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Y H & C Investments Monthly Update: Edition 151

Asset/Index

January 2021 Return

Dow

-2.04%

S&P 500

-1.71%

NASDAQ

+1.42%

Russell 2000

+7.66%

Oil (WTI/Brent)

+7.689%

Gold

2.72%

10 Yr Treasury Yield

1/1/2021-.917%

12/31/2021-1.064%

US. Economic & Financial Markets Outlook- Covid Slows Down U.S. Economy As Retail Traders Wreak Havoc On Hedge Funds! (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 January, the Dow Jones Industrial Average lost 2.04%, the S&P 500 fell 1.71%, and the NASDAQ increased 1.42%. As the United States enters the final month of winter, the economy is sputtering from the Covid-19 pandemic and new strains of the virus from South Africa and Brazil. Efforts to accelerate the number of vaccinations administered to the general population have yet to see meaningful results. Unemployment remains stuck in the seven percent area and the service related industries continue to struggle as states reluctantly and slowly begin to lift lock down restrictions. Even with the Covid challenges, many parts of the U.S. economy remain healthy. Housing, health care, technology spending for enterprises, and auto sales all look solid and could see a big jump over the next year. As vaccines ramp up, it is not hard to see growth accelerate as the long dormant travel and leisure areas begin to contribute to activity. Travel opening up would also be a huge boost to the airline, aerospace, and energy industries.

From an economic conditions point of view, a slight rise in bond yields is minimal and borrowing costs remain attractive for corporations and small businesses which are looking for access to capital. The low bond yields bode well for merger and acquisition activity, and recent deals in the money center banking and asset management area foreshadow plenty of deal flow in 2021. Likewise, the IPO pipeline is full as the 2020 success of high profile names will tempt others to test the public markets. The newly changed rules for direct listings also gives issuers a little more choice about how to go public. If you throw in the 2020 popularity of SPAC financing, new listings should be strong for the balance of the year. With the good economic conditions, you would be correct in assuming equity prices should be seen favorably, as they are. The important question is how much optimism in the future is baked in current prices?

With the sudden emergence of WallStreetBets on the retail trading front, highly shorted stocks have been attacked, resulting in astronomical short squeezes. Valuations for the broader market remain elevated relative to historical levels. There are pockets of the market which look incredibly expensive, and others which seem quite cheap. Nothing new there. With interest rates probably anchored for the next few years by central bank assistance, inflation is the wild card for market disruption. Stay careful, do your homework, choose wisely, and look for the right opportunity, especially if it is hated or neglected.

Global Economic & Financial Markets Outlook- High Covid Numbers Keep Investors Wary As Slow Vaccine Rollouts Hurt Confidence! (All country index data provided by countryeconomy.com, January 31, 2020.)

Economies run on employment, capital and confidence. Holding employment levels constant, capital conditions remain favorable as could be, with interest rates near zero or below zero in many countries. The final factor, confidence, is where the global system is currently struggling. Citizens are scared because of the nature of the virus, as well as the way it has progressed across the globe and caused so much sickness and unfortunate death. Government leadership and responsibility for preparing and managing the health conditions remain questionable at best. With promising vaccines starting to roll out, progress has been slow and remains that way. Investors have long been skeptical of government effectiveness regarding nearly any economic matter, and it is why free and open markets, with as little government involvement as possible, are favored by financial professionals. Let’s look at some individual country equity indexes to see how global markets performed in January.

Across Europe, mature western country indexes were mostly negative as seen by the UK’s FTSE (-.82%), CAC of France (-2.74%), Germany’s DAX (-2.08%), Spain’s IBEX (-3.92%), Italy’s MIB (-2.97%), Portugal’s PSI (-2.12%), and Greece’s ASE (-7.30%). Eastern Europe was quite strong with Bulgaria up 11.59%, Romania ahead by 5.12%, Hungary rising 3.35%, but Poland retreating 1.81%. In Asia, Japan’s Nikkei grew by .80%, China’s Shanghai gained .29%, the Hong Kong Hang Seng leaped 3.87%, while Taiwan’s TAIEX also rose 2.75%. Down under, the Australia ASX gained .31% while India’s Nifty lost 2.48%. Across the pond and down south, Brazil’s IBOV fell 3.32%, and Mexico’s Mexbol lost 2.45%. In the great north, the Canadian TSX dropped .79% . Elsewhere, notable results came in positive from South Africa’s JSE (+5.39%), Israel’s TA (+6.70%), and Lithuania’s OMX, ahead by 7.63%. Looking ahead, vaccine manufacturing and distribution by the large pharmaceutical companies should ramp up significantly over the next three months and governments and private sector companies will need to work together to help get the majority of the population vaccinated. The next six months will be crucial in monitoring the progress, or lack thereof, so investors need to stay abreast of the continuing developments across the globe in this area.

The Art of Contrarian Thinking- Options Are A Tool Best Used For Risk Management, Not YOLO Trading!(YH & 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 today’s modern lingo, YOLO means you only live once. It is the rallying cry for the WallStreetBets crowd which has suddenly become a force in financial markets. It is based on the idea of buying or selling options and going for a home run trade, partly or wholly by using margin. Let me be very clear that I would not advise anyone to engage in the financial markets using this tactic. There are already quite a few stories about young people committing thousands of dollars, or more, to options trading which has not worked out, meaning they lost all their capital. If this is an inappropriate way to use options, what might be a more responsible method? Let’s take a look.

In my opinion, the most effective use of options is to hedge an existing position which has increased in value. Maybe the best use of options I have knowledge about is when John Malone of Liberty Media used option collars to lock in gains on Sprint, Motorola, and other telecommunication holdings during the height of the internet bubble. He hedged the downside appropriately, the bubble in telecom and media popped, and Malone earned a bundle by using options efficiently. Like any financial instrument these days, options can be structured in nearly any combination which can be imagined. As an investor, if you are going to use options, you have to think through potential outcomes based on the performance of the company and how long the length of the option is. Options are derivatives, which only means their value is based on something else. In the case of stocks, it is tied to the value of equity associated with the option. The most common way to hedge a big gain in a stock you already own is by selling calls, buying puts, or some combination of both. You can use the options at different price points below or above the current stock price, and at different time intervals (monthly, quarterly, six months, a year, longer than a year). Speculative options trading usually involves buying calls or selling puts on a stock you don’t own, and often involves using lot’s of margin. I cannot emphasize the point strongly enough that if you are going to use options, do it responsibly and think through the possibilities, especially negative outcomes, before you do it. Finally, following others into a trade is typically a poor strategy, especially financed in an irresponsible manner. Options are a tool, like other financial tools, so use it appropriately.

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(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)

 

 

 

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