fbpx

Y H & C Investments Monthly Review: November 2019- Edition 136

U.S. Economic & Financial Markets Outlook- Strong Consumer Bolsters Economy As Manufacturing and Capital Spending Slump!

(Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research possible 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 October, the Dow Jones Industrial Average gained 3.23%,  the S&P 500 rose 4.36%, and the NASDAQ increased 3.66%.  Historically, October has been the month of the year which suffered the largest losses for equity market investors, most notably in 1929 and 1987.  Looked at from that context, the last thirty days have proven mild, even productive for capital markets.  Yesterday, the Federal Reserve Board announced the decision to cut the Federal Funds rate by twenty five basis points.  If one were to evaluate the two pieces of the overarching Federal Reserve Board mandate, that being employment and inflation, the current situation could not be better.  Unemployment sits at record low levels (approximately 3.5%), and inflation has registered at 2% or below for nearly the last decade.  Based on those crucial data points, with U.S. stock markets sitting at spitting distance from record levels, it certainly calls into question why the Federal Reserve Board is lowering the Federal Funds rate?

Our famous Fed is notoriously data dependent, so the slowdown in capital spending throughout the corporate sector, and the dropoff in manufacturing over the last few months is the primary reason for the cut.  Of course, over the last few weeks, corporate earnings have rolled in and generally met or exceeded expectations in most industries.  Important areas like banking, technology, and health care have improved, while energy has suffered across the board from lower selling prices.  The star of the show remains consumer spending, which is alluded to continually by high profile companies and CEO’s in their conference calls and earnings releases.  Looking ahead to the all important holiday shopping season, consumer confidence remains elevated so it is reasonable to expect solid numbers in this crucial three month period.

As for the equity market, the next few months are typically very good for equity owners.  With last year’s terrible fourth quarter fresh in most investor’s memory, low interest rates bolster stocks prices while elevated valuations are a ceiling.  Seasonal trends should work in stocks favor but sentiment remains subdued, which is a good thing.  In sum, some optimism is probably justified but each situation always has to be evaluated on it’s own value, or lack thereof.  Imagine that.

Global Economic & Financial Markets Outlook- Markets Remain Green As Cheap Money Helps Soothe Investors!

2019 remains a year where investors across the globe have benefited from unprecedented financial conditions.  By this, I mean that ultra low interest rates, in some cases (Japan, Switzerland, Germany) negative, make risky assets more attractive.  The argument for negative rates remains non existent inflation and  minimal economic growth, or worse, deflation and declining activity.   In the midst of global tension regarding trade and tariff issues, getting paid to borrow (or close to it) certainly doesn’t hurt consumers.  Let’s take a look at some country results, shall we?

In Asia, the China A50 Index is ahead by 25.18% year to date, while the Shanghai Index is up 12.93%.   Japan’s Nikkei has gained 4.21%, and the South Korea Kospi if flat (+1.92%).  In Europe, the UK’s FTSE MIB is positive by 23.59%, the CAC of France in the green to the tune of 21.88%, and the DAX of Germany helpful by 22.27%, while the Euro Stock Index (a combination of all European Indexes) reflects a 20.62% rise.  Elsewhere, Brazil’s Bovespa has a rise of 22.03% and Canada’s TSX is up 15.21% year to date.  Looking ahead to the next few months, with central banks keenly aware of any economic weakness, or so they believe, it is important for investors to keep their eyes out for any pickup in growth, and probably more important, any whiff of inflation.  Either of those two would force an abrupt rethinking of the current easy nature of global monetary policies (meaning, cheap money).

(All country index data provided by countryeconomy.com, October 30, 2019.)

The Art of Contrarian Thinking- What Makes You Different!

One of the great things about the world is that there are nearly eight billion people on the planet.  All people are similar in that we all have red blood flowing through their veins.  We all only have twenty four hours in a day.  All of us only have so much time on the planet.  Conversely, each of us is unique, in our own special way, as TV host Mr. Rogers use to say.   Each of us looks a little different.  An individual is born with natural aptitudes or gifts in height, weight, mental acuity, physical agility, etc.  In that light, when thinking about investing, uniqueness is important as far as your specific holdings, and in combination, your entire portfolio.  Why is each company special?  What makes the business and it’s opportunity distinct versus other companies, especially as compared to the industry?

In the investment and business world, the term for uniqueness is differentiation.  Analysts, portfolio managers, and the top business leaders know the value of differentiation because it is related to competitive advantage.  Buffett and Munger consistently mention moats, which is really just the differences between the what the business has to sustain and build profitability.  A unique business isn’t different because it’s management team or you as an investor believe it is different.  A differentiated business has features across it’s organization, product line, customer base, and operations which are only found with that company.  As an example, large pharmaceutical companies own patents on drugs which they research, develop, go through three medical trials, and then if approved by the Food and Drug Administration, manufacture.  Those drugs can only be legally bought from the specific pharmaceutical company that owns the patent on the drug.  If the drug is mandatory or necessary, it can become a multi billion dollar product, or a unique competitive advantage.  Some large pharmaceutical companies rely on one big drug as the vast majority of their sales.

Another example of a competitive advantage might be a real estate, retailer, or casino company which can identify great locations, secure the rights to use that location, and then build a profitable entity on the basis of that great location.  You see this in large cities across the globe like New York, Los Angeles, Chicago, San Francisco, Las Vegas, etc.  Increasingly, with on line sales eating into physical locations market power, many investors see the power of great physical assets as diminishing.  I would respectfully disagree.  A great location in business is a powerful competitive advantage, and the more superior locations a company has, the greater the earnings power of the business.  The same holds true for a concert, or a sporting event which only takes once a year.  Those are special events and the right to put them on is unique and cannot be duplicated.

As an investor, my feeling is these are the kinds of companies you want to own because their profitability typically builds over time and usually does not erode.  Just as each person is unique in their own special way, so are the best companies.  It’s our job to find them, and ultimately reap the rewards if you are correct.

Finally, if you would like all blog posts, newsletters, and published research, please fill out the form below.

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

 

 

Finally, if you would like all blog posts, newsletters, and published research, please fill out the form below.

 

(Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research possible 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