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WALL STREET IS NO PLACE FOR EMOTIONAL MONEY….

I have grown to understand if you don’t have a plan for your money Wall Street will.

The hardest part of a retail investor’s financial life is taking a loss. In fact, it’s been documented that investors keep their losers and sell their winners. And while this seems logical, it’s both irrational and self-defeating at the same time.

Number one, if you sell your winners too soon, it ruins your chance to recover the money that put you in a deficit.

Secondly, more times than not, your stock selection process is at fault. So, chances are the stock is down with good reason.

This is typical when you are chasing the social media hype and top-ticking companies at their peak, which means you are buying into the hype at the end of its run. Since knowing how to analyze a stock is lacking, chances are…greed overtakes the worst part of your emotions and starts making emotional decisions on your behalf.

When you are in the storm of your emotions, it virtually guarantees that you will sell on emotion and buy on the fear of missing out. This is the part where you revenge trade, disregarding your intrinsic trend—instead of walking away and attacking your plan, your lack of planning becomes the aggressor.

And panic walks in the door, accompanied by self-doubt and insecurity. Panic produces stress hormones, and the adrenaline kicks in. The fear of losing puts you in fight-or-flight mode, not realizing the market’s bite is bigger than your fight.

Self-doubt makes you question yourself in the worst possible way, whispering in your ear, “This market is not for you.” Insecurity doubles as embarrassment making you wish you hadn’t gotten involved with the market at all.

It’s like one disastrous relationship, where you think the type of girl or guy you like always gets you in trouble—until you take some time by yourself, and rebuild the parts of you that you lost along the way.

This is your informational stage, and you start to seek answers. If you are lucky, you might read the right book or get the right mentor who pushes you in the direction you overlooked.

This is the discovery process where you realize that the people who got wealthy in the stock market either—(1) built their fortunes on the backs of down or depressed markets that made a comeback or (2) understood their craft well enough to profit off a predicted dire event.

For instance, George Soros. Soros made billions predicting the collapse of the British pound. He will forever be remembered as the man that broke the Bank of England. The event was called Black Wednesday.

In September 1992, George Soros made a humongous bet against the British pound. Soros’s big bet was influenced by the decision that Britain made to join the European exchange rate mechanism (ERM), which fixed rates to the German mark.

Soros felt this was a bad move since it made exports less competitive, and it hurt economic growth. Secondly, Britain’s economy was weak, and its inflation rate was higher than Germany which meant it had to keep interest rates high to maintain the exchange rate.

In 1990, the reunification of Germany caused inflation to spike and put upward pressure on the German mark, which also put pressure on Britain's economy. It was the Maastricht Treaty that created a single currency, which caused the instability that led to the crash of the British pound.

Once Britain entered the exchange rate mechanism, speculators began scrutinizing the inclusion of the British pound, which led speculators to question how long a fixed exchange rate could fight natural market forces.

To counter, the Bank of England raised interest rates into the teens to attract investors to the British pound. This attracted the negative attention of George Soros, so he began to short the British pound. He made 1 billion dollars, as the British pound lost 15% against the mark and 25% against the dollar—eventually causing Britain to withdraw from the exchange rate mechanism and George Soros made out like a bandit.

George Soros is also known as an activist investor when he places a bet on a company, he understands the full breakup value of that company and its potential. When he invests he understands the structural value of a company and advocates for what is in the best interest of the shareholders.

My mentor is Peter Lynch because of his theory, buy what you know and never buy a stock that couldn’t be explained to a seven-year-old.

Peter Lynch believed in growth at a fair value, so it’s important to learn how to understand, how to measure value, and how to measure growth in the stocks you invest. If you aren’t doing fundamental research, you are gambling with the pamper money. Why risk your nest egg regardless of what anyone says, in regards to risking money they could afford to lose? I have never met a person who could afford to lose money.

It would do all retail investors some good if they studied the forefathers of the stock market, so the next time they feel that pit in their stomach urging them to make an emotionally irrational decision—at least they might have some examples of what to do, and what not to do when they face financial diversity.

DAMNED IF YOU DO, DAMNED IF YOU DON’T...

Could there be a recession bubbling underneath what looks like a healthy economy?

Could we be ignoring the obvious clue and economic calamity that interest rates and persistent inflation are having? Although unemployment is at 4.1%, and the fourth-quarter GDP came in at 2.3 %, are we ignoring a head-to-head collision that’s about to take place?

What about Sahm’s Rule, the inverted yield curve normalization, or the fact that inflation has increased four months in a row?

Based on the last five inverted yield curves, we have seen a recession between 0 and 1000 days following the normalization of the yield curve. This might explain the fact that the Feds have cut the Fed fund rate by 100 basis and instead of mortgages and bond yields going down, they have gone up

In fact, mortgage rates have choked the living daylight out of the average consumer while institutions held home buyers down against their will and beat them over the heads with their wallets.

Since 2022, institutions have been the 800-pound gorilla, denying home buyers the right to own a single-family home at a fair price. While interest rates have been taking a little steam out of their engines, supply is at a deficit. Plus, mortgage rates have been firmly pressing up against the 7% up 165% since bottoming at 2.65% in January 2021.

This has impacted the rental market by keeping rents elevated. Considering some are paying 30% to 50% of their income for rent, 20% of their income for cars, and 12.8% for food, with a shrinking capacity to spend, the consumer most likely will cut spending.

There is still a froth in the system, according to the Bureau of Labor Statistics, food is 24.7% more expensive than before the pandemic. Car insurance increased by 25% and to top it off, in states like Florida, home insurance can make you house-poor.

Once you pile a contraction in manufacturing and compounding credit card debt, at some point it’s expected that we see economic activity slow down across the board due to a tapped-out consumer.

The Feds are stuck in a holding pattern, but some of the sharpest minds are thinking that they are making the same mistake in reverse—like when they waited too long to raise interest rates.

They are seriously damned if they don’t and damned if they do. Being too restrictive can cause a recession; being too accommodating can cause inflation.

On CNBC, Donahue Peebles was talking about how the Feds should have cut 50 basis points in the first three Fed cut meetings and 100 basis points in the last in 2024, simply because on a community and regional bank level, they have stopped lending because rates are too restrictive, as well as due to the level of rates—it’s causing a re-rating in commercial property debt.

This means the quality of the commercial loan is dropping, which could be the next ticking bomb. According to the CRE, most of the exposure is in the office spaces, accounting for only 11% of big banks’ portfolios but 21% of regional banks' loan ratios. This is putting stress on the regional and community bank system as in some cases they have to modify loans.

On a consumer level, if access to money is expensive— this means in the area of credit—buying a new or used car is expensive, getting a mortgage is expensive, and as long as it stays more expensive to buy than rent—rental inflation will remain elevated, squeezing an already stressed consumer.

And while the Fed’s decision is motivated by rising inflation and an uncertainty of what’s to come, one thing is for certain, the economy can’t continue to run on all cylinders as the gas is 70% consumer and the empty indicator is flashing.

IT’S REPORT CARD SEASON…

It’s that time of year again…Report Card season. The S&P 500 is off to a great start; not only are we seeing earnings surprises, but it’s the magnitude of earnings surprises. According to Fact Set they are above their 10-year average.

We are still in the early rounds, but the index is reporting higher earnings in the fourth quarter relative to last week and the end of the quarter. In fact, the index is recording its highest year-over-year earnings growth rate in the 4th quarter in 3 years.

As of January 24th, 16% of the S&P 500 reported 4th quarter results. Out of those 80%, they’ve reported earnings above the 5-year average of 77% and the 10-year average of 75%. So far, companies are reporting 7.3% above estimates.

This is extremely important as the estimates on the street for 2025 are at peak levels. According to what LPL Financial analysts are predicting, we see between $269 and $289 per share in earnings for the S&P.

And although we are off to a fast start, they reported 7.3% which is still below the 5-year average of 8.5%, but it’s still above its 10-year average of 6.7%. So, I guess we can stay cautiously optimistic. The week of the 20th—as usual first up to bat, were the financials leading the charge.

A combination of positive surprises in the financial and downward revisions in the energy sector led to an increase in surprises. Meaning…the bar was lowered, which gave energy companies a lower target to beat.

During the week of the 20th, we witnessed earnings growth of 12.7% in the fourth quarter relative to 12.4% last week, and 11.8 at the end of the fourth quarter ending December 31st.

12.7% was the highest year-over-year earnings growth rate for that period since the 4th quarter of 2021 of 31% percent, and the sixth consecutive quarter of year-over-year earnings growth for the index.

It’s still early but seven out of the 11 sectors are reporting earnings growth for the 4th quarter, and six out of the 11 are reporting double-digit earnings growth.

• Financials

• Communication services

• Information technology

• Consumer discretionary

• Health care

• Utilities

While four sectors are reporting declines, energy is the only sector reporting double-digit earnings declines. Moving on to revenue, only 62% have reported revenue above estimates.

This is below the 5-year average of 69% and the 10-year average of 64%. The aggregate total of 0.7% thus far is below the 5-year average of 2.1%, and below the 10-year average of 1.4%. Utilities were the culprit bringing down revenues for the quarter so far.

This I find extremely interesting considering the streets ran utilities companies through the roof on the AI hype. At one point last year, every utility company was trading above their 50-day moving day average, which is an extremely bullish indicator for the sector.

Opine with me for a second…utilities carry low PE ratios, stable returns, and long-term contracts. So, it’s easy for institutional traders to manipulate the market to the upside throwing piles of cash in because logically speaking, who wouldn’t want stability and dividends in a turbulent market?

So who would question the manipulation?

Utilities are far from a growth play, but we saw companies like Vistra Corp. making new highs and moving from boring to exciting under the tailwinds of artificial intelligence.

Wall Street loves its candy, but I digress; getting back to last week’s reporting—4.6% was the blended growth rate for the week of the 20^th as compared to 4.7% last week, and a 4.6% growth rate in revenue for the 4th quarter ending December 31st.

If 4.6% were to hold it would be the 17th consecutive quarter of revenue for the index. Looking at the bright side, eight sectors are reporting year-over-year revenue growth in the fourth quarter led by information tech, and conversely, three sectors are leading the way down and of course, energy is at the head of its descent.

This is why the narrative of ‘Drill baby, drill’ doesn’t budge the needle for me in terms of energy being investable; it’s too cyclical and dependent on the economy for growth. Utilities on the other hand are considered non-cyclical in nature because of their steady stream of income.

Let’s face it, no one is going to cut off their electricity to save money.

Looking forward, analysts are expecting 11.3% earnings growth for the 1st quarter of 2025 and 11.6% earnings growth for the 2nd quarter, respectively, and 14.8% year-over-year earnings growth for the calendar year.

The forward PE comes in at 22.2, which is above the 5-year average of 19.7 and the 10-year average of 18.2 and above the 4th quarter 21.2 PE ending December 31st.

Earnings season is the best barometer we have to determine the heartbeat of the financial economy. History dictates that the market moves with earnings so let’s keep our eyes on the prize.

HOUSE RICH VERSUS LIQUID WEATHLY…

So, I asked the question on my social media pages, would you rather be house rich or liquid cash wealthy?

Apparently, the die-hard real estate owners took great offense to the thought of investing in the stock market as opposed to buying a house and paying taxes in perpetuity.

While I enjoyed the controversy, I felt it made sense to clarify.

First, I asked, if you had two assets…one valued at 3 million and the other 16.1 million over a 30-year time span, which would you choose? It seems obvious, but believe it or not, the answers were less than obvious.

I received replies like, where are you going to live? Or, it’s an asset versus spending on rent, plus you get to write off the interest expense. You are absolutely correct. Prior to December 15, 2017, a married couple could write off interest expense on up to 1 million dollars of mortgage debt if they filed jointly, and 500k if they filed separately.

After December 15, 2017, it dropped down to 750k of mortgage filed jointly and 375k if filed separately. Upon a sale, as a couple up to 500k in profit was tax-free, and 250k for single filers.

And while the tax benefits of owning property are undeniable, let’s unwrap another layer. The 3 million dollar asset is a 1 million dollar home, which costs approximately 2 million to buy over that same time frame, which technically only has 1 million in actual profit and is not liquid—meaning, you can’t sell it and have cash in hand the next day.

I merely asked, wouldn’t it be better to invest that same million dollars and leave it in an investment vehicle like the S&P 500, which has a historical average return of 10.6% over the last 100 years?

This would net a better result—when factoring in compound interest the net result was $20,542,524.28, which is far better than the 16.1 million in my earlier example. You would have thought I called them a bunch of atheists because I was assaulting their belief system.

And then it hit me…we have been conditioned to believe the doctrine that builds the system, instead of ourselves. The way I see it using simple math…if you made a 50% return and if after 30 years you sold that 3 million dollar home that you paid 2 million dollars for—between mortgage payments and interest, the net proceeds not including realtor fees, would be 1 million dollars.

And based on inflation and the fact that your money is worth less in the future than it is today, and the dollar has lost 74% of its value since 1980— having 3 million 30 years from today, will be like running at high speed on a treadmill going nowhere.

Let’s say the historical 30-year growth rate on a house is 3.8%—this means the value would compound over 30 years at the rate of 3.8% and would be worth $3,061,403.72.

Now keep in mind, the average age of today’s homebuyer is in their late thirties (38), paying off a 30-year mortgage would place them at the retirement age of 68.

Question…if the average person has $272,589 in their 401k, and pensions are only 15% of the private sector, how does a person at 68 make it on $1135.75 a month, when you divide $272,588 /20 years = $13,629.40 and then divide by 12 months in the year?

Chances are, they are going to have to sell that home and downsize to sure up their retirement. Based on this information, which choice would you choose? $3,061,403.72 or $20,542,524.28?

Now, let’s put it in the proper perspective. Based on today’s climate, it is cheaper to rent than to own? When mortgages were at 2%, owning made more sense economically.

Also, the average person doesn’t have a million dollars lying around. But let’s say you could afford that million-dollar mortgage, which, at 7%, would be approximately $6,556.76 a month.

It costs you $2,200 for a two-bedroom rental as a married couple with 1 child in a 200k income household.

The take home pay as a couple is approximately $11,356. Let’s say after all bills they amount to $6,200

You would still have $5,156 left over, which means if you invest just $4,000 a month for 30 years in the S&P 500, your retirement portfolio would be worth $9,869,656.22.

Now imagine a young couple getting married, between the ages of 28 and 31. This means retirement at 58 to 61; and if they work just four more years, they will increase their nest egg to $15,016,594.08. This is the power of compounding returns, where time is your best friend—as opposed to paying a mortgage of $6,556.76 for 30 years, which equates to 2,360,433.60.

Now, if we are in a low-interest rate environment where it’s cheaper to buy than to rent, then it makes absolute sense to do both.

DEEP SEEK THE NEW APEX PREDATOR…

Nothing sells like fear…literally. The Chinese founder, Liang Wenfeng (a prominent figure in both the hedge fund and AI world), puts out Deep Seek and both American technology and energy market sell-offs under the premise that the AI landscape will be forever changed in terms of cost and efficiency.

Deep Seek is an unknown, open-source Chinese start-up that brought Silicon Valley to its knees with its innovative, cutting-edge AI models. The actual threat is to mega tech giants like Google, Meta, and Microsoft.

Last year, big tech, Google, and Meta spent billions on the AI arms race.

Google reportedly spent 33 billion, Meta 27 billion, Microsoft 46 billion and Amazon 19 billion, so collectively…125 billion— all fighting for AI dominance trying to own the AI real estate in their respective spaces with NVDA being the dominant beneficiary.

Out of nowhere comes this obscure little Chinese start-up called Deep Seek, which reshapes the entire concept of how big tech is going about Artificial Intelligence and reframes the race.

Deep Seek introduced an open-source AI model that reportedly costs 5.6 million and worked just as efficiently, if not better than Open AI, for a drastically lower cost per token than Open AI’s ChatGPT.

DeepSeek-R1’s API costs just $0.55 per million input tokens and $2.19 per million output tokens, compared to OpenAI’s API, which costs $15 and $60, respectively.

The timing couldn’t have been better. U.S. Chinese tariffs have been causing turbulence in the stock market, bond yields have been rising and President-elect Donald Trump was just inaugurated. 

Big tech was due to report starting Wednesday the 29th. Valuations were at an all-time high and then along came a disruptor that potentially threatened both the amount of GPUs that companies may need future state and the cost per API token.

The token cost was so drastically cheaper, and the AI model was just as good that it caused panic across Silicon Valley. The only startling fact is that the news was over 30 days old, which made it a tad bit suspicious.

The markets started to sell off Sunday evening after a note from economist Ed Yardeni, stating that Deep Seek’s success could put a weight on U.S earnings reports. Institutional traders and retail investors both lined up on the bid selling into the frenzy.

NVDA lost nearly 600 billion in market cap in one day, the largest drop in history. The panic was also inflated by Wall Street analysts saying that the AI run was a bubble and that this could change the way big tech is investing in AI, which would impact NVDA chip dominance and lower Big tech spending.

Dan Ives, Managing Director and Senior Equity research analyst at Wedbush Securities, stated he spent the weekend on the phone with 25 CIOs and Tech executives and nothing has changed in the AI spend allocation picture and that the street, in his words, has gotten this “Way wrong.”

Scale AI’s Alexander Wang stated last week from Davos that Deep Seek may be using up to 50k H100 than they are willing to admit but can’t disclose due to import controls.

This then calls into question the stated 5.6 billion cost as well as the aggressive time frame of a few months to build.

Although they have been legitimized, Deep Seek’s partnerships with companies like AMD— Deep Seek has stated that while they have achieved remarkable results they are primarily focused on research and have no detailed plans for widespread commercialization in the future, which translates to, we will not be able to obtain new NVDA chips to increase compute.

I am also of the belief that the street got this wrong, but I am also experienced enough to know that manipulation of the 30-day-old story, as well as the perfect timing was all about the institutional trader's advantage, especially just before the earnings with Meta, Microsoft, and Tesla reporting on Wednesday the 29th and Apple on Thursday the 30th.

Not to mention, neither Meta or Microsoft stated that they are looking into cutting CAPEX spending.

Nvidia reports on the 26th of February and since they are in their quiet period we will have to wait to see what Jensen has to say.

So, could this all be smoke and could this backfire and create even more demand for NVDAs chips?

The Arms race for AI is in its 1st inning and there are no signs of slowing. If there is a cheaper AI model it doesn’t change the need for NVDAs high computing chips; In fact, it increases demand.

Big tech are Apex predators so if they can get six times as much on the same spend they will spend triple to get 18 times as much to get to their goals faster.

Either way, it’s fun to watch!!!!

 Thank you for reading, we appreciate your feedback—sharing is caring

 Kevin Davis Founder of Investment Dojo and Author of The C.R.E.A.M. Report

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