Their Loss Could Be Your Gain…

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Last year Americans purchased 16.3 million cars and light trucks.  At the same time approximately 2.2 million of them were repossessed.  That last number was up significantly and estimated to rise even further in 2026.  That means there was almost one repossession for every seven new vehicles sold.

New cars have risen to stratospheric prices since the pandemic ended.  Loans that used to be 3-5 years for the typical buyer have now stretched to 6 or even 8 years in some cases.  We are also in a K shaped economy, where the top 50 percent of us are doing pretty well and the bottom 50 percent not as much.  Some buyers have bitten off more than they can chew, or their circumstances have changed.

When someone misses car or lease payments, eventually the “snatch man” will come and take the car.  The finance company will then sell the car to recoup as much of the outstanding balance on the loan as possible.  Invariably they will sell the car at a dealer auction, in a process known as wholesaling.

A dealer auction is a marketplace, increasingly online, where the buyers and sellers are finance companies or car dealers of some sort.  Unlike consumer auctions like Bring a Trailer or some classic vehicle sites, you the general public are not welcome.  The pricing at these auctions is usually well below what a vehicle would sell for either privately or at a dealership.  In general, car dealers buy these vehicles, clean them up, sometimes add a warranty and mark up the price by many thousands of dollars.

What if you could buy the repossessed vehicle at the dealer auction for far less money than the final retail price?  Often you can.  There are “dealers” who although they don’t have a sales lot, meet the standards of the dealer auction.  They will buy these cars on consignment for the public.  You, the buyer select the car you would like to buy from the auction’s online selection and tell your dealer what the maximum is you would pay for that vehicle.  For comparison, auction results are available for the previous few auctions. 

Since the dealer auctions are now heavily online, most cars have a Carfax report, and the auctions offer sellers an independent 3rd party evaluation of the vehicle.  This evaluation has tons of photos and a description of any damage or missing parts, trim, keys, etc.

Your dealer will bid online for a car you select up to your maximum price.  If you win the auction, you pay the sales price, a buyer’s auction fee, and a fee to the dealer – usually $750-1,250 (sometimes a bit more for high end luxury or sports cars).  You will also pay for the transportation of the vehicle to the dealer, as the auctions are not usually local.  From a transactional standpoint, the dealer buys the car from the auction, and you buy the car from the dealer.  You then pay tax, title and registration fees – sometimes your dealer can help you with that as well.  It’s important to remember that financing can be a bit more difficult in these situations.  Traditional banks usually won’t finance a car not purchased at a new car or national chain used car dealership.  So, if you want to finance an auction purchase, you may have to do some homework.  On the other hand, these cars will usually appraise (remember they are using book value) for far more than what you are paying, so loan to value should be an easy hurdle to clear.  Your dealer will also require you to give them a deposit prior to bidding for you.  That protects them and is refundable if you don’t win an auction.

A car is a depreciating asset.  It is possible to buy a late model, low mileage repo or off lease for many thousands less than retail.  As an example, the Toyota RAV4 is the most popular car in the country.  It is likely that this purchase method could lead to a savings of $10K or more over a comparable late model trade in on a dealer lot.  Many of these cars will also still have the balance of the factory warranty.  A soft economy and continued repossessions are only going to make these purchases even more compelling.

A note to my business owner clients and friends, this is also a viable option for your light business work trucks.

The Bottom Line:  Take advantage of economic opportunities.

–Michael Ross, CFP®

Private Credit – On The Rocks

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Private Credit transactions are loans made to businesses and purchasers of them (often private equity corporations and funds) by non-bank lenders in the non-public market.  Many of the lenders are investment partnerships overseen and managed by Business Development Corporations that are funded by institutional and accredited investors.

The Private Credit market has grown from an estimated $300 billion 10 years ago to over $1.8 trillion today.  That means a large tranche of lending has moved from banks and the public debt markets to a relatively discreet and unregulated group.

Many of the Business Development Corporations like Blue Owl, Blackstone, Ares, and Apollo are public corporations which gives us a window into their Private Credit activities and results.  While the funds themselves are discreet entities, the BDC’s must disclose their interests in them, financial results, and other material information about them.

What we have learned is a large portion of their loans have been made in the software sector.  Many of the loans were to facilitate private equity firms buying out these software firms prior to the AI craze of the past few years.  Now these firms are under threat from AI.

AI is changing the economic landscape in many industries and one of those is software, especially SAAS.  While the regulatory and court battles over copyright and patent issues are yet to be fought and settled, for the time being that industry is taking it on the chin.  Public companies like Adobe and Salesforce clearly have real and perceived problems as indicated by their stock valuations. The world of private software companies financed by private credit is likely having similar issues.

This is confirmed by disclosures made by the Public BDC’s where we learned about enhanced redemption requests in the funds from their investors, often exceeding the contractual quarterly maximums.  The value of the stock of these BDC’s has been cut down, in many cases to 12 month lows.  In other words, some of this debt is distressed.

Most of you are not investors in these funds, so you might be asking how it might affect you.  There are three areas of note…

Defaults or repricing of debt in these funds will cause write downs by the investors in them.  Many of them are institutional investors like pension funds and life insurance companies.  Are you insured by one of those insurance companies?  Have you invested in a company whose pension fund may now have a shortfall that must be made up with additional contributions?  Time will tell.

Are you invested in the software sector in general?  Are any of these companies at high risk of being negatively affected by AI?  Many can’t miss software companies from 2022 no longer have water in their moat and the alligators have died.  Time to get out?

The bigger picture is it has been 17 years since the Great Financial Crisis, and we have not had a credit cycle since then.  Unlike the GFC which was triggered by fraud, if this triggers a credit issue it would be more like the 1989-92 version where the junk bond market dried up in the wake of the Drexel collapse and Milken prosecution contributing to a recession.  If that happens, are you prepared?  Do you have a plan or strategy?

The Bottom Line:  Where There Is Smoke There Is Usually Fire. 

–Michael Ross, CFP®

This Drawing Changed Everything For Me…

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Last week I wanted to comment on x.com in the wake of the Supreme Court Tariff Ruling.  I always try to add an image of some sort when I post.  In this case, I thought of something that would be eye catching.

Usually the images I select, whether on this blog, x.com or LinkedIn are photographic.  Historically, I have used stock photos and more recently I have tried image generation.  The generation was nothing very specific, just generic, which always seemed OK. 

For this one I had a drawing in my mind and decided to try “AI” image generation.  This is what I put in the description of my request”

“Create a cartoon image in caricature and landscape format. A train track running across the entire image. A steam engine on the left side stopped in the tracks, with “Trump Crazy Train” written on the boiler and Donald Trump wearing overalls and a red engineers cap saying “Make America Great Again” On the right side facing the train on the tracks are caricatures of the six justices in robes who voted against the tariffs and a caricature of the Supreme Court building across the tracks behind the justices with “Supreme Court” written on the building.”

A single paragraph and the image above is what I got.  It took about a minute.  It blew me away.  It was probably 90% of what I envisioned in my mind.  I probably could have further refined it, but in this case it wasn’t necessary.

It made me see AI in a whole new light.  It’s not just advanced computing with faster processing and more data.  It’s Revolutionary as opposed Evolutionary.  It’s game changing already.  In a way that even the dot com internet wasn’t.

Think about just this project.  It clearly doesn’t bode well for illustrators, cartoonists, the software that they use, or the companies and programmers that create and maintain that software.

I now see the world in a different light.  It will influence how I see the economy, investment opportunities for my clients, and how I run my business.  I’m smart and wise enough to realize there will be shakeouts and winners and losers on this journey, but the train has left the station.

The Bottom Line:  This Blew Me Away.

–Michael Ross, CFP®

The Tech and Bitcoin Bubbles.  A Dual Threat?

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Today is Black Friday, the biggest consumer FOMO Day of the year.  Shoppers go nuts to track down the best deals ever on that special something that someone can’t live without.  Items that will cost far more tomorrow, if not this afternoon.  Never mind that many of the items will be available for much less on December 26th.

Think back for a moment to the 2003 to 2007 period, our previous economic FOMO period.  We had low mortgage interest rates and lax underwriting standards for them.  Home buyers flocked to the cheap easy money, often with no income or other documentation required.  The housing demand generated by these loans drove prices up significantly.  Buyers were paying prices for homes and borrowing amounts they could not economically afford. 

Interest rates began climbing in this period, and by 2007 had reached levels that made the payments on the prevalent adjustable-rate mortgages unaffordable.  The owners of those houses could not make the new payments, and fewer new buyers could afford to buy.  This reversed the uptrend in housing prices and put many owners underwater, meaning they couldn’t make their payments or even sell the home.  It accelerated into a housing price collapse.

The crisis, which first hit banks and then the investment markets, tipped the economy into a recession.  Rising unemployment rates put more homes into foreclosure and deepened the recession.  It was the dual events of an artificially fueled housing bubble bursting and high unemployment from a real recession that brought the whole house of cards down, ending up with the the worst economy the US had seen since the Great Depression.

Fast forward to today and we face another FOMO Dual Risk.

The investment markets are currently floated by a small handful of companies in the tech sector.  If this bubble were to burst, many levered investors would be hit with margin calls.  They would face two choices: Sell those stocks into weakness often locking in losses and further weakening share prices.  Or, use cash or other capital to meet the margin calls.

But…

Today a notable amount of “other capital” is in Bitcoin and other similar crypto.  Crypto is not cash, but a commodity and would need to be sold to pledge against a margin call.  This could create a run on the bank in crypto, depressing those values – who knows how far.

And there we have it, another Dual Threat risk.  This could be even bigger than in 2007.

Stay Tuned…

The Bottom Line:  Understand all the risks.

–Michael Ross, CFP®

Convert The Dip…

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Many of you may be familiar with the “Buy the Dip” strategy certain investors use.  It means that when a security or general market takes a dip in price, they use it as an opportunity to invest more money at a lower price – taking advantage of a temporary discount.  In other words, they see it as being on sale.

Deciding whether to convert a traditional IRA or 401(k) into a Roth is often a complex decision.  The decision process must consider current and future projected income, tax rates, deductions, tax preferences and other related programs such as student financial aid and Medicare costs.   Frequently, when a conversion strategy is developed for larger accounts, it will be executed over several years, to avoid moving into high tax brackets and loss of other preferences and benefits.

When a conversion is executed, it is usually done by transferring the current assets from the traditional account into the new Roth account, rather than liquidating the assets and transferring cash.  The income that is recognized is the value of the assets on the date of transfer.  The value being transferred is taxable to the account holder in the year the transfer is made.  Often, the plan will include transferring the assets with the highest short-term appreciation potential first to reduce the income recognized at transfer time.

Now let’s circle back to Buy the Dip.  Once a decision is made to convert a certain value of assets in a given tax year, it is a smart strategy to transfer those assets when their value is low.  That means more assets can be transferred with the Financial Plan’s dollar limit for that year.

Next time your favorite investment in your traditional IRA or 401(k) takes a dip, instead of just buying the dip, Convert the Dip.  When it recovers in price, the gain will be tax free forever.

The Bottom Line:  Convert That Dip.

–Michael Ross, CFP®

I Don’t Know and Neither Do You…

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I Don’t Know and Neither Do You…

On November 5th we will all head to the polls  At stake is control of the Federal government for at least the next two years.  Hopefully, on November 6th we will know the results.

From a Tax and Financial Planning standpoint there are only 3 possible outcomes.  One party controls both the House and Senate and wins the White House (that’s 2), or we get split government.  The outcome will create many predictable events, laws and policies that are likely to affect the Financial Planning of almost everyone. 

Before I break down the different paths, I want to share some facts that are important to know.

 First, the individual portion of the 2017 Tax Cut & Jobs Act (TCJA) will expire on 12/31/25.  This means for 2026 the individual portion of the tax code will revert to the Obama era tax code.  Included in this are higher tax rates, lower estate and gift tax exemptions, higher capital gain taxation, and the elimination of section 199A – Pass through deduction  for small business owners to name a few biggies.

The party controlling the Senate will only need a simple majority to pass budget items (taxation and spending), unlike the usual 60 votes for almost all other legislation.

Regardless of who the winner is, there will always be some horse trading on minor items at the margin, those bi-partisan issues that they find some agreement on.

Now let’s take a look at the 3 possible scenarios and possible strategies:

A Republican Red Sweep.

  • The TCJA will be extended and made permanent.  I will guess pretty much as is.
  • The SALT deduction limitation may be amended, as it is not popular with Republican legislators from Blue states.
  • Tips and Social Security earnings may become tax free.
  • There may be some move to shore up Social Security, but through raising the retirement age (down the road), rather than through higher taxation.
  • Because changes are likely to be minor, most people will not have much planning to do in anticipation of tax code reform.  It is important to remember that personal income tax rates are not likely to decrease from these levels and will still have a future risk of going up from here.

Split Government.

  • The TCJA will expire and higher tax rates will go into effect for individuals and pass though small businesses for 2026.
  • It is not likely that there will be much modification to the reversion other than the aforementioned horse trading.  There could be some trade-offs between taxation and spending as well.
  • As tax rates will be going up, there are some general strategies that could benefit many people although because everyone is different there may be tradeoffs for some.
  • You will have two tax years (24 & 25) to plan implement these strategies.  That is an advantage allowing income acceleration to be spread out avoiding tax bracket creep.
  • Some specifics:
    • Accelerate ordinary income where possible.  Paying taxes at a lower rate will usually be worth more than the time value savings of deferral.
    • Consider recognizing capital gains while the rates are lower.  From a tax perspective, it may be time to sell your business or other assets such as highly appreciated stocks or investment real estate.  Exercise stock options.
    • Convert your traditional IRAs to Roth’s.  Change your 401(k) contributions to a Roth.
    • If you have assets in the $12 Million+ range, you might consider gifting some of them while you can take advantage of the higher gift tax exclusion.  You might also consider selling the assets, paying the lower cap gains rates and gifting the cash, so your heirs don’t have to pay higher rates at a future date.
    • Defer losses.  They will be worth more when rates are higher.
    • Defer charitable donations.  They will be worth more when rates are higher.
    • Analyze whether it may be prudent to convert your closely held pass through business to a C Corporation which will pay tax at 21%, in light of the expiration of the QBI.

A Democratic Blue Sweep.

  • The Democrats would likely attempt to raise taxes beyond the pre-2018 Obama rates.
  • Some of their proposals include:
    • Increasing the Medicare surtax from 3.8% to 5%.
    • Eliminating the cap on Social Security taxes (FICA).
    • Eliminating or capping the step up in basis on inherited assets.
    • Taxing some capital gains as ordinary income.
    • Unlike the other two scenarios, raising corporate taxes as well.
  • The strategies would be largely the same as under split government, but even more critical for many taxpayers.

It’s important to remember that today anything is possible.  On November 6th, we will have a good idea about what is probable.

The Bottom Line:  On November 6th, we will all know.

–Michael Ross, CFP®

Back To School…

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Do you have a college student headed back to school, or going for the first time?  If so, this might apply to you.

Most people know that their aging parents should have a few documents as part of their Personal Financial Planning.  A Health Care Proxy, which allows someone to make medical decisions for them if they become incapacitated and they can’t.  A HIPAA Authorization, which would allow a medical practitioner to discuss their care with someone else.  A Durable Power of Attorney, which would allow someone else to handle financial and business affairs on their behalf if they are unable to, or wish someone else to do it on their behalf.

Aging parents often appoint one or more kids to do this so the powers are there in case they are needed or wanted.  What about College Students, or Young Adults?

You may not have thought about this, but when your child turned 18, you lost most of the legal power you held from the time they were born.  You no longer automatically have the power to make legal, financial or medical decisions on their behalf. 

Your child may be hundreds or thousands of miles from home.  While some of the aging parent fears, such as strokes, dementia, falls, etc. don’t apply much with young adults, things do happen.  We don’t want to think about it, college students sometimes get in serious accidents, or legal trouble.  When they do, they may not be in a position to make or execute decisions for themselves. 

Having these documents and the powers they grant to you can be priceless in a crisis situation, saving critical time or even avoiding a judge making a decision.

These documents are fairly standardized, and although they can vary from state to state, they can be modified and adapted to meet your needs.  If your child is attending school in another state, most states will accept documents properly executed in their home state, but you might want to inquire.

It’s a simple process to execute these.  Most attorneys will handle this for a nominal fee.  There are self- serve template documents as well, but a mistake could be a problem when you really need them.  Your child must agree to granting these powers to you. 

If you have a child on the fence, it might be helpful to let them know that they can rescind these powers at any time.  It’s also a good opportunity to push them further into the adult world.

The Bottom Line:  Welcome to the real world.

–Michael Ross, CFP®

Pop Goes The Power Supply…

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Every now and then, an infrequent purchase comes up.  This week a power supply on one of our desktop computers died with a big popping noise.  It’s an easy swap, 4 screws and a couple of snap connecters – a less than 10 minute process.  I ordered one at the end of the day and it arrived at lunchtime the next day.

The new one cost $31.99.  In my head that was considerably more than the last one we had purchased.  I was right.  The last time we purchased one, it was $24.99 in January 2019.  That’s an increase of 28% in 4.5 years.  The first two of those years were in a lower inflation period.  It works out to an average annual increase of 5.6% – likely much more since 2021 started.  This is a commodity item that hasn’t changed (same wattage, and certainly no new patents apply). 

Purchases like this make it clear that inflation is running hotter than the official statistics the government puts in front of us.  It seems clear that for the foreseeable future, we are going to have to adjust to the new normal.  This is a reminder to adjust inflation assumptions in your Financial Planning.

The Bottom Line:  Incorporate the real world in your Financial Planning.

–Michael Ross, CFP®

Beware A Banker Bearing Gifts…

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The other day, I got a glossy advertisement in the mail.  It was from a local bank that was offering me a “Premier Relationship.”  If I deposited $500K or more into a Premier Checking Account by May 21st, and kept the money there for at least 90 days, I would get a bonus of $3,500.

It sounds good so far.  They also promised waive a monthly $35 fee (which sounds steep to me), give me no ATM fees, and 24/7 phone support.  I read the fine print, got my pencil and a calculator out, and started working the numbers.

The actual interest on the account is 0.01% APY – yes you read that right.  The $3,500 bonus is only 0.7% simple interest if I kept the money there 90 days or more.  So on an annualized basis (assuming I could get future bonuses), the compounded interest rate would be under 3%.

For comparison, a 90 day T Bill will currently yield an annualized rate of over 5.3%, and that’s state income tax free (if you are in one of those states that imposes such a tax).  Amazingly, I bet there are people that are flocking to take advantage of this.  Don’t be one of them!

This is another great reason to have a competent Financial Planner who won’t let you make mistakes like this.

The Bottom Line:  This is an offer you can refuse. 

–Michael Ross, CFP®

There’s A New Fry Guy In Town…

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For quite some time, I have been pontificating two things – well, OK more than two things, but these two came together for me today. 

I believe that investing in non-publicly traded startup and early stage companies offers the potential for returns that can dwarf the returns one can reasonably expect by investing in public companies.  There are many reasons for this, but the reality is, by the time the company goes public, via an IPO, the new investors are buying out the earlier funders and founders.  In other words they are selling to you.  What does that tell you?  These investments come with a much higher risk – requiring much more homework and verification, and statistically the failure rate is higher.  It’s an arena where nobody (except maybe founders) should put all their eggs in one basket.  However, all it takes is one real home run and the duds are long forgotten. 

Besides the higher risk, there is an additional caveat.  Most people cannot legally invest in them.  According to the SEC, you must be “accredited”.   You don’t have to pass a test, just have a high level of income and/or assets.  In other words the rich get richer.

I have also been a fan of AI Robotics.  AI is promising us the moon.  Most of it on a practical basis is still a bunch of hype and truly useful applications to date are far and few between.  I guess if you have a HS term paper due tomorrow, it could be helpful.  The ability to produce smart robots is one of the areas that hold short term economic promise.  A robot that can efficiently do complex non repetitive tasks in a varying environment has real value.  Most of the companies developing and producing these are relative cottage industries.

Today I stumbled across a company called Nala Robotics.  I did some digging.  They are based in Illinois and make a series of fast food kitchen robots.  You can see for yourself here; www.nalarobotics.com  The videos on their site are really cool.  I could only find information on one round of funding for $1.9 million, although I suspect there must have been more than that.

It’s hard to cull information on small closely held companies without really digging.  Since, I am not doing this on behalf of a client, I did a quick search.  Pricing info was vague, but they offer one of their products “The Wingman”, a robotic fryolator for rent at $2,999 per month.  If you do the math, that’s less than what it would cost in salary, taxes, benefits, and workman’s comp for one month of a $15/hr. minimum wage fry guy being available for all the hours a location is open.  I would guess there are other efficiencies.  No sick days. The ability to react instantly to demand as food is being ordered.  It even automatically cleans itself.

It’s hard to tell if Nala will be the grand slam home run in this field.  I would guess the makers of these machines that get the order from McDonalds and the other biggies will go to the head of the class.  It does seem that we are on the precipice of an explosion in this genre and many other AI robots.

This is clearly happening.  Stay tuned.

The Bottom Line:  Rosie Meets Edison