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Y H & C Investments November 2021 Monthly Update- Edition 160

 

Index/AssetOctober 2021  
Dow Jones+4.35%  
S&P 500+5.70%  
Nasdaq+6.40%  
Russell 2000+2.48%  
Oil+9.86%  
Gold+1.35%  
Silver +6.20%  
10Yr Treasury Jan 2021-.917

October 30- 1.566%

+9.7 Bp  
U.S. Dollar Index+.10%  
Bitcoin-Jan 2021-29,374.15

10/30/2021- 61,113

 

+27.03%  

U.S Economic & Financial Markets Outlook-Third Quarter U.S. GDP Slows to Two Percent as Thanksgiving and the Holidays Approach! (Return figures in this section come from the October 30, 201 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 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 4.35%, the S&P 500 rose 5.70%, and the Nasdaq increased 6.40%.  Consumer spending accounts for nearly seventy percent of United States gross domestic product.  In the third quarter, consumer spending retreated by 1.6%.  The minimal GDP growth rate is consistent with a reduced willingness to spend.  Personal income was down .7% in the third quarter as well.  It also directly impacts the ability to lay out money for goods and services.  In conjunction with the significant increase in the number of Covid cases because of the delta variant, the third quarter economic numbers are easily understood.  Still, a two percent expansion is not a retreat, so recession was not the outcome.

Bears pint to inflationary pressures across the economic landscape.  Higher costs are affecting consumers and businesses in a negative way.  The most obvious question about the higher costs is the length of time they will persist?  Equally important is the effect on consumer behavior.  Typically, if one knows higher prices are coming, purchasing today is the rational decision.  The pushing forward of spending compels workers to request higher wages.  Ideally, workers consider inflation and negotiate higher salaries for as long as possible.  Employers face the challenge of passing the higher wage costs along to their customers.  Pricing power, or the lack thereof, is a big determinant of business quality.  Without it, many enterprises face a huge problem if inflation continues for a long time.

As far as the economic environment is concerned, high energy prices ripple across nearly every economic sector.  With supply chains impeded because of insufficient worker availability, government overreach, and logistical issues, the effect on holiday spending could be quite significant.  Many economists point to the Federal Reserve being behind the curve as far as controlling inflation is concerned.  All asset prices are tied to interest rates.  Any increase in the crucial variable (the denominator) will bring valuations lower.  The Fed stands by the transitory call.  With debt to GDP ratios at all time highs, Chairman Powell might not be able to raise rates even if he were so inclined.  In sum, the inflation question and its effect on interest rates will play a huge part in determining how investor’s view markets over the next few months and into 2022.

Global Economic & Financial Markets Outlook-Growth Resumes as European Markets Stay Strong While Asia Struggles! (All country index data provided by countryeconomy.com, October 30, 2021)

Across the globe, the key question to consider is how long inflation persists?  For central banks, the current policy prescription is to resist the temptation to react.  The thesis is supply chain bottlenecks and further vaccine distribution will help cure higher prices in the next six to twelve months.  With global bond yields mostly offering investors negative real returns, equities still offer an appealing alternative.

Let’s look at some specific country returns.  In Europe, the UK’s FTSE (+12.03%), Frances CAC (+23.04%), and Germany’s DAX (+14.36%) are indicative of western Europe’s strong results.  In Eastern Europe, Hungary (+28.71%), Romania (+30.4%), and Poland (+21.22%) show the promising numbers which investors long for. In Asia, Japan’s Nikkei (+5.28%), China’s Shanghai (+2.14%), and South Korea’s Kospi (+3.38%) are evidence of the struggles across the continent.  Strong performance in India (+26.3%) and Indonesia (+11%) are the exception in the East.

Looking ahead, inflation’s staying power and in what magnitude will determine how the banks set interest rate policy going into 2022.  One country to pay attention to is Turkey, where currency weakness and Mr. Erdogan’s heavy involvement in financial affairs continue to upset foreign capital.

The Art of Contrarian Thinking- Why You Look for Hidden Optionality in Your Investments!  (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)

Regardless of the kind of asset someone invests in, large gains are what most people are trying to accomplish.  Once concept to utilize is what is called optionality.  Many investors are familiar with options.  Options are simply derivative instruments of an underlying asset.  The price of Y is based on what happens to something X.  Optionality has very little to do with derivative instruments.  Instead, think of optionality as all the bonus possibilities associated with an investment.  These additional pieces of a business can significantly alter the price of the underlying stock.

For example, the most common situation would be a sum of the parts analysis where all the assets of the business, minus the liabilities, are calculated to be worth $50.00 per share.  Let’s say the cash totals $10.00 per share, ownership of a stock in another company is another $20.00/share, and an operating business is valued at $20.00/share.  If the current market price of the company is $40.00 (stock price), there is a 20% discount to the total value of the assets.  Essentially, you are getting $10.00 per share of cash for free.  This is a simple example of optionality.

Other common situations of optionality in a stock price are where a company has a pipeline of projects, a pending acquisition, or a mispriced asset which the market is not considering.  Smart management teams realize the situation and take steps to find ways for the market to somehow value the unappreciated assets.  One way to do this is to have private investors, usually a private equity group or a hedge fund, buy into these assets and announce the transaction publicly.  Some of the readers may be familiar with the company Vimeo (VMEO).  It was a holding of IAC Interactive (IAC).  Private equity valued it in the billions of dollars and bought a piece of it.  IAC then spun it out into a separate publicly company.  In the matter of a few months, what was being given zero value as part of IAC was now worth a whole lot as a separate public company.  For investors, the more optionality you believe is not being priced correctly, the better.  Remember, while options are nice for hedging, what you are really looking for is optionality!

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

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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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