Motley Fool Money - “Focus on the Fastball”

Episode Date: January 16, 2024

Earnings season begins again and the big banks lead the way. (00:21) Ricky Mulvey and Jason Moser discuss: - The “new” growth engine for Goldman Sachs - The macro risks that Morgan Stanley highlighted. - Why the CEO of Adidas gave his cell phone number to 60,000 people. Plus, (14:20) Robert Brokamp and Alison Southwick open up the member mailbag and answer your questions about investing a lump sum, saving for kids, and ABLE accounts. Stocks mentioned: GS, MS, ADDYY Epic Bundle discount link: www.fool.com/epic198 Got a question for the show? Our email is [e-mail] Host: Ricky Mulvey Guests: Jason Moser, Alison Southwick, Robert Brokamp Producer: Mary Long Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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earnings are back and banks are leading the way. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Jason Moser. Jason, thanks for being here. Hey, Ricky, how's everything? It's going all right. You know, we had negative 30 degrees last night in Denver, Colorado. So I am intensely grateful to have a podcast to keep me from getting bored. Well, we had a lot of snow here in Northern Virginia as well, at least a lot for us. So yeah, it's a nice inside day. There you go. I always worry about starting with the weather,

but I think negative 30 is enough to make a note of. That's an attention getter. We got two big banks reporting today. Let's start with Goldman Sachs. The headline for this quarter seems to be different based on your measuring stick if it's compared to if you do it quarter by quarter or year by year. But let's start with the positive. Earnings for the quarter up 50% from a year ago.

So how does that happen for a massive bank? like Goldman Sachs. Yeah, I think for oftentimes, the most obvious suspect here is in the loan loss provision line item there. And a lot of these banks, me, quarter to quarter and year to year, they'll reserve money for potential losses that they may realize on loans that are out there, whether it's commercial, real estate, credit cards, whatever it may be. And so oftentimes, when things start improving, they will pare down those loan loss provisions. And so I think I think that ultimately is one of the big tailwinds here for Goldman.

To put that into context, the provision for credit losses, this quarter, or this reported corps was $577 million versus $972 million from a year ago. So substantially less. And if you look at it in the context of the whole year, the provision for credit losses for 2023 in total was $1.03 billion. In 2022, that number was $2.72 billion. So that's money that is essentially released, right? Back into the system, so to speak.

And oftentimes, that can be one of the first things that really ramps up profitability for these banks, whether it be on a quarter-to-quarter basis or year to year. Yeah. Goldman Sachs sort of touted in the past this sort of its consumer platform business for its growth engine. Now, it really seems to be going back to the asset in wealth management business. A little bit of, hey, let's focus on the fastball to grow these revenues. Yeah, I think it's with Goldman's action, Goldman is not the first bank, I think, that comes to people's minds when we think about consumer banking, right?

I mean, it's an investment bank. So I think it's important for companies, banks, and otherwise, to make sure they never really relent on their core competency or their core competency. And in this case, like with Goldman, I mean, they tried a few things in the consumer banking realm that just failed to gain traction, right? I mean, whether it's Marcus or even the Apple Card relationship, right? I mean, we've seen that relationship is coming to a close as well, and not for good reasons. So when you look at what Goldman traditionally does, you look at the other financial services providers out there that focus on sort of different areas in the market. This is just, consumer was not something where Goldman just traditional.

had a lot of exposure or expertise for that matter. So, while I applaud them trying, it was something that didn't really line up with their core competency. So I think when you're not realizing the return on those investments that you hope to realize, sometimes you just got to cut your losses and say it's not working, and you just move on. But some of the consumer platform is still doing all right, although that seems to be from an increase in just average credit card balances, maybe not the business itself, as you mentioned. Yeah, and that's not a surprise. We've certainly seen throughout the last several quarters. That consumer credit card balances just continue to go up, up, up. And I mean, now they've surpassed $1 trillion

dollars in total record highs. So that is something to keep in mind. Going back to that conversation in regard to loan losses, I mean, these banks need to keep that stuff in mind, because if the consumer runs into a little bit of a wall there and is unable to service that debt, even just, you know, a small stretch of payments, that is something that's going to have an impact on these banks. So it's good to see that they are being relied upon to provide that credit. But that also comes with some challenges as well. And in this environment, I mean, that's something we're all kind of wondering about, right? I mean, you can only go so far before you've got to start paying that debt off a little bit. And so the consumer, I think, is going to be a real big

point of focus here in the coming year, especially now because it's not just credit cards, right? I mean, we look at this whole buy-and-out pay-later thing. It's obviously providing another avenue for consumers to spend and for merchants to sell. Eventually, you've got to pay the Piper, right? And that is debt that's not necessarily being accounted for either. So, yeah, those are good numbers to keep in mind. So Goldman Blue revenue and earnings estimates out of the water, but investors do not seem to be reacting to it as of now. Stocks down a little bit this morning. So what are they reacting to? Why are they feeling a little tepid about Goldman?

Well, like I said, Goldman is an investment bank, right? And so most of their money actually comes from dealmaking on Wall Street. That's great during the good times, and it can be a bit challenging when the times aren't necessarily so great. I think there's still some questions regarding the deal environment right now. I mean, IPOs have just are at a standstill. Mergers and acquisitions are becoming a bit more challenging. Obviously, a lot of focus on antitrust.

So, I think there's some questions in regard to the deal environment, number one. Number two, I think the consumer banking efforts, I mean, that was an avenue of potential growth that investors might have been pricing in that really is not going to necessarily show up like investors had hoped. And so that probably could lead to some of the glass-hap-n-empty perspective as well. And then, I mean, the other thing I think is just, it's worth keeping in mind. But David Solomon, the CEO of Goldman, I mean, he knows what he's doing. He's no dummy.

He's a quirky guy, right? I mean, he's got some sort of eccentric habits. He was a DJ until he decided to give that up because it was really kind of taking, I think, a lot of attention away from his full-time job. So I'm not saying there are necessarily leadership questions, but I do think David Solomon is at least a leader that probably Wall Street is keeping a little bit closer tabs on than others. It's one of the rare instances where the person goes back to the day job instead of focusing on

DJing. But let's focus now on Morgan Stanley. It's the first earnings report for the new CEO, Ted Pick. He's been in the job about two weeks. So, like Goldman, the wealth management unit did well this quarter. Unlike Goldman, they built in a really larger provision for credit losses. Anything stand out to you about Morgan Stanley? Yeah, I think you said it, really. I mean, it's as much of the same as Goldman with a couple of exceptions there. And you really hit on one there with the provisions for credit losses. I mean, actually increasing. for Morgan Stanley in this case. And I think that's just something to keep in mind again. And I think that speaks to when you listen to CEO Ted Pick, when he's talking about

sort of the state of banking, the state of investing, the state of their business, right? He just seems to be a little bit more. I don't even know if it's concerned. But I think he just, he has a few things that are maybe more on his radar. I think he's certainly paying attention to the consumer. I don't think he's quite sold yet that. that will necessarily return to this deal-making environment and that things will just continue on an upward trajectory. So those are the two things that kind of really stand out to me. Yeah, he pointed out the geopolitical downside risk and also the basis of the U.S. economy.

I think he did a fairly good job reminding investors that, hey, if the Fed cuts rates a bunch of times this year, it's because the economy's not doing so well, so that might not be a good thing. Yeah. that cutting rates because you can versus cutting rates because you have to. And that'll be interesting to see how that narrative is shaped through the year. So one metric that's coming out is these banks report their earnings. It's the return on tangible equity. And for investors, I expect them to see this number as more banks report this week. We think of return on equity. It's just net income over shareholders' equity.

How is this tangible equity measure different? And why do bank investors like keeping an eye on? it. Yeah, so tangible common equity, it's a measure of a company's physical capital, right? When we're talking about tangible, things that you can touch, right? That's kind of the way I always think about it. There are things that businesses have sort of intangible assets, whether you know, some sort of intellectual property or whatnot. But tangible common equity is focused on the physical capital.

It's calculated by subtracting out the intangible assets, things like IP, goodwill, whatever it may be, and preferred equity from a company's book value. book value is the value of a company's total assets minus its total liabilities. And so, tangible common equity, it's one more metric. It gives a bit of a more certain view of a company's assets there based on netting out those intangibles. It can be used in many cases, and particularly with banks, it can be used to sort of calculate capital adequacy, right?

How well capitalized? How solvent is this bank? You can actually calculate the tangible common equity ratio, which is something where it just ultimately, you divide that by tangible assets. And that gives you a measure of capital adequacy at a bank, right? It's something that can help you understand the losses of bank can sustain before shareholder equity ultimately gets wiped out. So again, focuses on sort of those things you can touch, right, as opposed to intangible.

and just another way to look at how stable these banks ultimately are. I want to move to a fun story to finish things off. There's a profile in the Wall Street Journal by Trevor Moss. It's about the Adidas CEO, Bjorn Golden, and basically how he's trying to turn around the apparel maker, a little bit of a glowing profile, and he's got a tough job on his hands. You know, he came into a difficult situation, which included about a billion dollars in Yeezy inventory.

So, J-Mo, one move that he has done during the turnaround, process is that he gave his cell phone number to Adidas's 60,000 employees. He says that for a time, he was contacted 200 times per week. What do you think? Is this genius? Is this dumb? Is this something in between? I'm at a bit of a loss. I hate to say genius or dumb. I mean, everybody's got their reasons for doing things. And maybe he's really just trying to lay out this picture of being a CEO who's in touch, is open to communication and trying to be as transparent as he can. But that's just, that's an untenable situation, right? I mean, there's just no way you can actually keep up with that. And I'm sure he's come to that realization in quick fashion. But yeah, I mean, this is a company that's got

its work cut out for it. I mean, it shows the risk when you are a business where so much of your success and so much of your, so much of your value is derived from a, brand, right? We talk about brand equity and how much, how important brands really are to any given business. In Adidas's case, it's a big deal, right? And the whole Yeezy thing just didn't work out, obviously, the way they wanted to. So a lot of work to kind of fix the mess that was created there. I love his enthusiasm. He seems like an eccentric, sort of unconventional leader. And maybe that's what Adidas needs right now. Yeah, it's more than a call every hour for seven days a week if you're keeping score at home.

I mean, I'm warming up to the guy. I doubt it a little bit a few months ago his sort of scattered approach, but maybe localization is what the company needs, streamlining decision making. He proudly ignores consultant reports. He's getting it back to an operating profit. And he clearly has, he has a sense of humor if you read the earnings transcripts. I mean, I know we're not judging based on humor here, but, you know, could Adidas be a decent turnaround play to look at.

Well, there's a lot of great leadership qualities there. I mean, may not necessarily be conventional, but again, maybe that's what Adidas needs right now. And I do think it's a brand that resonates particularly globally. I know a lot of times we kind of tend to focus on our sort of domestic box here in the United States. But when you look out internationally, Adidas is still a very powerful brand. And I think, given time and given proper leadership, absolutely, this thing can come back around. Jason Moser, thank you for your time and your insight. Thank you.

All right, before our next segment, first, a quick ad. We talk about stocks a lot on the show, but it's just a peek at the Motley Fool's investing universe. This year, we're rolling out a new offering. It's called Epic Bundle. The service includes seven stock recommendations every month, model portfolios, and stock rankings, all based on your investor type. We're offering Epic Bundle to Motley Fool Money listeners at a reduced rate is a thanks for listening to the show. So, for more information, head to Fool.com slash Epic198. and I will also include a link in the show notes.

If you've got a question for the show, our email is Podcasts at full.com. That is Podcasts with an S at full.com. And up next, Robert Brokamp and Allison Southwick are going to tackle some of those questions that you sent in about saving for kids, taxes and trading, and a little-known savings account. Our first question comes from Sam. I'm in my 20s and put my 401k in the S&P. One thing I like about it is that I'm investing a little bit every two weeks, essentially averaging out the price at which I buy in. Let's say you have a lump sum of money sitting in a

money market fund, say $12,000. And you want to get that into the S&P. Would it make sense to spread out the time at which you buy? For example, put $1,000 each month over the course of a year. Of course, that would only give you the average over the course of a year. Maybe one should spread it out even longer. Or maybe this whole plan is just another way of trying to time the market, which often doesn't work out well. Maybe better not. overcomplicate it and put it all in at once. Thanks for everything you do. Well, Sam, many folks have run the numbers behind this question, including a handful of studies from Vanguard and a few posts from Nick Majuli of the Dollars and Data Blog.

And they conclude that roughly two-thirds to four-fifths of the time, you're better off just investing the lump sum. The reason the numbers are different is they looked at different timeframes and the frequency in which you get the cash in. Sometimes you put it in over three months, 12 months, 24 months. But the bottom line is, Historically speaking, in most cases, you're better off just investing the money as soon as you can. Why? Because of most years, stocks outperform cash. So the sooner you get the money into the stock market, the better off you'll be. Of course, that means, I don't know, 20 to 30 percent of the time or so, you would have been better off gradually moving into the market. So that's just the risk you're going to have to decide to take.

This question, by the way, is also relevant to anyone who is saving for retirement in that you'll likely have a bigger nest egg if you max out your retirement account each year as soon as possible, rather than doing it over the course of the year or waiting until the end of the year. The one caveat to this is if you frontload your 401k and you max it out before the end of the year, you may miss out on some of the match. It just depends on your plan and whether your employer does something called a true-up at the end of the year. So check with your plan administrator to see if you'll still get the full match if you front-load your 401k. And then the other scenario to consider is for retirees, who will love. likely see more growth in their portfolios if they take withdraws out on a monthly or quarterly

basis rather than all at once at the beginning of the year. Again, this is because the money will stay invested for longer. But this also comes with more risks. So I would understand if a retiree would just want to take the full year's withdrawal all at once and have it safely sitting in cash. Next question comes from Lou from Minnesota. Let's say you decide to trim a stock position, which you have purchased multiple times and have some lots that are that are losers and some winners and some close to breaking even. Is it best to sell your worst loser with the thought of getting a tax break, but the downside of recording a definite loss?

Or is it best to sell your biggest gainer, as then you realize the most profit? Or is it best to sell any positions that are close to break even? Again, this is all for one stock with multiple lots. The only goal is to trim the position as perhaps the thesis changed a little. Well, this is a good question because if you've held a stock for a while, may have multiple cost bases because you've decided to purchase the stock at different times, or you've been reinvesting the dividends. And every reinvested dividend is a new purchase with the different cost bases. So if you decide to trim the position, it definitely makes sense

to identify the shares you're selling to maximize the tax consequences, assuming, by the way, that the stock is held in a taxable brokerage account and not in an IRA or 401K. And which shares you should sell will depend on your current tax bracket. So if you're in a higher tax bracket today, take the loss. It may not feel good, but that loss will offset any capital gains when you file your taxes, and excess losses can reduce up to $3,000 of ordinary income in a single year. And if you still have losses beyond that, they can be used on future tax returns in future years. Now, if you're in a lower tax bracket, you might want to bite the tax bullet and take the gains this year. Actually, up to certain levels of income, long-term capital gains are actually tax-free.

For 2024, those levels are around $47,000 for single-five. and $94,000 for married filing jointly. We're talking about annual income there. And if you're below those thresholds, then it definitely makes sense to do what is called tax gain harvesting, at least up to the point where the gains are tax-free. If you sell a whole bunch, then your income will go above those income levels, and those gains will be taxed. All right, let's hear from Christopher. My daughter and son-in-law will welcome their first child, my first grandchild in July. Oh, congratulations, Christopher. And I would like to set up either a 529 plan, education IRA, or just a general investment account for them.

Which one do you prefer? And how would I go about doing that? Thanks for your help and great information you provide. Yes, Christopher. Congratulations. That's outstanding news. And good for you for wanting to get her or him off on the right foot financially. So you first have to decide on the goal of this account.

If you want your grandchild to be able to use it for any reason, college or otherwise, then open a custodial account. which nowadays in most states is an Utma account, stands for Uniform Transfer to Minors Act account. Most brokerages offer them. The main downsides are that the gift is irrevocable, can't be transferred to anyone else. There may be taxes if it generates significant gains or income. If the gains in income are pretty low,

there are actually some tax benefits to it. It can reduce college financial aid eligibility since it's an asset owned by the child, and anything owned by the child will reduce aid more than something owned by a parent or grandparent. and the kid gets the money at a certain age, whether they're responsible enough to manage it or not. Now, if you want the money to be used for college and maybe retirement, then go with a 529 savings plan. Depending on your state, you might be able to deduct contributions on your state income tax return.

Growth and withdrawals are tax-free if used for qualified education expenses, which can include a limited amount of elementary and secondary school expenses and school loans. and starting this year, up to $35,000 of unused $529 money could be gradually transferred to a Roth IRA for the beneficiary if the account meets certain criteria. Also starting this year, 529's owned by grandparents are ignored by the federal application for federal student aid, otherwise known as a FASA. So as a grandparent, it's best to own the 529 yourself. The main downside of 529s, at least as far as most Motleyful podcast listeners are concerned, is that you can only invest in mutual funds. and not individual stocks. If you want to buy stocks in an education account, consider what was originally called the Education IRA, but is now known as the Coverdell Education Savings account, named after the late Senator Paul Coverdell of Georgia. However, Coverdells have certain

contribution and income limitations. So you can learn about those, as well as how to choose the best 529 for you at the best site for such information, Savingforcollege.com. Next question comes from TMF Frugal. After paying off, all debt, fully funding a six-months emergency fund held in a high-yield savings account, fully funding a Roth IRA, fully funding a health savings account, contributing to a Roth 401k up to company match, 4%, with only investment in a state street S&P 500 index with a 0.01 net expense ratio, is it better to go ahead and max out the Roth 401K or continue purchasing equities in a regular brokerage account? I'm 53 and single with two grandkids. I opened a

custodial account for each of them at birth and contribute $1,000 per year for each of them and buy a stock advisor and rule breaker stocks for them. They will gain control of these accounts at 25. I hope to work until 70. Wow, TMF Frugal is living up to his name. That's right. So, yeah, a plus work on what we've just heard about the finances there. I particularly appreciate that you have your cash in a high-yield savings account. Many people still have their cash in low-yielding bank accounts these days, and that you have such a low-cost index fund complementing, what I suspect, is a Roth IRA full of individual stocks. So, good job there. As to where to put additional funds, it would depend on whether you're on track for saving enough for retirement. And I suspect, given that everything you said,

that you're in fine shape, especially since you plan to work until age 70, which significantly reduces the amount you need as compared to someone who, say, wants to retire at 62 or 65. That said, there's plenty of evidence that a large percentage of people actually retire around two to three years sooner than they had planned. So when you run your retirement numbers, just see if you have enough, if you end up deciding to retire sooner. And if you're behind, then putting additional money in the 401k is the way to go. If you're not behind and you want to spend that money in the next few years, then maybe go with a taxable brokerage account, right? Because generally speaking, you may pay taxes and penalties if you take money out of a retirement account before

age 59.5. There are some ways around the taxes and penalties, especially with Roth accounts. But generally, if you need the money before 59.5, it's best to stick with a brokerage account or just put more in that high-yield savings account. Our next question comes from Tim. Hi, Allison. Hi, Robert. Hi, Tim. I recently found your show, and I've been going through the archives. It's going to take me a while. You two are doing great work, and it's much appreciated. I've searched, and I can't find any episode where you've discussed ABLE accounts. While not everyone is eligible, I bet many of your listeners would benefit from hearing. about them, just a suggestion. So it sounds like Tim is maybe listening to back episodes of Motleyful answers, maybe. Thanks, Tim. Yes, that's great to know, Tim. And you're right. I don't think we have discussed ABLE accounts. So now is as good a time as any since this year marks the 10-year anniversary of the passage of the Achieving a better life experience act, otherwise known as the ABLE Act, which created the ABLE account. So it was passed in 2014, and then the big tax law passed

in 2017 made some significant changes to Able accounts. I'm going to just cover the highlights, so you definitely want to do more research if you think these may be appropriate for you or someone you know. ABLE accounts are for people who are diagnosed with a qualifying disability before the age of 26. The growth and withdrawals are tax-free, as long as the money is used for qualifying expenses, which is really a very broad category. It's everything from basic living expenses to education and medical expenses. The other main benefit is that some or all the money is generally ignored for the purposes of

of qualifying for government aid like supplemental security income and Medicaid. Anyone can contribute to an ABLE account for an eligible beneficiary, and the annual contribution limit is tied to the annual gift exemption or exclusion, which in 2024 is $18,000, plus additional money from a job can be contributed in that amount is determined by the annual poverty levels and whether the worker receives a retirement benefit. And then finally, the accounts are sponsored by states. A few states actually don't have them, but you can use the programs run by other. other states that allow outside citizens to participate.

So those are the basics. Make sure to learn more before opening an ABLE account, perhaps, starting with IRS publication 907, tax highlights for persons with disabilities. And depending on the severity of the disability, you might want to see a lawyer determine if a special needs trust is also appropriate. And our last question comes from J.S. I work for a state government. I have a pension, a 401k, and a 457 account.

The availability of the 457 account essentially doubles my contribution limit for 401Ks, at least in my limited understanding of it. Any thoughts on how best to take advantage of this? There are actually two types of 457 accounts, a 457B and a 457F, when the latter is usually a deferred compensation plan for a higher income employee. So I'm going to assume that JS is talking about the 457B, which is much more common. So, a 457 can be offered by a government entity or a nonprofit is almost exactly like a 401k with a few key differences. The biggest is that there's generally no 10% penalty if you take out the money before age 59.5. Another difference is that the extra catch-up contribution available to those who are 50 and older doubles in the three years before retirement. And a third difference is that unlike 401Ks, an employer match in a 457 reduces the amount the employee can contribute,

and for this reason, most 457s don't have a match. As JS suggests, if you have both a 401k and a 457 at your office, you can actually contribute the max to both accounts. But if you can't afford to save that much, or you just don't need to, given how well you've saved up to this point, plus the fact that you have a pension, here's some thoughts. So first off, you want to take full advantage of the match if you have one, and if you do, it'll most likely be in the 401K. And then evaluate the expenses and investment choices into each account. In many cases, the 401k and the 47 are pretty much the same accounts from the same provider. But if not, you want to go with the one with the lower fees and the better investments. And then, all else being equal, choose the 457 since you don't have to pay the early distribution

penalty if you happen to need the money before age 59 and a half. I have a question. What happened to 457, A, C, and D? We just went from B to F? That's a good question. Just look up the Internal Revenue Code, section 457, and you'll learn the answer to that question. No, that's your job, bro. That's up of my job. Ew. We'll save that for a future episode. I'm so excited. Can't wait. That's so good. As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. So don't buy or sell anything based solely on what.

you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back to you.