Y H & C Investments December 2022 Update- Edition 171


IndexNovember 2022 Return3rd Quarter

2022 Return

2022 Year to Date Return (1/1/2022-11/30/2022) 
Dow Jones


S& P 500+8.52%-6.27%-14.39% 
Russell 2000+5.45%-3.65%-15.98% 
10 Yr. Treasuries- Yield-3.62%-53.1Bp


+92 Bp+139.4Bp 
WSJ/US Dollar Index-6.15%+6.33%+9.11% 

20, 454

Y H & C GARP Portfolio

(Returns not GIPS Certified )

-2.5%-10.1%-33.1%Data comes from Interactive Advisors
Y H & C Concentrated GARP Portfolio

(Returns not GIPS Certified)

-4.3%-14.8%-13.9%Data comes from Interactive Advisors


U.S Economic & Financial Markets Outlook-Retailers Loaded with Inventory as Markets Anticipate the Fed! (Return figures in this section come from November 29, 2022, edition 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 the 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 November, the Dow Jones Industrial Average gained 7.60%, the S&P 500 rose 8.52%, and the Nasdaq jumped by 8.96%.  With Thanksgiving Day behind us, along with the midterm election, the rest of 2022 should be predictable.  From an economic standpoint, the holiday shopping season is always important as many retailers are dependent on this period for a large percentage of their sales.  As part of their planning, executives must forecast demand and base their inventory purchases on these projections.  It is well known that supply levels are much higher than in prior years, so large discounting is prevalent across the industry.  Early indications of results are strong in the online area but rather sparse at brick-and-mortar locations.  Anecdotally, here in Summerlin, shoppers were engaged in a big way.  Extrapolating that observation across the country would be ill-advised.

On the financial markets front, investors are clearly looking ahead to the December Federal Reserve meeting.  Most observers expect Fed Chairman Jerome Powell to raise rates again, either by fifty or seventy-five basis points (100 basis points is 1%).  In terms of economic conditions, the biggest change over the last year resides in the housing market as transaction volumes have collapsed.  With thirty-year mortgage rates near seven percent, residential real estate is certainly in a recession, if not a depression.  In a similar state are the transaction volumes for investment banks and venture capitalists.  IPOs, SPACs, and merger and acquisition deals have all but disappeared, with the year-over-year numbers down a staggering 90% or more.  In the energy domain, prices remain elevated at around eighty dollars a barrel for oil, and that is with the Biden Administration drawing down the Strategic Petroleum Reserve to the lowest-ever recorded level.  On the earnings front, most companies exceeded their estimates, shock of shocks.

Politically, with all the grim economic news, the consensus for the midterm elections would be a resounding win for Republicans (a red wave).  It did not materialize, but the Republicans will take back control of the House of Representatives.  Democrats will remain in the majority in the Senate.  On the legislative front, there is a high probability the next two years look destined to be full of vitriol with little to no success in getting anything passed.  Democrats will likely get appointees through the confirmation process in the Senate.  An obvious issue to pay attention to is the effect of the FTX bankruptcy on crypto-related assets, as well as the fundraising associated with the founder, Sam Bankman Fried.

For investors, usually gridlock is a good outcome as the elected representatives are so busy arguing they cannot pass anything too stupid to make the business environment worse.  As for investment opportunities, the most obvious areas to consider are financials, small and microcaps, and emerging markets.  All have historical valuations well below traditional metrics.  The specifics of each situation are crucial to analyze.  The other important question is what you decide to own, and how much capital you deploy.

Global Economic & Financial Markets Outlook-Winter Arrives and Energy Issues Are Top of Mind for Global Markets! (All country index data provided by countryeconomy.com, November 29, 2022)

Investors remain focused on the lack of energy supply for Europe.  Energy-producing countries, many in the Middle East, have positive investment returns in 2022.  It is a vastly different return profile from those of energy-consuming nations.  In conjunction with the energy question, investment capital is also reacting to the prospect of a European recession in 2023.  With interest rates moving higher across the globe, tightness in both energy and money has proved difficult for investors to place any faith in for growth.  As a result, many major European country stock indexes are in the red by five to ten percent year to date.  Specific examples include Germany (-9.63%), France (-6.77%), Spain (-4.50%), Portugal (+4.48%), Austria (-16.48%), and Belgium (-15.10%).  Across Asia, the results are not much better with China (-13.46%), Japan (-2.65%), the Philippines (-4.80%, South Korea (-18.28%), and Taiwan (-19.26) all in the red.

Looking for pockets of strength outside these areas, India (+7.28%), Indonesia (+6.54%), and Singapore (+3.73%) are all solidly green.  Brazil also stands out with a +5.81% return.  One could make the argument that investors are looking for specific countries where GDP growth is improving, in part because interest rates have already peaked in those nations.  Looking ahead, the next quarter will focus on inflation, interest rates, and energy supply.  How they impact specific regions and countries will determine where capital flows and the magnitude of the moves.

The Art of Contrarian Thinking-Dealing with the Dreaded D World: Dilution! (YH & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

As the year winds down, investors are forced to examine where they stand from a tax liability standpoint.  For higher levels of taxable income, the end of the year usually involves selling positions where there are unrealized losses.  In evaluating the candidates for losses, let’s focus on companies where the management team elected to, or was forced to, issue more stock.  By doing so, the company raises more capital but grows the share count.  As such, existing shareholders own less of the company after the capital raise.  The important question to ask with dilution is how did management handle the process of raising capital?

Over the course of thirty years of investing, I have experienced plenty of capital raises.  The best managers raise capital by minimizing dilution, either selling stock when the price has risen dramatically or by issuing warrants in a similar fashion.  Note the common theme here: when the stock is higher, typically much higher.  Management teams that raise capital at poorly timed moments put their existing shareholders in a position of extreme dilution.  By doing so, the business now must grow much bigger in the future, and in a much quicker time frame, to offset the dramatic increase in the number of shares issued to raise more capital.  It also highlights why using the debt markets can be a very intelligent way to be part of the capital raising process.  When evaluating candidates for year-end tax selling, those companies which have diluted your ownership in an inconsiderate way should probably be shown the door.

Y H & C Investments- December Update

November was an interesting month because we got plenty of news from the companies we own.  On the positive side, energy and healthcare entities held up well.  A few small holdings reported nice numbers and were rewarded.  Real estate properties performed with solid results, too.  On the other side of the coin, a casino company delayed the opening of a big project by a few months, but that is typical for a major development.  The biggest disappointment was with a very small company we have owned for a long time and has a great deal of potential but just has not seen traction.  It is the nature of small companies that they often take much longer to realize their promise, and, unfortunately, sometimes they don’t.  I still believe in the potential, but the disappointing news was difficult to digest.  Still, the final chapter may not be written with the company.

Finally, I thought I would bring up the FTX fiasco.  As we have discussed many times, using leverage when investing is usually not a good idea.  It is hard to imagine an advisor to FTX did not say to the leadership, look, you better make sure you know where all your leverage is and what liquidity issues are out there.  Moreover, with the volatility of digital assets, remember you only own ones and zeros, leverage should have been avoided at all costs.  To be a reliable steward of capital, the responsible parties controlling investment capital needed to make the simple decision to stay away from borrowing.  It didn’t happen, and that is an unfortunate decision many people will suffer from.

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)

Subscribe to Our Newsletters

Contact Us