and the FTSE High Dividend Yield Index was down .32%. For investors not familiar with the arithmetic of portfolio losses, the Nasdaq 100’s loss of 32.4% last year and gain of 36% this year sounds better than the FTSE High Dividend Yield’s losses of .3% last year and .7% this year. However, the arithmetic of portfolio losses illustrates why that is not the case.

Recovering from a loss of 32.4% requires a gain of 48%. Remember, the larger the loss, the greater the gain needed to get back to even. Small losses are easily recouped. If your portfolio loses 1%, it only takes a 1.01% gain to get back to even. If your portfolio loses 5%, it takes about a 5.25% gain to get back to even. A loss of 18% (S&P 500 loss in 2022) requires a gain of 22%, and as already mentioned, a loss of 32.4% requires a 48% gain.

The table below shows the gains required to get back to even for a 1%, 5%, 18%, and 32% loss.

Combining 2022 and 2023 returns, the Nasdaq 100 is still down about 8% despite this year’s impressive returns, while the FTSE index is down 1%. What’s more, the maximum drawdown (peak to trough decline) from year-end 2021 for the Nasdaq 100 index was 34% compared to 13.4% for the dividend index.

In our view, the tendency of dividend paying stocks to fall less in bear markets than more speculative shares is part of what makes them appealing to investors in or nearing retirement and especially to investors taking distributions from their portfolios.

The trade-off of investing in shares with lower volatility is that they tend to lag in up markets just as they lead in down markets. Lower volatility tends to cut both ways. The last two years are extreme examples in both directions and should not be taken as a guide to future outperformance or underperformance.

It is also important to remember that the last two years of total portfolio returns are unlikely to represent how the portfolios we manage for you will perform over the long run. Stocks have basically been flat, and as interest rates have increased substantially over the last two years, there has been a stiff headwind for bonds.

We believe the headwind for bonds should ease over the coming years, though. Using the 5-year Treasury as an example, starting from today’s yield of 4.45%, the interest rate on this bond would have to increase by 3.55 percentage points to a yield of more than 8% for the position to be at a loss two years from today.

Sticking with a Plan

One of the most important determinants of achieving long-term investment success is making a plan and sticking to it. Your plan may differ from another investor’s plan, and his plan may differ from the next guy’s plan. Every investor has a different ability and willingness to take risk. Long-term investing does not have to be a one-size-fits-all exercise. The mistake that many investors make is not in developing a plan but in abandoning that plan during unfavorable periods in markets. Wholesale strategy or asset-allocation shifts in pursuit of higher returns or smaller losses can decimate portfolio returns and make it much more difficult to achieve the goals one set out to achieve in the first place.

Including both stocks and bonds in a portfolio is one of the best ways we know of to help temper the ups and downs of markets. As recently noted in Kiplinger:

“You engage in asset allocation because, like ballast in a boat, you want to minimize the sway of the portfolio,” says Sam Stovall, chief investment strategist at investment research firm CFRA Research. More important, “because you’re smoothing out the fluctuations, your emotions are less likely to become your portfolio’s worst enemy.

Risks with Investing 

Allowing the fear of missing out to drive investment strategy is a mistake not only because it often leads to greater portfolio volatility and to concentration risk. Diversification is said to be the only free lunch in investing. As an advisor, crafting diversified portfolios for clients also means always having to say you’re sorry. The nature of diversification means at least one position or asset class in a portfolio is likely to be lagging or performing poorly.

So why does Richard C. Young & Co., Ltd., an advisory firm interested in client satisfaction, insist on crafting diversified and balanced portfolios? Despite it setting the stage for some difficult conversations, insisting on diversification is simply the right thing to do.

Risks abound across the global investment landscape. There are, of course, knowable risks like chasing performance in overvalued and overbought shares, but there are also unknowable or extremely low probability risks that are difficult to plan for. The way to reduce the potential impact of these risks is to diversify.

Take Hawaiian Electric as an example. Hawaiian Electric runs two regulated utilities that provide electricity to approximately 94% of Hawaii residents in Oahu, Hawaii, Maui, Lanai, and Molokai. Sounds like a stable business in a desirable state to live and visit. Electric utilities have low business-cycle risk, and there is almost no risk of new entrants as the industry is a regulated monopoly. Why not load up on utilities, collect the fat dividends, and benefit from monopoly economics? What could go wrong?

Below is a price chart of Hawaiian Electric shares. The shares are down 75% in August alone.

Hawaiian Electric Industries shares have plunged because there is mounting evidence that the company’s equipment was involved in starting the recent tragic Maui fires, which have sadly caused over 100 confirmed deaths and people still missing. Liabilities from the fires could sink Hawaiian Electric. Some victims of the fires have already filed suit, accusing Hawaiian Electric of negligence. The lesson for investors: Take the free lunch and diversify.

Inflation 

After being an afterthought for investors for a decade or more, over the last two years inflation has become a primary focus. The Fed, politicians, and investors have all been focused on it. Some investors I speak to don’t think inflation will go away. It may feel that way as the methods the Bureau of Labor Statistics uses to measure inflation don’t make it a particularly intuitive indicator to gauge; but inflation is, in fact, falling.

Perhaps the disconnect between perception and reality with respect to inflation is the fact that falling inflation does not mean a decline in prices. Falling inflation simply means the rate of increase in prices has declined. On average, prices are still going up, just at a slower pace. If you anchor your inflation estimates on goods or service prices from two years ago, inflation still seems to be rampant.

The raw data tells a more encouraging story. The chart below updates a chart we ran in June that shows the six-month annualized rate of change in core CPI and core CPI minus shelter and used autos. We have also included the 12-month rate of change in core CPI. All are off their highs of 2022, with the six-month annualized rate of change in Core CPI minus shelter and used autos down near the Fed’s 2% target.

Cash is King Again… and So Are Treasuries 

For the first time in 22 years, cash yields are higher than the earnings yield on stocks. The earnings yield on stocks is simply earnings divided by the price. For the S&P 500, the earnings yield is 4.7%. The Fidelity Treasury money market yields nearly 5%. Treasury yields on notes maturing within three years are also higher than the earnings yield on the S&P 500. With the economy still showing some resilience in the face of higher interest rates, we could see another interest rate hike or two by the Fed over the next 6-12 months. That could push cash yields up even higher.

I cannot overstate the benefit of today’s high cash yields. Ultra-low interest rates were a drag for conservative investors and those interested in income for over a decade. Ultra-low interest rates also greatly distorted markets, inflating valuations and keeping zombie businesses alive with free money. At today’s 5% money market yields, an investor could double his money every 14.4 years. At the 0.25% yield that prevailed for most of the 2010s, it would take 288 years.

In addition to the higher yield on money market funds, Treasury and corporate yields are also at attractive levels. Short-term Treasuries offer yields between 4% and 5%, and short-to-intermediate-term corporate bonds offer yields of 5% to 6% depending on maturity and rating.

Have a good month. As always, please call us at (800) 843-7273 if your financial situation has changed or if you have questions about your investment portfolio.

Warm regards,

Matthew A. Young
President and Chief Executive Officer

P.S. During a recent Barron’s Q&A session the magazine asked, “What are your best fixed-income strategies right now?” I agree with the response given by the head of fixed income for BNY Mellon:

First and foremost, we’re constantly telling investors to not get over enamored with very short-term instruments. Right now everyone’s like, “Look what I can get for T-bills and look what I can get for cash.” We tell them to diversify, to extend durations, to get out of cash. We’ve been pounding the table on not being overweighted in cash and reminding clients that while it looks really attractive now, it could change very suddenly. Those rates that you thought were really compelling could go away; a 5% yield could turn into a 3% yield.

P.P.S. Yahoo! Finance recently cautioned investors not to ignore potential risks and become too complacent:

“Expectations are on the more optimistic side. So any small thing could rattle investors,” said JPMorgan Private Bank senior markets economist Stephanie Roth. “There are a long list of things that are potentially surprising to markets. Everybody is generally complacent. So it could be any negative news that would scare investors.”

And this from Truist strategist Keith Lerner:

We see a market more vulnerable to bad news as stocks have become extended on a short-term basis… and already have seen some of this vulnerability in the first few days of August on Fitch’s surprise downgrade of US debt. Also, the move in the 10-year US Treasury yield above the 4% level will likely act as a headwind to further expansion in already lofty equity valuations.

P.P.P.S. Best-selling author Morgan Housel explores the strange ways people think about money in his book The Psychology of Money:

Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior is hard to teach, even to really smart people. Money—investing, personal finance, and business decisions—is typically taught as a math-based field, where data and formulas tell us exactly what to do. But in the real-world people don’t make financial decisions on a spreadsheet. They make them at the dinner table, or in a meeting room, where personal history, your own unique view of the world, ego, pride marketing, and odd incentives are scrambled together.

Barron’s interviewed Housel in July, covering a range of money-related topics. Barron’s asked Housel what is the biggest mistake investors make. He responded:

Not being introspective enough about what your goals and risk tolerances are. A lot of people think of investing in the same way they would think of math, where there’s one right answer for everyone. Like it doesn’t matter how old you are, where you are from, two plus two is always four for everybody. There’s no black and white law that’s like that, and a risk that is good for you to take might be terrible for me to take and vice versa.

The biggest thing is realizing that there are a million different games to play, and you have to figure out the game that works for you. A lot of investors get tripped up because they start to emulate maybe somebody on TV, maybe somebody on Twitter, maybe someone in their own household, and they start playing a game that is the wrong game for them.

P.P.P.P.S. Parts of the U.S. economy continue to remain resilient. As reported in MarketWatch, “An ISM barometer of U.S. business conditions at service companies such as restaurants and hotels strengthened to 54.5% in August from 52.7% in the prior month. This is the highest level since February. Economists polled by the Wall Street Journal had expected the index to slip to 52.5%. This is the eighth straight reading above the 50% threshold that indicates expansion in the economy. The details of the report were also strong. Activity improved to 57.3% in August from 57.1% in the prior month. The new orders index rose 2.5 percentage points to 57.5% in August. The employment index rose 4 percentage points to 54.7%. Prices rose 2.1 percentage points to 58.9% in the month. Thirteen out of 18 industries reported growth in August.” According to Kurt Rankin, senior economist at PNC Financial, “Strong new orders activity is an indication that consumer and business activity in the U.S. economy continue to defy gravity — higher interest rates, accumulating debt, and depleted savings have all failed to squash services spending thus far and the ISM Services PMI reveals that the trend is tilting higher once again.”

June 2023 Client letter

The S&P 500 and Nasdaq 100 indices have rallied impressively to start the year. After they underperformed blue-chip dividend stocks (FTSE High Dividend Yield Index) last year by the most in at least two decades, both indices are outperforming by a similar amount YTD. Due to the arithmetic of portfolio losses and the necessity to make up for lost ground, despite similar return differences, the FTSE high dividend index is still ahead of both the S&P 500 and Nasdaq 100 from the prior bull-market high. The outperformance of dividend stocks in a bear market and their underperformance when the market rallies sharply are typical of the more conservative nature of higher dividend shares.

What is not typical is the magnitude of the divergence in performance during the recent bear and bull markets. What explains these large gaps? The S&P 500 has become unbalanced and top-heavy, in our opinion. Big Tech has long been a key mover of the Nasdaq 100, but the S&P 500 now seems to be moving to the beat of the same drum.

Apple and Microsoft alone account for over 14% of the index. So, while the S&P 500 may be up significantly YTD, a handful of tech shares plus Tesla—which trades as if it were a tech stock—accounts for most of the return. 

Technical analysts may explain this by telling you that the breadth of the market is weak. A healthy rally is one where many issues participate. One way to measure breadth is to plot the cumulative advance-decline line of NYSE stocks. The chart below shows the advance-decline line along with the S&P 500. The S&P has risen above prior highs in the chart, but the advance-decline line appears to be stuck in a downtrend. That could change quickly, and it has improved of late but not to the degree that signals the market is in a healthy uptrend. 

What factors could derail the market? Risks we are monitoring include underwater securities on bank balance sheets, potential problems in commercial real estate and its impact on bank balance sheets, inflation remaining stickier than anticipated, and the Fed hiking farther than anticipated or leaving rates higher for longer than anticipated. Valuations, especially considering the more attractive fixed-income landscape, also remain a concern. 

There are of course always risks. Bull markets are said to climb a wall of worry. Attempting to move entirely in or out of the market based on potential risks is a loser’s game. Market timing may sound like an appealing palliative to alleviate anxiety about market risks, but there are better strategies for managing risk. In “The Case Against Market Timing,” Bloomberg News recently highlighted some of the risks and failings of market timing. 

But for investors with decades of investing ahead of them, sitting on the sidelines is a surefire way to sabotage long-term returns—even if cash looks more attractive than it’s been in years. Many money market funds yield 4% or more and Treasury bills yield around 5%. 

Investors have been fleeing stock mutual funds for the relative safety of money funds since last year.

Equity mutual funds saw more money going out than coming in every month of 2022, peaking with a $94.7 billion outflow in December, according to the Investment Company Institute. For all of 2022, a net $472 billion left stock funds.

Assuming that money wasn’t reinvested, it missed out on the subsequent rally that’s seen the S&P 500 gain 8.6% and the Nasdaq 100 surge 21% this year through Monday’s close. 

Trying to time the market involves two decisions—when to get out and when to get back in. Many investors who pull money from the stock market during turbulent times wind up sitting in cash for too long, debating when it’s safe to return, and miss the rebound as a result.

 Many investors make the mistake of getting out of the market on its worst days, even though the best and worst days are often clustered together in times of volatility. The opportunity cost of missing those best days, compounded over time, is large.

A JPMorgan Asset Management analysis found that someone who invested $100,000 in a fund tracking the S&P 500 Index from Jan. 3, 2000 to March 31, 2023, had an annualized return of 6.5%. For those who missed the 10, 20 and 30 best days, the respective returns were a mere 3%, 0.7%—and a 1.2% loss.

Looking at results over an even longer period of 50 years, an analysis by Citi Global Wealth found that an investor’s returns would have been reduced by 9.5% each year if they missed the 100 best days.

Instead of trying to move in and out of the market to manage risk, we craft balanced portfolios and focus our equity investing on what we believe are higher-quality dividend-paying stocks.

Bonds Still Serve a Role for Many Investors

Bonds delivered disappointing results in the face of a falling stock market last year, but in our view this is no reason to be discouraged. While positive returns would have offset some of the weakness in stocks, the increase in yields is a welcome development for investors who have suffered through years of distortive 0% interest rate policy. 

Medium-term U.S. Treasury bonds currently offer yields of 4%, with high-grade corporate bonds paying closer to 5.5%. High-quality corporate bonds have a high probability of making all scheduled interest and principal payments. According to S&P Global, the highest one-year default rate for A-rated bonds was .39%, and for BBB-rated bonds it was 1.02%. While the sharp increase in interest rates has resulted in unrealized losses showing on your statement, these losses will be temporary if you hold the bond to maturity and the issuer does not default. Getting paid a known and fixed value at maturity is a feature that does not exist with stocks.

We also anticipate that, should the stock market take another significant dip in response to a recession or other economic concerns, bonds would perform better than they did last year. With interest rates bordering on their highest levels in 15 years, there is meaningful room for yields to fall and bond prices to rise in a recessionary environment.

Use Quality to Manage Risk 

On the stock side of portfolios, we look to manage risk by purchasing stocks that pay dividends and have a history of increasing those dividends. Over the last two decades, in down months for the S&P 500, non-dividend-paying stocks were down about 50% more than high-dividend-paying stocks. This isn’t always true. For example, during March 2020, high-dividend-payers were down slightly more than non-dividend-payers. However, on average, we believe high-dividend-payers will hold up better in down markets than non-dividend-payers.

When a recession or other market-related events cause investors to flee risk assets, it is shares of companies such as Procter & Gamble, one of the premier household products manufacturers, where stock investors often find comfort. P&G has paid a dividend through every bull and bear market, every recession and expansion, and every financial crisis since 1871. P&G has also increased its dividend every year for the last 69 years.

We don’t just buy defensive dividend-payers. We also include more cyclical businesses such as banks and industrials. These stocks do tend to be prone to more volatility, and their dividends are more likely to be cut (we have owned some in the past, including Intel) than companies like P&G in an economic downturn. But to craft a well-diversified portfolio, one should also include companies that perform well when the economy is booming.

One of the more cyclical stocks we like is Texas Instruments (TI). TI is known for its pioneering work in the field of analog chips. These vital components serve as the building blocks for countless electronic devices. TI’s analog chips play a crucial role in enabling functions like signal processing, power management, and data conversion in a wide range of products, including smartphones, industrial equipment, automotive systems, and more. While TI hasn’t enjoyed the same boom as chipmakers like NVIDIA from excitement over artificial intelligence, we believe it has higher barriers to entry and lower disruption risk than a company such as NVIDIA. Analog chips are often low-cost components that are designed into electronic devices. Manufacturers may be reluctant to switch suppliers to save what is often an insignificant amount of money. Texas Instruments’s shares yield 2.85% today, and the company has increased its dividend for 19 consecutive years. 

More on De-Dollarization

Last month I wrote that de-dollarization was unlikely to threaten your financial security. Two recent Bloomberg articles on this topic provide additional insight into why the dollar is likely to remain the primary reserve currency for the foreseeable future.

While the U.S. move to weaponize the SWIFT payment system to punish Russia has been seen as a catalyst for a move away from the dollar, Bloomberg reports the share of payments via SWIFT in dollars has actually risen since last year:

Since Russia invaded Ukraine in February 2022, use of the dollar in global transactions has only grown, jumping to 42.7% from 38.9%, according to Swift, the member-owned cooperative that provides financial messaging services to more than 10,000 institutions and corporations in 210 countries. A decade ago, the dollar’s share was less than 35%. Clearly, the world sees benefit in transacting business in a currency where the rule of law takes precedence.

That rule of law is what draws capital from all around the world to the US in good times and bad. In the week before lawmakers agreed on raising the debt ceiling, the US Treasury Department auctioned $120 billion of two-, five- and seven-year notes. What’s remarkable is that even with all the breathless commentary about the US heading for a sure default, each of the sales attracted much higher-than-average demand from a group of buyers generally seen as a proxy for foreign investors. So-called indirect bidders took 68.2% of the $42 billion in two-year notes offered, the most for that maturity since 2009, according to data compiled by Bloomberg. For the $43 billion in five-year notes, they took 72.7%, the second-most on record, while it was an equally gaudy 72.3% for the $35 billion of seven-year notes offered.

Much of the talk concerning an alternative reserve currency seems to come from the so-called BRICS countries (Brazil, Russia, India, China, and South America).

The influence of the BRICS coalition could be substantial, given the group has 42% of the world’s population. But economically, it delivers just 23% of total global output and only 18% of trade…

The defining element for a reserve currency is where it is the second-most used currency for domestic transactions. The dollar is pretty much the most-utilized method of exchange across the world after each nation’s own currency —sometimes even surpassing domestic currencies. Almost every commodity, including oil and gold, trades in dollars. Even crypto-currencies are paired almost exclusively with the greenback….

A common currency is on the agenda. One Russian idea is to make it part-backed by gold—although moving gold bars around is no simple matter. Despite a mutual dislike of the extended reach of the US Treasury’s Office of Foreign Assets Control, the grouping’s fundamental differences are too wide for it to make headway.

The bottom line is that de-dollarization is unlikely to be a threat to your personal financial security over a time horizon that necessitates a change in investment strategy today.

Is Inflation Finally Cooling?

Recent inflation data has shown some encouraging signs. The year-to-year percentage changes for both the headline consumer price index and the core consumer price index are still far too high, but annualizing the rates of change in the seasonally adjusted inflation data looks more encouraging.

The chart below shows the annual percentage change in the core CPI, the 6-month annualized percentage change in the core CPI, and the 6-month annualized percentage change in the core CPI minus shelter and used autos.

Core CPI is still running at 5.3%, but it has fallen from a peak. On a six-month annualized basis, core inflation is running at 5.1%; but if you strip out shelter and used autos, the six-month annualized rate of change is now at 3.3%. Why take out shelter and used automobiles? Housing prices and rental prices have already started to fall, but their declines have a lagged impact on the CPI. Used autos also appear to be at unsustainable levels and have started to decline.

To be clear, it is still too early to call an end to elevated inflation, but a further cooling off in inflation data without a recession (which isn’t yet evident in the data) would be the best possible outcome.

Have a good month. As always, please call us at (800) 843-7273 if your financial situation has changed or if you have questions about your investment portfolio.

Warm regards,

Matthew A. Young
President and Chief Executive Officer

P.S. One positive headline for the economy that might be overlooked is the continuing return to pre-pandemic behavioral norms. According to Transportation Security Administration figures, more travelers passed through airports during Memorial Day weekend compared to the same holiday before the pandemic.

The Transportation Security Administration reported that around 9.78 million people moved through security checkpoints between Friday and Monday, compared with 9.74 million during the same period in 2019.

“This summer travel season could be one for the record books, especially at airports,” said Paula Twidale, senior vice president of AAA Travel, in a statement.

P.P.S. Careful with Venmo and Cash App. The New York Times recently reported that “Unlike deposits in savings and checking accounts at federally insured banks, funds stored in many ‘peer to peer’ apps aren’t automatically protected, potentially putting cash at risk if the app’s parent company stumbles financially, the Consumer Financial Protection Bureau warned in a consumer advisory this month.” Millions of Americans use these apps to send money to friends and buy goods and services. Annual transaction volume is approaching $1 trillion and is expected to exceed $1.6 trillion by 2027. If you or any of your family members have a high balance in your Venmo or Cash App accounts, it may not be a bad idea to consider moving those funds back to an FDIC-insured account.

P.P.P.S. As noted in the WSJ, an important housekeeping item is making sure you have a will. Believe it or not, “…54% of Americans told Gallup they didn’t have a will in 2021. Even the wealthy put off estate planning—one in five Americans with investible assets of $1 million or more don’t have a will, according to a recent Charles Schwab survey.”

“If you die without a will, a range of state laws dictate who gets your assets, and your loved ones may get nothing. They might get kicked out of the family house and could face hefty surprise tax bills.”