|Index||October 2022 Return||3rd Quarter|
|2022 Year to Date Return (1/1/2022-10/30/2022)|| |
|S& P 500||+5.26%||-6.27%||-18.76%|| |
|Russell 2000||+8.07%||-3.65%||-17.75%|| |
|10 Yr. Treasuries- Yield-4.052%||+41.5 Bp|
|+92 Bp||+241.7p|| |
|WSJ/US Dollar Index||+1.27%||+6.33%||+14.93%|| |
|Y H & C GARP Portfolio|
(Returns not GIPS Certified )
|+9.6%%||-10.1%||-31.4%||Data comes from Interactive Advisors|
|Y H & C Concentrated GARP Portfolio|
(Returns not GIPS Certified)
|+12.4%||-14.8%||-10.1%||Data comes from Interactive Advisors|
U.S Economic & Financial Markets Outlook-3rd Qtr GDP Comes In At 2.6% While Markets Get an October Treat as Gains Highlight Sector Rotation! (Return figures in this section come from October 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 the 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 10.99%, the S&P 500 rose 5.26%, and the Nasdaq limped ahead by 1.60 %. Many economists continue to predict an imminent recession, third-quarter gross domestic product exceeded estimates, coming in at 2.6% versus the 2.3% expected result. With the economy still facing high inflation rates, tight labor markets, and constricted supply chains, businesses exceedingly face the problem of a limited pool of potential workers. Consumer and government spending bolstered the GDP results while slowing from the second quarter figures (1.4% versus 2% in Q2). The other notable data point is the continuing shift of spending from goods to services. In specific industries, the rapid slowdown in the housing market, particularly in residential investment (-26.4% in Q3, -17.8% in Q2), remains a big area of concern for investors and government officials. The thirty-year mortgage rate exceeding seven percent for the first time in decades has a dramatic impact on housing transaction volumes.
On the inflation front, some data indicate that price increases are beginning to slow (personal consumption expenditure index, lower energy prices, core inflation). Some of the largest companies across the globe repeated the same theme in their earnings calls, which is the observation the economy is beginning to slow.
Concerning corporate earnings, there is a rotation in capital flows away from the large technology giants. Last week, behemoths Amazon, Microsoft, Meta (Facebook), and Alphabet (Google) all saw their values shrink after reporting results that either fell short of expectations or provided future guidance for next year which left investors disappointed. Much of the problem for the largest tech entities comes from the high valuations their massive growth created over the past few decades. Apple is the only company of the tech titans which has not been severely affected by the market turn downward over the last year. Meta, the artist previously known as Facebook (down 70%, provides a prime example of the pain being felt across the technology landscape.
If capital flows out of one area, it typically moves elsewhere. There is a compelling argument to be made that it is healthy for the broader market to remove the concentration of capital long found among the top five technology giants. The most obvious sectors benefiting from capital inflows are energy and health care. Financials have yet to benefit but with more rate increases still imminent, it is certainly possible they could see more interest in the coming quarters. With the all-important midterms only a week away, the docket is full of major events: a Fed meeting, the continuing deluge of earnings reports, and the midterms. I’m certainly watching, and I imagine you are as well.
Global Economic & Financial Markets Outlook-Rising Inflation and Rates Combine to Plague Global Markets As Countries Move Away from Globalization! (All country index data provided by countryeconomy.com, October 30, 2022)
World equity markets remain steeped in losses as most country indexes have lost 15-20% of their value in 2022 (year to date). The root cause of the capital flight is the dramatic rise of inflation and corresponding increases in interest rates by central banks across the globe. Many economists believe the world’s financial reaction to the Covid pandemic, financial support of its citizens, was appropriate given the difficult circumstances. In economics, there are always a variety of choices about how to deploy resources. The decisions have consequences, and the reality of the current environment is global inflation is the outcome of the world’s financial decisions.
The countries which have fared best from an equity standpoint are resource-abundant, typically energy exporters of oil and gas, sans Russia (the global outcast). Saudi Arabia, Norway, Oman, Qatar, and Kuwait are all faring better than the global indexes, and except for Norway, all are in the green in 2022.
Looking to the immediate future, politics is front and center with the reappointment of China’s President Xi Jin Ping. In England, Liz Truss was replaced by Rishi Sunak and the pound and FTSE rallied on the change of leadership and abandonment of its prior economic plan. Brazil has re-elected socialist Lula for President. Israel will hold elections next week with Benjamin Netanyahu making a bid to reclaim the leadership spot. Of course, the midterms are a week away here in the United States, too. With South America electing socialists in Mexico, Columbia, Brazil, and Argentina, the movement away from globalization and free markets continues worryingly. It is a trend to pay close attention to, especially with the hawks now dominating the newly elected Chinese leadership council. Economics is about making decisions related to resources and policies leaders make which affect how countries deploy their assets. Market outcomes are partly based on how capital owners see those policies versus the other choices they have across the globe.
The Art of Contrarian Thinking-Think Like the CEO of the Company You Invest In! (YH & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)
One of the most important themes of investing is believing in the leadership of the company you invest in. As a minority investor, you are depending on the CEO to grow the business in a way the investment community finds attractive. The CEO is responsible for capital allocation decisions which will involve millions of dollars, and much more if they are successful. The ability to deploy capital with high rates of return shows up in the financial results over many months, quarters, and years. If we also add to this capital market activity, be it raising money or engaging in merger and acquisition discussion/activity, the use of funds becomes the most important job a CEO has.
In this light, excellent CEOs deploy capital in creative ways where the returns are very high. In the case of smaller companies, growth rates of 100% or more can be attained, both in revenues and profits at the various points on the income statement. There is often a lag between the time capital is used and the ultimate return a company eventually achieves. The delay can be a few quarters or a year or more, but clearly, results sooner are always better than later, depending on the magnitude of the returns. Naturally, I would rather wait a year for a 100% return than a 10 or 20% return over six months.
One final point to consider about a CEO and their company stock. They all know the price of their stock. They all monitor it. The stock price always matters to them. Please make sure you understand the next point as I find it a good rule to follow. The best CEOs don’t care if you don’t buy their stock. They own plenty of it, and the investors who believe in them will buy it, too. Good CEOs know how good a business they have or are in the process of building. The job of an investor is to try and understand the business as well as the CEO. If you do, you can recognize why the CEO wants as much of the stock as they can get. Conversely, if they don’t own it in size, that tells you plenty as well.
Y H & C Investments- November Update
In October, I attended the LD Microcap conference in Los Angeles, California. In listening to quite a few presentations and meeting with a few CEOs and investors, the dominant theme was the low price of the stocks. Every CEO mentioned the price of the stock versus the strong outlook for their business. Keep in mind that from my point of view, very few companies are worth deploying capital in. The historical evidence is less than 10% of all companies outperform market indexes over a long period. Selecting the smaller companies which will ultimately be huge winners is very difficult, so I want to get a very large sample of entities to monitor before deploying our hard-earned capital.
The other point to bring up is how the market is turning away from many technology companies. The best time to buy stocks is when they are on sale, which many entities are. The big question is do you want to own the business, and why? Each investor makes that decision on a case-by-case basis.
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 because it helps people do what they want to when they want to do it. 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 investment help, please keep me in mind.
Thanks for reading the newsletter this month!
(Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)