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Y H & C Investments March 2022 Update- Edition 164

 

Index/AssetFebruary 2022  
Dow Jones-3.53%  
S&P 500-3.14%  
Nasdaq-3.43%  
Russell 2000-8.65%  
Oil+9.11%  
Gold+6.00%  
Silver -2.20%  
10Yr Treasury

January 1- 1.631%

February 28- 1.853

+6.1Bp  
U.S. Dollar Index+.51%  
Bitcoin-Jan 1, 2022-46, 055

February 28, 2022

43, 086

+11.21%  
Y H & C GARP Model-15.9% https://interactiveadvisors.com/yhc-investments?portfolio=long-term-garp

 

 
Y H & C Concentrated GARP-1.8% 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-Inflation Pushes Fed on Rates as Putin Invades Ukraine, Markets Sell Off! (Return figures in this section come from the February 28, 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 February, the Dow Jones Industrial Average gained lost 3.53%, the S&P 500 fell 3.14%, and the Nasdaq dropped 3.43%. Over the last six months, the biggest focus for investors and consumers alike has been inflation. Rising prices translates into the largest jump in decades, totaling 7.5% year over year. The dramatic increase, accelerating enormously over the last few months, is forcing the Federal Reserve to change its policy on the all-important Fed funds rate. To fight inflation, rates must rise. Some analysts believe the Fed is far behind the curve as far as where rates need to be. With the ten-year Treasury Bond currently sitting with a yield of 1.965%, real yields remain dramatically negative. In fact, many believe the Fed was destined to raise rates seven or eight times in 2022 (One being Goldman Sachs).

Vladimir Putin changed the calculus because of his recent military action into Ukraine. With the globe heavily dependent on Russia and Ukraine for quite a bit of oil, corn, wheat, palladium and other metals, supply chains across the globe are facing all kinds of shortages soon. Under those circumstances, European economic activity will see dramatic slowdowns over the next few quarters. With a potentially major realignment across all of Europe, the Federal Reserve Board can now safely announce they will raise rates by twenty-five basis points and see how the economy responds.

On the economic front, with the omicron virus quietly receding into the background, all states are lifting Covid restrictions. The service sector is poised to see much better activity from the second quarter onward, potentially sooner. One area to keep monitoring is energy prices. With oil now broaching the $100 per barrel level, quite a few predictions see black gold heading towards $130-150. With natural gas prices soaring in Europe and Asia (35$ and 38$ per BTU vs 4$ in the United States), global pressure on supply chains starts with the energy complex.

In terms of the equity markets, the biggest drawdowns over the last six months have taken place in the growth area. Many of these companies have seen their equity values reduced by 50-80% or more. Naturally, this is a good place to look for mispriced assets, however, many of these equities had no business being priced where they were, so a huge drop just renders them now stupid versus absurd. The dramatic losses will force companies to seek out ways to create returns for upset shareholders. Often, it will involve improvements in operations to prioritize profitability as opposed to focusing on growth. In many situations, it will involve merger and acquisition activity. Regardless, investors have an opportunity to benefit from the growth selloff.

Global Economic & Financial Markets Outlook-Putin Invades Ukraine and Disrupts Global Markets! (All country index data provided by countryeconomy.com, February 28, 2022)

One of the wonderful things about financial markets is they are constantly changing. What happened yesterday is old news. The future is what counts. Traditional economic theory says market-based economies are more entrepreneurial (dynamic) than government-controlled systems (static). Over the last few months, Russia deployed a force of two hundred thousand troops to train and conduct exercises on the Ukraine border. Putin attacked Ukraine last week. There is plenty of history between Russia and Ukraine, but the conflict centers around Ukraine self-determination and desire to be a democratic country with its own duly elected government officials. They also have long desired to become a member of the North Atlantic Treaty Organization (NATO). Mr. Putin’s response, uh, “Nyet.”  Ukraine is a large country with over forty million people. It has an abundance of natural resources, especially corn, wheat, oil and gas, palladium, and other hard metals. Financial markets realize the geopolitical implications of Putin’s move. If successful, a Putin controlled Ukraine would give him the ability to attack other NATO countries like Poland, Romania, and Hungary. He could also turn elsewhere in the north, Latvia, Estonia, Lithuania, and potentially Sweden, Norway, and Denmark. So, this is a monumental moment for the world, and especially Europe, eastern Europe in particular.

The response from the European Union and western democracies like the United States, Canada, and Britain is a coordination of severe economic sanctions and increased military support. There is a compelling case to be made the effort is far too late. From a financial market’s perspective, equity markets have sold off across the globe. Oil prices are sharply higher, as are the entire commodity complex. Of note, the Russian ruble has weakened dramatically, now trading 108 rubles per dollar (it began the year at 75 to the dollar). Russia responded with capital controls and a dramatic increase of interest rates (8.5 to 20%). It has restricted the selling of securities by foreigners and money transfers outside the country. Looking ahead, investors are 100% focused on the events in Ukraine.

 

The Art of Contrarian Thinking- Unless Putin Presses the Button, the World Only Ends Once, so Keep the Faith! (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)

There are moments when it seems like the world is going to end, especially if you are trying to navigate the financial markets. Over the last few months, the investment climate turned rougher. With global central banks facing a surge of higher prices across most segments, it has become apparent interest rate policy has been too lax, in an irresponsible way. Now, we add the potential of World War three, with Vladimir Putin telling the world Russia is on high nuclear alert as it proceeds to dismember Ukraine and kill millions in the process.

Markets like certainty and dread the opposite. War brings maximum uncertainty and with Russia and Ukraine supplying plenty of oil, wheat, corn, and palladium (catalytic converters), well, inflation is potentially headed much higher. In this environment, holding equities is difficult. One could easily ask the question, “Why bother?”  So why own risk assets?

First, if you select companies with excellent management teams, unique assets, competitive advantages, and growing earnings power, your ownership value has a good chance of improving over time. Second, there are a few holdings which may become exceptionally large and global leaders. If they do, your returns will probably be quite good on those positions. Third, one or more of your holdings may be acquired, or the leaders can do something quite smart, potentially merging it with a similar kind of business to make it more valuable. In sum, there are many ways you can benefit by owning good companies who have leaders that are proven value creators. One of the key tenants of any investors is what my dad used to say, “You have to keep the faith.”

Y H & C Investments Company Update

Like most long only investors, 2022 has been difficult from a market returns standpoint. Many of our holdings have reported their quarterly results, and often they were not rewarded. In some cases, they were punished. In difficult market environments, it is always good to have positions of large companies which you can count on. You want to depend on those billions of dollars of income coming in. You want to know your dividend check will arrive. Staying power matters when you encounter market volatility. Just because the stock gets pounded every day does not mean the company is going anywhere, especially if it churns out billions. In fact, they will take advantage of those which are having a tough time. Keep the faith.

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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