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|Index/Asset||June 2022||2nd Quarter 2022||First Half 2022|
January 1- 1.631%
June 30- 3.015%
|+3.52Bp||+28.89 Bp||+107.15 Bp|
|U.S. Dollar Index||+2.82%||+6.50%||+9.10%|
|Bitcoin-Jan 1, 2022-46, 055
June 30, 2022
|Y H & C GARP Model||-8.10%||-16.4%||-30.3% https://interactiveadvisors.com/yhc-investments?portfolio=long-term-garp
|Y H & C Concentrated GARP||-2.3%||-13.8%||-9.2%
|Y H &C Results Are not GIPS Certified and dependent on third party calculations. They are time weighted||
U.S Economic & Financial Markets Outlook-Economy Slows as Inflation Hurts Consumers; Investors Flee Risk Assets! (Return figures in this section come from the May 30, 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 June, the Dow Jones Industrial Average lost 7.44%, the S&P 500 fell 9.37%, and the Nasdaq dropped 10.46%. For the second quarter, the Dow retreated 11.25%, the S&P 500 gave up 16.45%, and the Nasdaq backed up 22.44%. With the first half of 2022 in the books, fear is pervasive. The Dow is down 15.31%, the S&P 20.58%, and the Nasdaq 29.51% year to date. For a little context, the Nasdaq’s first half performance is the worst ever. The Federal Reserve’s mandate is full employment, stable prices, and moderate long term interest rates. On each of these points, you could make a case Jerome Powell’s tenure has been proficient. However, based on where the economy and consumer sentiment currently reside, Chairman Powell’s credibility is being questioned by the investment world. Consumers haven’t been this sour on the economy in many decades. Inflation has trended higher for a year, sitting at a touch under 9%. The Fed only recently has begun raising interest rates, with projections for more hikes later in the year. With all major stock market indexes seeing heavy losses during the first half of the year, the consensus of investment strategists is Mr. Powell is well behind in addressing the problems facing the U.S. economy.
Looking towards the back half of the year, investors see higher interest rates and a litany of problems associated with it. First, the housing market faces dramatically higher borrowing costs for potential purchasers. With thirty-year mortgage rates now above six percent, volumes of new and existing home sales have dropped dramatically in the last quarter. As housing is one of the largest sectors in the economy, the downstream effect on falling volumes will affect all areas tied to it, including the broad refurbishment space. With the downturn in equity markets, investment banking activity in the IPO and merger and acquisition domains have all but disappeared. Leading venture capital firms are advising their portfolio companies to batten down the hatches to conserve dollars and become as efficient as possible.
In six months, both consumer and investor sentiment has turned as negative as has been seen in decades. Under the current circumstances, the only sector investors have an interest in owning is energy. Interestingly, many high-quality energy companies still have not seen any interest in equity ownership from the investor class. Similarly, bank stocks are shunned, even with interest rate hikes looming. Clearly, forced liquidations from leveraged entities or redeeming investors are playing a big role in market activity. From an investment standpoint, when everything is hated, like now, buyers can purchase assets where they receive much more for the dollars they put to work. The hard part for buyers is finding targets and having the courage to own stocks when the rest of the world hates them. Bear markets usually last 12-18 months, but sometimes can go on for much longer. Yes, indeed, the current predicament is tough and will probably remain so for the foreseeable future. Still, bear markets eventually end, and equity prices receive a different perspective when they do.
Global Economic & Financial Markets Outlook-Energy Issues Force Germany to Reverse Decades of Green Policy as World Equities Stay Red! (All country index data provided by countryeconomy.com, June 29, 2022)
Russian aggressiveness in Ukraine unified global opposition against the military encroachment, especially across Europe. Mr. Putin responded by using European reliance on Russian energy supplies (50% of all gas usage comes from Russian suppliers like Gazprom) to threaten cuts in the future. European leaders know they must prepare for the cold winter months by finding other suppliers to source and store energy, especially for generating electricity. Germany is the strongest economy in the European Union, but it’s long held green centered energy policies have left it vulnerable to what is essentially energy extortion by Russia. Germany’s new chancellor, Olaf Schultz, has recently advocated for reversing the EU’s commitment of stopping the financing of fossil fuel projects by year end. Essentially, the Europeans realize they need more gas, liquified natural gas, and coal now, and for the foreseeable future. It is clear evidence that energy is a long-term strategic security issue for all countries. The same situation exists for the United States with respect to semiconductor chips and reliance on foreign suppliers, especially Taiwan. Don’t think China isn’t paying attention to both situations, either.
In the global equity markets, most equity indexes are red across the board. Europe is down nearly 20% year to date while Asian giants like China, India, and Japan are off by 7-10% range. Looking forward, the country to pay attention to is Japan. Japan’s central bank maintains it’s easy monetary policy of extremely low interest rates. Its policy is inconsistent with the rest of the world’s major global central banks, which are raising rates to try and fight global inflation. Investors have seen the dichotomy and driven the yen to an exchange rate of nearly 140 to the dollar, which is the weakest rate in nearly 20 years. It bears watching and if it continues, could have major implications on Japan’s foreign currency holdings across the globe, especially here in the United States. Any change with those assets certainly will move interest rates. Yes, it is very much worth watching.
The Art of Contrarian Thinking-Understanding the Investment Thesis: Risk Management Quality is Only Discovered In Bear Markets! (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)
When an engineering company tests their products for efficiency, it does so in extreme circumstances. The same concept takes place for astronauts or pilots who are training for life threatening flights. Extreme duress makes an environment difficult for those responsible navigating through it. Similarly, investors only discover the quality of their risk management during difficult environments like the one we are in. Over the last six months, investors who placed capital in speculative assets with little substance have seen the value of their assets reduced dramatically. Even more speculative would be to borrow money against asset values to purchase more of these questionable assets. It is why we are seeing liquidations and bankruptcies taking place across the cryptocurrency area, along with the implosion of the stocks of SPAC sponsors. Many others, including once highly valued software as a service, space-based technology and consumer companies, electric car-based entities, and of course, psychedelic and cannabis-based providers. Using leverage leaves investors vulnerable to custodians taking their assets at the most inappropriate times. Now is one of those environments. It’s easy to look at those who are blowing up, but it is more appropriate to look at what is transpiring in your own portfolios. How are they holding up?
You can look at the numbers of the models I manage and see there has been pain for owners of portfolios that I am responsible for. In markets like this, everything suffers, including bonds, which historically have been the one place which doesn’t lose value. What is not said is how things progress over the next few years. During 2008 and even going back to 2000, many high-quality companies went on to achieve great accomplishments and their equity owners were well rewarded. Only time will tell how investors fare three to five years from now.
Y H & C Investments- July Update
In June, other than the difficult environment all investors are faced with, the most noteworthy event for my company was attending the LD Microcap Invitational. I met quite a few outstanding people and had several good meetings. For 95 percent of the companies I researched, there was not a good fit. If you just look at the five- and ten-year track records of many of these entities, their stock prices are down 80-90%. When the track record shows the company cannot create value, the facts tell the story. However, there are always changes taking place with any company, and given the right circumstances, sometimes value creation may be on the horizon. It is not easy to find these, but in the current environment, with stocks down so much, the risk reward ratio couldn’t be better. There are a few opportunities I believe are worth capital, and the one which I find the most intriguing is a company specializing in digital signage. If you are interested in learning more, please email me (email@example.com).
Elsewhere, June was also a month where I completed the annual CFA professional learning requirements. There was a learning component regarding data analysis which was interesting to digest. It covered the various types of artificial intelligence methods which are used to analyze data and applied towards investment management practice.
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. Nothing is guaranteed with investing and the future is what matters, so to that end I will continue working hard to create value for those of you who have placed your trust in me. 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 and I hope you have a great 4th of July!
(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)