Y H & C Investments April 2023 Update- Edition 175

Index January 2023 February 2023 March 2023 1^st Qtr 2023

Dow Jones

33,274.15 +2.83% -4.19% -.35% .38%

S& P 500

4109.31 +6.18% +2.61% +1.57% +7.03%

Nasdaq

11,584.55 +10.68% -1.11% +4.56% +16.77%

Russell 2000

1802.48 +10.35% -1.81% -6.52% +2.34%

Oil- 79.93

(Brent) -.53% -1.81% -7.06% -7.05%

Gold-1987.00 +6.14% -6.81% +6.67% +8.57%

Silver-

24.235 -1.82% +12.77% +13.33%+ .23%

10 Yr. Treasuries-

Yield-3.471% 37 bp 100BP=1% +50 bp -48.9 bp -40.9 bp

WSJ/US Dollar Index

96.23% -1.38% +2.79% -1.31% -.34%

Bitcoin

28, 407 +39.32% -2.10% +27.72% +71.42%

Y H & C GARP Portfolio (Returns not GIPS Certified)

+6.7% -3.8% -3.7% -.4%

Y H & C Concentrated GARP Portfolio (Returns not GIPS Certified)

+5.8% -.4% -5.2%. 9%

U.S Economic & Financial Markets Outlook- Fed Hikes Again as Three Banks Break, While Economy Maintains Employment Levels! (Return figures in this section come from the March 30, 2023 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 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 March, the Dow Jones Industrial Average lost .35%, the S&P 500 rose 1.57%, and the Nasdaq increased 4.56 %.  In the first quarter of 2023, the Dow tacked on .38%, the S&P 500 added 7.03%, and the Nasdaq jumped by 16.77%.  If you would have asked most economic analysts which sector of the U.S. economy was best positioned to handle tighter monetary policy, it would most likely have been the banking area.  Banks adjust their lending rates based on monetary policy moves by the Federal Reserve.  Historically, bank rates were tied to LIBOR, which is now given a different acronym (SOFR- Secured Overnight Financing Rate).  Many economic observers predicted the FED would stop raising interest rates as soon as they broke something.  In March, Silicon Valley Bank (the 16^th largest US Bank ), Silvergate Bank ($11 billion in assets), and Signature Bank ($110 billion in assets) all failed and were put into receivership by bank regulators, the FDIC.

The media reported each of their issues was somewhat tied to a mismatch of assets and liabilities and their durations.  My take is the analysis of these failures is incomplete.  In the case of any bank, when a large percentage of deposits get pulled in a short time frame (a bank run), there is always a big danger of failure.  With technology enabling mobile deposit and withdrawal, any bank can suffer from a massive run and watch their deposits leave, pretty click, oops, I mean quick.  In the case of Silicon Valley Bank, the venture capital community looked at the mismatch of the value of the assets versus the total deposit levels and decided the risk was too great.  It took three days for nearly fifty billion dollars to leave, and Silicon Valley Bank was toast.

In the other two cases, both took crypto coin assets and had numerous problems with the important regulatory mandates of Know Your Customer (KYC) and Anti-Money Laundering (AML) statutes.  Banking regulations stipulate reporting compliance with all mandatory requirements.  Between poor reporting and click, click, deposits leaving, the two S’s, Signature and Silvergate, added a final S, that being Sayonara.

Markets responded as they typically do, first with fear and then with acceptance.  Naturally, the government assured the public the banking system is strong.  Meanwhile, there are calls to insure all deposits, not only those below the 250-thousand dollar threshold.  Newsflash folks, our country does not have the capital to insure all deposits even if our government wanted to.  Elsewhere, oil sold off on fears of the banking contagion.  Employment remains strong, which gives the Fed cover to continue its tight policies to fight off the big I.  As for stocks, when banks and oil are weak it is very difficult for the broader market to do well.  With the first quarter over, the long-awaited Fed pivot maybe be inching ever closer.

Global Economic & Financial Markets Outlook-Swiss Government Orchestrates Buyout of Credit Suisse As Financial Authorities Feared Another Lehman! (All country index data provided by countryeconomy.com, March 30, 2023,)

Switzerland has long been famous for three things: exquisite chocolate, fine watches, and secrecy in its banking system.   Over the last century, people from all over the globe would bank with the Swiss with the implicit understanding their financial affairs would remain private.  Credit Suisse, the Swiss-based financial company, was founded on July 5, 1856.  Credit Suisse probably would be considered the poster child for Swiss Banks which built their reputation on the privacy of financial matters.  It is a company made up of a large wealth management piece, the second largest bank in Switzerland, and an investment bank.  In 2022, it sold the securitization business to a private equity firm.  You see, over the last five years, Credit Suisse faced billions of dollars of legal fines because of violations revolving around financial impropriety in its organization.  You name it, they were involved in it- imprudent lending to a preferred hedge fund client, fraud in funding a supply chain finance organization, and wealth manager impropriety with client funds, just to name a few of the most prominent blemishes.  In the last century, there have been several large global financial institutions that have not followed laws.  In many of those cases, over time, the financial institution eventually finds a solution and remains a functioning entity.  Not so for Credit Suisse.

In March, through an accumulation of problems, the Swiss Government forced Credit Suisse to sell itself to UBS for a little over $3 billion dollars.  At the time, Credit Suisse had both assets and liabilities of nearly $500 billion.  The Swiss Government had its hand forced because, for three consecutive days, Credit Suisse saw outflows in its bank of $10 billion dollars, like what we saw with Silicon Valley Bank.  European markets were on edge and after Silvergate and Signature failed, and Credit Suisse saw the price for its credit default swaps increase dramatically.  Those prices are the cost of insuring its debt instruments.  Governments around the world recognized the seriousness of the problem because of the size of Credit Suisse.  The Swiss government ignored corporate governance and wouldn’t allow Credit Suisse shareholders to vote on the takeover.  There is also controversy about how the Swiss Government treated the AT1 bonds of Credit Suisse, about 17 billion dollars’ worth.  Some prominent holders of these instruments include David Tepper (owner of the Carolina Panthers) and the large debt manager PIMCO.  These debt obligations were wiped out and given a value of zero, which legally the Swiss government can do.  Clearly, there were extenuating circumstances with what took place with Credit Suisse.  When any organization puts itself in a position of vulnerability, unimaginable actions can force outcomes one would never consider possible.  In sum, very rarely do you see a 200-year-old institution disappear in less than a month.

The Art of Contrarian Thinking-Dealing with Disappointment: What You Learn Which Is Applied For Future Choices! (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)

Investing is brutally difficult.  The best investors in the history of the profession are correct, at best, six out of ten times.  With those statistics in mind, a priority is to understand why it is important to hold your winners as they continue to grow.  One or two big successes will pay for all the mediocre or poor performers.  However, the most important point is to learn from all the positions which don’t turn out the way you want.

When I look at situations that were big learning opportunities, the biggest revolve around management teams that say one thing, and then, low and behold, a week later, the opposite turns out to be the case.  Along the same track is the management team which makes projections that seems incredibly impressive, but when you have the results, they are nowhere near what was forecasted.  Those two circumstances cause capital losses, both immediate and over time.  There is only one course of action.  It starts with the letter S and ends with an L.  In between, there are expletives and my emphasis, stronger expletives.  In retrospect, the more work done before you invest, the better.  Another point, it is a good idea to slowly accumulate shares as a company builds its credibility.  Your money is earned by working hard.  It needs to go to those entities which deserve your trust.  It is built over time with intelligence, planning, execution, and patience.  Avoid empty promises or pie-in-the-sky prognostications which only cause financial pain.

Y H & C Investments- April Update

The last month was an interesting one as most of our holdings performed well.  However, there were a few positions that turned out very poorly.  It is difficult when people you know and like put their faith in your analysis and judgment and the outcome is poor.  In these situations, I go back and look at the investment and look at all the different mistakes which are made.  In many instances, there were multiple points where looking very closely would have led to a different conclusion on ownership.  A big part of investing is deciding when to be patient and when to be decisive.  The great thing about the future is you can apply these experiences to make better choices which could be of great benefit over a long period of time.

Thanks for reading the newsletter this month, and if you think it is worthy, recommending it to a friend or family member would be greatly appreciated.

(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)