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Y H & C Investments August 2022 Update- Edition 168

 

Index/AssetJuly 2022  
Dow Jones+5.62%  
S&P 500+7.97%  
Nasdaq+11.35%  
Russell 2000+9.11%  
Oil-9.37%  
Gold-1.40%  
Silver -.44%  
10Yr Treasury

January 1- 1.631%

July 31- 2.651%

-24.3Bp

YTD- +113.7Bp

  
U.S. Dollar Index+.66%

YTD- +10.28

  
Bitcoin-Jan 1, 2022-46, 055

July 31, 2022

24, 531

+26.26%

YTD- -47.08%

  
Y H & C GARP Model+6.18% -24.12% https://interactiveadvisors.com/yhc-investments?portfolio=long-term-garp

 

 
Y H & C Concentrated GARP-2.46% -11.66%

https://interactiveadvisors.com/yhc-investments?portfolio=concentrated-garp

Y H &C Results Are not GIPS Certified and dependent on third party calculations. They are time weighted   

 

 

U.S Economic & Financial Markets Outlook-Powell Follows Through with Rate Hikes as Economy Shows Signs of Slowing! (Return figures in this section come from the July 29, 2022, editions of the Wall St. Journal. Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

In July, the Dow Jones Industrial Average gained 5.62%, the S&P 500 rose 7.97%, and the Nasdaq increased 11.35%.  With financial markets in the United States suffering the worst first half in twenty years, investors continue to evaluate monetary policy as one way to help determine how to allocate capital.  In the last two months, the Federal Reserve approved two seventy-five basis point rate hikes (100 basis points equals 1%).  The Fed is attempting to slow the rapid rise of prices across the economy.  With year over year inflation running at decade high levels of 9.1%, the current 2.65% level on 10-year Treasury notes is still decidedly negative on a real return basis (2.65-9.1= -6.45%).  Mr. Powell has been consistent for many years that monetary policy is data dependent, and he mentioned the same thing again last week.  Indeed, if inflation continues to run at above five percent, the current interest rate level won’t be sufficient to reduce long term inflation expectations.  Those are crucial as they get factored into wage negotiations and contract discussions across the economic landscape.

On the employment front, government officials point to unemployment levels near all time lows, around 3.5%.  Critics respond that the labor force participation rate is a better gauge of employment.  With eleven million jobs currently unfilled, employers continue to communicate their desperate need to fill open positions.  The latest quarter of GDP contraction technically puts the U.S. economy in a recession.  It meets the long-held definition of two consecutive quarters of declining GDP growth.  Naturally, many dispute the numbers and deny the economy is in recession, including the current administration’s financial leadership.

On the earnings front, a majority of the S&P 500 companies generate most of their earnings from global sales, so when those earnings get translated back into dollars, the earnings per share numbers are reduced when the dollar is strong versus overseas currencies.  Second quarter results included the strong dollar as a problem for quite a few multinational enterprises.  Still, the largest companies in the country continue to rake in billions in profits.  The narrow distinction of 3.78 billion versus a 3.775 billion earnings estimate is trivial, but the investment world plays up the most minute details to display their level of supposed genius.  From my vantage point, yes, the economy is slowing some, but corporate profits are quite healthy.  There are plenty of strong industries which offset those which are struggling.  No industry can grow forever, that is why the old quote of ‘Trees don’t grow to the sky,’ still makes sense.  On the investment side, many believe the bear market isn’t over and will not be until markets fall another 30-40% or more.  If that is true, and the final flush takes place over the next year, it will prove to be one of those rare occasions when assets are marked down to rarely seen levels.

Global Economic & Financial Markets Outlook-Dollar Strength Highlights Currency Effect on Global Capital Markets! (All country index data provided by countryeconomy.com, July 29, 2022)

One of the most fascinating areas of all capital market activity is foreign exchange.  It is dynamic and there are an infinite number of possibilities available to trade or invest.  Just consider five mature market currencies: the U.S. dollar, the Euro, the Japanese Yen, The British Pound, and the Mexican Peso.  There are 54 combinations (625) which can occur with this group of assets.  If you combine different time frames (one month, one quarter, two quarters, three quarters, one year), the possibilities are overwhelming.  Currencies are important because they are the underlying unit of value of an entire country’s economic system.  Historically, when currencies lose a great deal of value, the potential for political or systematic change increases dramatically.  The most prominent example of this is Germany after World War One.

In the current global economic environment, the divergence in Central Bank monetary policy is a large reason some currencies are seeing a huge loss of value.  Specifically, in Turkey, Japan, and now Pakistan, the failure to raise interest rates to counter inflation, along with political uncertainty, has led to dramatic declines in currency value.  Japan’s currency is a specific U.S. concern if the Yen continues to depreciate.  Japan holds over a trillion dollars of the 15 trillion dollars of foreign holdings of U.S. Treasuries.

In global equity markets, most major regions remain in the red with the typical loss range of five to fifteen percent.  Energy based countries like Saudi Arabia and Norway are positive, aside from Russia.  Looking ahead, the same items of inflation, interest rate policy, energy, and country growth rates will continue to dominate global markets throughout the balance of the year.

The Art of Contrarian Thinking-Hanging in There in the Nothing Is Any Good Market! (YH & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

I’m sure you have met people in the world where no matter what happens, everything is always terrible.  Debbie Downers deluxe!  The investment world is full of these types, and the current environment is one where very few companies are taken at their word.  They may have created billions of dollars of wealth for their shareholders over the last twenty years, but currently, the mindset of the investment world is what are you doing now?  A prove it to me market if there ever was one.  So how does one go about navigating this environment?

First, my approach is to constantly monitor the positions we own.  Every earnings release is read, and every investor presentation is evaluated.  Every conference call transcript is compared to what was expected from the company.  We have a broad range of companies to navigate and interpret their results.  They are a diverse set in terms of the size of the business, industry, lifecycle, and what each company’s goal is.  A fifty- or hundred-billion-dollar entity has a different situation than a sub one hundred-million-dollar enterprise.  Even the big entities have critical issues I want to understand.  How can they affect the business and investor attitude towards the company?  With the smaller companies, I listen to their most recent conference call, sometimes multiple times.  One of the major themes for me is to understand what each company is doing to improve their business.  All companies, big and small, constantly evaluate how to change the business in a positive way.  It may be with capital expenditure, cost cutting, entering different markets, new product lines, or a management change.  It could involve a merger, spin off, a sale of assets, stock buyback, or a combination of all of these.  Knowing what you own and why you own it is the way I manage a negative nellie market, and it may be a way you can too!

Y H & C Investments- August Update

In July, the month was a slow one.  Personally, I was on vacation for a few weeks.  Still, I monitor what our companies are doing from an operational standpoint.  On that note, July has been full of earnings reports, and they continue deep into August.  There are several major releases this week and I will be reading and listening to those calls, as has been the case for over a decade.  There are also a few virtual investment conferences throughout the month in which I will participate.

On a personal level, again I want to thank my clients for their continued support.  Interacting with people who trust you with their hard-earned money is an ongoing commitment and one I accept and relish.  Investing is important in it helps people do what they want to when they want to do it. I also appreciate those of you who recommended my services to your friends.  It has helped a great deal so if you know of anyone who needs some investment help, please keep me in mind.

Thanks for reading the newsletter this month!

(Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

 

 

 

 

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