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Y H & C Investments September 2020 Monthly Update- Edition 146

Economic & Financial Markets Outlook-U.S. Economy Struggles with Corona as Equity Markets Helped by Fed Policy! (Return figures in this section come from the August 31, 2020 edition 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 August, the Dow Jones Industrial Average rose 6.62%, the S&P 500 gained 6.24%, and the NASDAQ vaulted by 8.00%.  Since March, the continuing divergence between excellent equity market results and the difficult economic environment for many small businesses remains a puzzle for a great number of investors.  With service-related industries still hampered by severe government restrictions, unemployment remains at near century long highs.  Very little clarity about relief is found in many of the largest states, which are staring at massive fiscal deficits and potentially severe job losses in the public sector (government employees).  Fed Chairman Powell recently tweaked policy to make it crystal clear employment considerations take priority over nearly any kind of elevated inflation readings.  In addition, Fed lending to states and municipalities has been accessed already (New York, Illinois, among others) and there is plenty of bond market support by the Fed in all areas of debt issuance (corporate, municipals, treasuries, agencies).

As has been the case for all of 2020, corporations have taken advantage of rock bottom borrowing rates (.70% on the 10-yr Treasury) by issuing record levels of debt.  At these attractive yields, corporate finance 101 dictates borrowing cheaply wherever and whenever you can.  Do not be shy about the amount either, more is always better than less.  With financial markets buoyant, the IPO market is rearing to go with a pipeline of candidates ready to issue stock to the public.  Names the general population are very familiar with already include Airbnb, Palantir, and Snowflake (there are plenty of others).  Private equity shops remain flush full of cash, and the recent popularity of SPAC vehicles gives another instrument to consider in ways to acquire companies.  Moreover, it portends an active fall and winter for investment banks working to set up and complete deals.

On the valuation side, the Fed’s support allows a more aggressive posture towards higher multiples.  Buyers have flocked to a limited number of firms where growth rates are higher.  The heavy concentration in these names makes the market vulnerable to any hiccup among these few companies.  One might argue the best thing which could happen to the overall market would be to see these names sell off, and capital flow to less favored areas.

Looking at the lovely political environment, we all know the mood is atrocious.  With no deal on a second ‘Cares’ stimulus package, addressing the growing number of deficiencies for millions of people (unemployment supplement, insurance protection and loans for small businesses, state and local government funding, specific industry relief-airlines, hotels, bars, restaurants) seems destined to  delay for at least another month, maybe until after the election.  Speaking of the election, the crucial contest enters the home stretch with debates starting at the end of this month.  With the balance of power hanging in Congress yet to be determined, as well as the grand prize of Presidential control, investors all over the world understand the ramifications of the outcome.  Until then, third quarter earnings become the next market focal point.

Global Economic & Financial Markets Outlook-World Markets Remain Deep in the Red as Virus Issues Plague Economic Activity! (All country index data provided by countryeconomy.com, August 31, 2020.)

The global economy continues to be deeply affected by the Corona virus pandemic.  Most country equity market index holders have typically lost anywhere from 10-15% of their value over the last eight months.  The logic is rational as risk assets during a once in fifty-year pandemic are avoided for fear of a loss of principal.  The lingering question is how does the world handle the virus?  It seems clear, either through a variety of vaccines and treatments, or muddle through to herd immunity.  200 vaccines are at various stages of development all over the globe, and hopefully the world gets a few approvals by year end.  Herd immunity is probably 10-12 months away.  In sum, we are probably right in the worst of it, so staying the course until recovery begins seems prudent.  Let us look at a few results on various continents, shall we?

In Europe, there is a wide range of results, anywhere from -27% year to date in Greece, to -2.29% in Germany.  Most countries are down near 20%.  In Asia, China is ahead by 11.33%, while Thailand is down 17.04%, Taiwan up 4.95%, Singapore down 21.21%, and India a -6.42%.  Clearly, plenty of variation in those results.  In the west, Canada is off -2.40%, Mexico -15.39%, and Brazil -11.68%.  Where each country is in the virus cycle, as well as the success (or lack thereof) of controlling it is spread, has some impact on capital flows.  Along with Central bank involvement in monetary policy, these key factors will influence how markets perform in the next twelve to eighteen months.

 

 

The Art of Contrarian Thinking-Saying No- Sticking to Areas Where You Have an Advantage! (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)

Playing to your strengths is a term used by strategists to describe utilizing the assets you must achieve the maximum impact.  In sports, coaches who find ways to use their best players in the most efficient way are more successful than those which waste some or all their finest players talents.  Similarly, each investor has specific knowledge advantages about industries that others may not.  Doctors in medicine, mechanics with cars, roofers and tilers in homes, insurance agents and actuaries with insurance: all should clearly understand their competitive industry dynamics much better than those outside the industry.    Consequently, investing in areas where knowledge has accumulated so you have in depth understanding of companies or industries plays to your strengths.  On the opposite side of the spectrum, investing in areas where you have little or no understanding of the specific company or sector is a risky approach.  For example, personally, there are some areas I just will not look at, let alone invest in.  Autos, railcars, biotechnology, leasing, and oil servicing are areas I have no interest in and no background.  There are far more areas to say no to than those you are going to be involved in.  With limited resources, especially capital and time, the object is to find the biggest bang for your buck.  Sticking to areas you have an advantage in helps you do that.

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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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