Cover:
-In 2024, bonds played second fiddle to stocks, but income investors found ways to get paid. In 2025, investors should expect similar results, with long-dated Treasuries and municipal bonds showing flat to negative returns. However, junk bonds, convertibles, and preferred stock generated mid-single to low-double-digit returns. Energy pipeline companies emerged as data-center plays, while electric utilities had a strong year as artificial-intelligence plays. The Vanguard High Dividend Yield exchange-traded fund, led by megacap dividend payers like JPMorgan Chase and Exxon Mobil, returned a respectable 17%. Looking ahead to 2025, investors can still find yield in stocks and bonds. In fixed-income markets, investors can get 3% to 5% yields on municipal bonds, 7% or more on junk debt, 5% to 7% yields on preferred stock, 2% on convertibles, and 4%-plus on Treasuries of varying maturities. Lower-quality investment-grade bonds and higher-quality junk in the 5% to 7% area offer attractive income potential in 2025.
Interview:
-The US dollar surged after Federal Reserve chair Jerome Powell's Dec. 18 news conference, which led to a quarter point lower in interest rates. Despite expected weakening of the currency's appeal, the U.S. Dollar Index (DXY) rose nearly 7% in 2024, despite Fed rate cuts, concerns about U.S. finances, and macroeconomic concerns. The impact of President-elect Donald Trump's tariffs, tax cuts, and the Fed on the dollar is a crucial question for investors in 2025 and beyond. Karthik Sankaran, a former foreign-exchange trader and portfolio manager, offers insights on macro strategy and has gained a following in the markets. Sankaran recently joined the Quincy Institute for Responsible Statecraft as senior research fellow in geoeconomics in the Global South program.
Tech Trader:
-Former partners Elon Musk and Sam Altman are dueling in a California federal courtroom over their personal animus over generative AI model development. OpenAI, a nonprofit organization, began as a means to counter Google's lead in AI research. They feared that Google would be the first to develop artificial general intelligence (AGI), defined as highly autonomous systems that outperform humans at most economically valuable work. However, the high cost of training AI models became a concern, leading to Musk leaving OpenAI in 2018. In 2019, OpenAI created a bespoke structure, controlling the company with a nonprofit board but creating a for-profit entity. Investors' profit would be capped at 100 times their original investment. Microsoft was the first to invest in OpenAI, providing billion dollars and then another $10B in 2023 after ChatGPT's release.
The Trader:
-Las Vegas based Caesars Entertainment has experienced a 30% drop in 2024, underperforming rivals MGM Resorts International, Wynn Resorts, and Las Vegas Sands. However, Wall Street is betting on a turnaround in 2025, with a consensus price target of nearly 65% higher than its current level. Caesars owns other top Las Vegas hotels and casinos, including the Flamingo, Harrah’s, Paris, and Planet Hollywood. The company's online sports betting business has also made strides, with digital revenue increasing more than 40% in the third quarter of 2024 and expected to continue growing in the fourth quarter and throughout 2025. Stifel analyst Steven Wieczynski has a target price of $63 for Caesars, more than 90% above Thursday’s close of $32.59. Investors should also be cautious of Carl Icahn, who purchased a more than 1% stake in Caesars in 2024. Although his new position is passive, Icahn is still bullish on the stock.
-Stocks soared in 2024 after a massive surge in 2023, but some argue that now is the time to be a little more cautious. According to data from Glenmede Investment Management, the average annual return for the S&P 500 index is a more modest 6.7%, following consecutive yearly gains of more than 20%. While the Magnificent Seven may not tank per se, it may not hurt for investors to add more defensive-oriented stocks from the healthcare and consumer-staples sectors to their portfolios. Bill Stone, chief investment officer at Glenview Trust, wrote in a recent report that allocating to underperforming defensives like consumer staples and healthcare seems like an intelligent move for 2025. Other staples stocks, such as Coca-Cola, PepsiCo, Mondelez International, and Target, underperformed in 2024 and may now be attractive.
Features:
-Elon Musk has donated 268,000 shares of Tesla stock valued at nearly $112M to charity, as part of his year-end tax planning. The transaction was part of Musk's year-end tax planning and represents gifts of common stock to nonprofits that are unknown. The recipients have no current intention to sell the shares. After the sale, Musk still owns slightly less than 411M shares of Tesla stock through his revocable trust established in 2003. In addition, Musk was awarded 304 million in Tesla stock options in 2018, which was rejected twice by a Delaware Chancery Court. Tesla shareholders are challenging the latest court ruling. Musk's mystery gifts are not new, as he previously shed shares valued at $1.95B in seven transactions between August and December 2022.
-President Biden's decision to block US Steel's sale to Japan's Nippon Steel on national security grounds demonstrates the flexibility of national security as an excuse for government intervention in the economy. This justification is likely to become more common when President-elect Trump returns to power on Jan 20. Biden argued that without domestic steel production and domestic steelworkers, the nation is less strong and less secure. However, the failed bid may have been due to a foreign company accidentally wandering into a political minefield by trying to acquire an iconic unionized American manufacturer in a swing state during an election season. The United Steelworkers' leadership opposed the sale to Nippon, and Biden's decision risks undermining the Committee on Foreign Investment in the USA, which reviews potentially sensitive transactions involving foreign buyers of US assets. The committee opened its investigation after the prospective deal was announced in December 2023 and concluded its investigation earlier this month.
Europe:
-Europe is a popular investment destination for bargain hunters due to its underperformance, with the Vanguard FTSE Europe ETF returning just 2% in 2024. However, European stocks trade at record valuation discounts compared to the US, where the S&P 500 fetches 22 times. Goldman Sachs analysts have noted that the Stoxx Europe 600 index should have "modest" earnings growth of 3% to 4% in 2025, leading to "positive but low returns" for European stocks. Europe's markets have little exposure to technology stocks and their high growth, with the biggest European tech companies, SAP and ASML Holding, being about a tenth the market value of Apple.
European stocks are also getting dinged for being European, with every sector trading at a bigger discount to the US. The European energy sector, which trades at about a 50% discount to the US, is particularly severe. David Herro, manager of the Oakmark International fund, views depressed European stocks as a coiled spring that could "explode" to the upside if they ever start to close the valuation gap. Luxury goods companies Kering, Richemont, and Swatch Group trade for 15-20X projected 2025 earnings. Depressed liquor producers Diageo and Pernod Ricard also look attractive. The European auto industry has rarely been more disliked by investors due to tough continental electric-vehicle mandates, declining profits from China, and Tesla's lead in autonomous driving. Cash- and asset-rich BMW and Mercedes-Benz Group now trade for 6X forward earnings.
Emerging Markets:
-China's economy is struggling, with December data from China Beige Book indicating that the government's efforts to boost the economy are losing power. The recovery in consumer spending has not materialized in a sustainable way, with sales volume in every retailing sector declining compared to the prior month and 12 months earlier. The manufacturing sector also shows no signs of recovery, with output growth slowing down due to weakened domestic and foreign demand. The only hope for recovery is if Trump's China tariff talk is hot air. Home builders and sellers reported better sales growth, but home prices fell in December, making it difficult for the government to boost consumer confidence. Economists expect more stimulus measures from Beijing, especially if Trump starts his second presidential term with increased tariffs on Chinese imports.
Commodities:
-No update this week
Streetwise:
-Jack Hough identifies Comcast, as the “most complicated big company” in America, taking the title away from pre-breakup General Electric. The company's ticker, CMCSA, stands for Class A shares, suggesting that the founding family is using an off-limits class to maintain voting control that outweighs its economic stake. Comcast's shares have made 62% over the past 10 years, lagging behind the S&P 500 index by 180 percentage points. However, the company has outperformed its television peers, with the company's adjusted Ebitda increasing 9% to $468M. The company's movies, including Despicable Me 4 and Twisters, have also been making money, with third-quarter revenue rising 12% to $2.8B. The 2025 slate includes new installments in the Train Your Dragon and Jurassic franchises, as well as a Wicked follow-up.