YH & C Investments Monthly Newsletter- May 2018 Edition #119

US. Economic & Financial Markets Outlook: Markets Slump As Tariffs, Technology, and Trump Combine to Shock Investors!  (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 March, the Dow Jones Industrial Average lost .16%, the S&P 500 rose 1.08%, and the NASDAQ increased 2.13%. Going on nearly a decade of economic expansion, the US. economy again posted a solid first quarter GDP number, growing at a 2.3% annualized rate. Some analysts note the slowing rate of growth in important areas like retail, new new auto sales, and potential headwinds in large consumer and corporate debt levels, not to mention the national debt. With energy prices rebounding and housing starts still below traditional levels, three percent annual GDP growth remains possible during the rest of the year. Strength in the corporate sector, through strong earnings growth across the industry landscape, as well as a robust merger and acquisition market, increased IPO activity, and plenty of fresh powder (available cash) in the private equity segment, all bode well for the all important financial sector.

In terms of economic metrics, the biggest attention getter during April was the ten year treasury bond breaking the magic three percent level. Many investors have long thought that stock markets (and their investors) have unduly benefited from unnecessary Federal Reserve policy activity, more generously known as Quantitative Easing (the buying of bonds to suppress interest rates). Even more controversial is the long length of time of this unprecedented liquidity and the potential negative ramifications markets will have to deal with (inflation?). With  QE becoming QT (quantitative tightening), cheap money is becoming more expensive, and the path higher will continue for some time. Inflation remains a concern, especially with employment indicators showing tightness in areas like construction and transportation. In total, conditions remain favorable but investors must continue to watch the two headed i-monster of inflation and interest rates.

As for equities, as long term bond yields move up, the relative merit of their higher yield becomes a higher threshold to compete with. Valuations remain in a traditional band which is a bit elevated but not excessively so. Volatility has picked up since the beginning of the year, especially with earnings season and as individual companies report their results. As always, what you pay for and what price remains the basis for intelligent decision making, clearly easier said than done.

Global Economic & Financial Markets Outlook: World Markets Retreat As Tightening and Inflation Concerns Outweigh Growth Outlook!  (All country index data provided by the Wall Street Journal April 30, 2018.)

As global investors peer out across the universe of available countries to invest in, capital flows continue to shift with no discernible pattern. With global central banks moving towards the US. led policy of quantitative tightening, judging inflationary trends and country growth rates leave many investors mystified as to where their capital should be placed. Looking at specific country results, Mainland China (-7.6%), Shanghai (-6.8%), Japan (-2.2%) and Indonesia (-6.9%) show red across the board as Singapore (+5.1%), Malaysia (+3.99%), and Hong Kong (+1.2%) were strong. Again, there is no evidence of a definitive pattern, like the proverbial story of a monkey throwing darts beating a professional investor (I know, you would rather have the monkey).

In Europe, France (+3.2%), Germany (-2.6%), Hungary (-2.2%), Italy (+9.5%), Norway (+7.7%), and Poland (-6.6%) give you the same kind of random result. With the UK (-2.8%) and Switzerland (-5.7%), you can see that gradually higher interest rates, at the very least, certainly affect investor psychology. Looking forward to the back half of the year, the lingering question remains the uncertainty of which specific market will perform well or will global markets turn adversarial in a more uniform way?

The Art of Contrarian Thinking- Examine Asset Quality (and forget about charts) to Help Determine The Value Of What You Are Buying! (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)

About a year ago, I attended a sparsely populated annual meeting of a small company (one other investor showed up). The highly experienced, qualified, and knowledgeable CEO was asked about a potential acquisition target. In describing why he was not interested in buying this enterprise, and forgive my language, to paraphrase, “Their assets are crap (substitute the s word).”He then went on to describe why there was no replacement value as what the company owned could be easily duplicated. Conversely, what I am trying to find is situations which are nearly impossible to compute with, or easily duplicate. Consider a single government contract with a state or federal agency (maybe 10 or twenty years), or the single pipeline in an area which supplies the entire region some kind of natural resource like gas or oil. Finding these gems is not easy as they are quite rare, and even more scarce when the goal is to buy them at attractive prices. You can look at it like trying to buy a very rare diamond, maybe the Hope diamond or a fancy (colored) diamond. The Hope diamond is unique, clearly, as only one exists. For every thousand or so regular diamonds you might have one good, fancy diamond. High quality companies with scarce, one of a kind assets are the same thing, with the difference being the stocks might generate income for you and your family, or appreciate, for decades to come. Thanks for reading this month.

Investing money in capital markets involves risk and could result in losing money.  Past performance is no guarantee of future results. Future results are likely to be different from past performance. All equity portfolios involve risk and may lose money. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile, liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, attaining or holding the CFA credential in no way suggests performance will be superior than a market index or market return.

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