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Y H & C Investments February 2022 Update- Edition 163

Index/Asset

January 2022  
Dow Jones-3.97%  
S&P 500-5.86%  
Nasdaq-10.06%  
Russell 200010.74%  
Oil+14.47%  
Gold-.27%  
Silver -2.20%  
10Yr Treasury

January 1- 1.631%

February 1- 1.773

+14.2Bp  
U.S. Dollar Index+.39%  
Bitcoin-Jan 1, 2022-46, 055

January 31, 2022

38, 646

-16.53%  
Y H & C GARP Model-9.49% https://interactiveadvisors.com/yhc-investments?portfolio=long-term-garp

 

 
Y H & C Concentrated GARP-1.37% 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-United States Economy Remains Strong as Inflation Forces Fed to Get Aggressive! (Return figures in this section come from the January 31, 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 January, the Dow Jones Industrial Average lost 3.97%, the S&P 500 retreated 5.86%, and the Nasdaq fell 10.06%.

Over the last ten years, the Federal Reserve engaged in a policy of keeping the fed funds rate at historically low levels. It’s ability to maintain the policy is based on inflation staying weak. With a dual mandate of high employment and low inflation, the latter staying at two percent or below allowed for non-traditional strategies like quantitative easing (buying of a wide variety of fixed income instruments in the open market using government capital). The major risk of the strategy is extending these low interest rate policies for too long and having inflation spike. Over ten years into this unprecedented policy experiment, inflation now plagues the country in a big way.

In fact, according to the most recent Bureau of Labor statistics reading, the seven percent jump in prices from 2020 is the highest change in decades (since 1982). In the spring and summer, Fed Chairman Powell and Secretary of the Treasury Janet Yellen made the rounds and repeatedly told the country inflation was transitory. Nope. They have now reversed course, imagine that. Investors are looking at a series of interest rate hikes over the next year. How many rate increases are we looking at? There are some economists who believe four, while others see as many as eight. Cooling down inflation and trying to manage an economy still burdened by Covid variants and regulatory overreach was not what Jerome or Janet envisioned a few years ago.

Faced with the realization that Fed tapering will be more aggressive than previously envisioned, the investment world quickly concluded assets need to be repriced. Anything with promises well into the future without having the financial operations to back it up is being quickly dismissed. Visionary leaders in space journey, electric vehicles, lithium battery makers, hydrogen fuel cells and their cars, sports betting empires, all SPACs, and plenty of SAAS, IAAS, and PAAS companies have seen dramatic drops in their values over the last month. Include crypto currencies in the carnage as well. Still, many of these assets are priced at multiples which could be considered excessive (crazy?).

Conversely, value-based industries, in the doghouse for a decade or more, have suddenly caught a major bid. Energy and financials stand top of mind, as does agriculture and some parts of real estate. All eyes are on supply chains, vaccination rates, and any sign Covid’s recent variant will start to taper off. Any normalization of inflation would be welcome, but most analysts don’t see if trailing off until at least the summer. Meanwhile, as assets become cheaper, a buyer receives more for their capital than only days earlier. Fear and greed, indeed.

Global Economic & Financial Markets Outlook-The ECB Breaks with the Federal Reserve as Stocks Start Cold! (All country index data provided by countryeconomy.com, January 28, 2022)

It has long been accepted in financial markets the Unite States leads the rest of the world (when the U.S. catches cold, the rest of the world sneezes!). With U.S. equities suffering a sharp pullback during January, one could easily conclude European, Asian, South American, and Middle Eastern equities would follow a similar path. To a certain extent, you would be accurate, as many continents also saw a rough January. However, the losses weren’t as extensive as in United States markets, with the range usually hovering between zero and five percent on the downside. Still, global investors are looking at elevated prices across the world and evaluating whether inflation is indeed ‘transitory.’  Let’s take a quick look at some country index returns, shall we?

In Europe, the FTSE (UK) rose 1.08%, Germany’s DAX fell 2.60%, Frances CAC lost 2.15%, Spain’s IBEX was flat (-1.16%), as was Portugal’s PSI (-.09%). Italy’s MIB dropped 2.86% while Greece’s ASE gained 4.86%. Belgium’s BEL20 lost 5.53%, the Czech Republic’s PX lost .68%, Poland’s WIG20 fell 2.53%, and Romania’s BET rose .99%. Those last four countries are interesting as investors are watching Mr. Putin’s aggressiveness on Ukraine border and all are close neighbors to the west. Turkey’s equity market is interesting to look at as well. With inflation roaring at over 20%, the lira dropped more than 50% in a year. It rendered the 35% equity jump saddled with a negative real return after adjusting for inflation and currency depreciation.

Elsewhere, other country results of note include China’s Shanghai (-7.65%), India’s Nifty was flat (-.08%), Hong Kong’s Hang Seng rose 1.73%, Australia’s ASX dropped 6.35%, South Korea’s Kospi got pasted by 10.35%, and Taiwan’s TAIEX lost 2.99%. Of pertinence was Russia’s MOEX, losing 7.8%. Turning south, Brazil’s IBOV gained 6.99%, Mexico’s MEXBOL lost 3.64%, and Chile’s IPSA gained 5.77%.

From a monetary policy perspective, the ECB is taking a different approach than the Federal Reserve Bank. The ECB is holding back on raising interest rates, a much more dovish response than Mr. Powell’s plan. It will be interesting to see which strategy is more effective over the next year.

The Art of Contrarian Thinking-Everyone Loves Parties, But How Long Should You Stay! (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)

Who doesn’t like a raging party? Good friends, wonderful food, superb entertainment, and refreshing beverages all make for a wonderful time. You stay a few hours, then a few more, and suddenly, what was a great affair for all can end up in a, well, potential problem. Why am I mentioning this topic?

In the financial world, having a successful investment can result in something which seems like a party that never ends. Great investments are exceedingly rare, and when you have something which goes up non-stop, well, that is what you want. Of course, like staying at a party too long, it can be the case that a stock can become overpriced relative to its business performance.

It can happen in various degree, as markets have a way of rewarding big winners with extreme exuberance. If you own something like this, congratulations, it’s a good problem to have. So, the obvious question is what do you do with it? It is easy to believe a stock is excessively valued, but the context must be based on the current size of the business. In most cases, enterprises have plenty of opportunity to grow. If one looks at Wal Mart’s 572 billion dollars of sales last year, a five, ten, twenty, or even fifty-billion-dollar company has plenty of runway to grow their revenues. Not every industry is as large as retail, but most companies choose large addressable markets to conquer. Also keep in mind how a big company like Apple, Microsoft, or Chase has added product lines (payments, music and tv subscriptions, air pods, watch) or made acquisitions (Fortnite, Minecraft, LinkedIn, Bear Stearns, Washington Mutual). Great leadership finds strategies to explode its revenues and profits two, three, five, ten-fold or even more. In sum, look at management’s plan and the penetration levels versus the markets the company is targeting. If the plan seems reasonable, even if the stock price is exuberant, it often is the case to just hold on. Even if it takes a few years, owning a proven wealth creator is usually worthwhile, unlike staying at a party too long.

Y H & C Investment Models and Company Updates

Like many readers, it was a tough month for our company models and many holdings. On the company front, I added a subscription alternative for those of you who are managing self-directed portfolios. Please email me at information@y-hc.com  if you would like to learn more.

Thanks for reading the newsletter this month and if you know of anyone who can use investment management services, a referral would be appreciated!

(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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