Y H & C Investments January 2025 Update
Winners Win, Losers Lose-
Y H & C Investments- Markets Rewarding Extreme Speculation
(Return figures come from the December 31, 2024, edition of the Wall St. Journal. Y H & C Investments may have positions in companies mentioned in this newsletter. Nothing in the newsletter should be taken as an offer to buy or sell individual securities. 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)
Below is a chart of the famous asset of the derriere, Fartcoin. Its current market value is approximately 870 million dollars.
Natural gas is a valuable asset and here is the description of it, as given by Wikipedia- Natural gas is a fossil fuel that is formed when layers of organic matter (primarily marine microorganisms)[6] decompose under anaerobic conditions and are subjected to intense heat and pressure underground over millions of years.
Clearly, natural gas has use cases and value in a variety of ways, especially in heating, cooking, and as a supply source for electricity. It is often found in the exploration activity for other hydrocarbons like oil. I would note the contrast between the legitimate value in natural gas versus what is being attributed to the artist known as fartcoin.
It is an excellent representative of the current market climate. Asset values are being driven by speculative activity in various segments, including the largest and most profitable companies of the S&P 500. Bigger just gets bigger. One trillion, two trillion, three trillion, kind of like preschoolers counting numbers but just adding zeros. Algorithmic trading is based on math formulas and data where a weight is given to a variable as part of the formula. The higher the weight, the more important it is in the buying criteria. If the weight is high on momentum, meaning the stock has been going up, then much of the buying will be what has been working. In November and December, investors rewarded what has worked and sold what has not. For those of us who have experienced markets for a while, this is nothing new, it takes place pretty much every year. What is different is the vast extremes of the winners and the rest of the market. Ok, so now what happens in 2025?
The environment is highly uncertain, but it is always uncertain. There are facts we can incorporate into our thinking and analysis. At the Federal Reserve Board meeting in December, the summary of economic projections indicated the committee expects two interest rate cuts in 2025 and two more in 2026. The current Fed Funds rate is 4.33% and ten year Treasury bond sits at 4.59%. There is new political leadership in the United States, and the incoming Trump administration indicates policies will revolve around deregulation, lowering tax burdens, and potentially the greater use of tariffs for countries who are seen as taking advantage of the United States with respect to trade practice. The net effect of these policies has yet to be seen, and opinions vary about how they change the growth rate of the US economy. One area where there is a great deal of excitement is in alternative assets, including cryptocurrencies. It is believed the new administration will put in place regulations which will provide certainty to the industry. Ok, so what do I think about 2025?
I believe the start of the year will be met with profit taking in assets where there are tremendous gains. On the macro level, the world is full of places where large structural shifts may completely change future economic conditions. Yes, artificial intelligence is a big factor, but so are economic variables like inflation and unemployment, changes in political attitudes and leadership, and the values of currencies. It would be very surprising if deal activity was not much stronger under a new administration. IPO’s and mergers and acquisitions should see a much better environment, especially in the smaller areas of the market. I expect next year to be a very different year than 2024. Winners don’t win forever, and losers often times wind up being winners. Of course, I suspected the same thing in 2024, so don’t hold your breath.
Spanning the Globe: Dollar Strength, and Global Weakness
All over the globe, currency values of large countries are trading at low levels relative to the US dollar. Prominent examples include the Canadian Dollar (1 dollar=1.44 CAD), Brazilian Real (1 US= 6.17 Reals), British Pound (1 Pound=1.25 US dollars), Euro (1 US dollar=.96 Euro), Yen (1 US=157.82 Yen), and Renminbi(1 US=7.299) Comparing these exchange rates to historical rates is advised.
With the uncertainty of the change in political leadership in the United States, investors are looking at the strength of the US economy and its superior growth rate relative to the rest of the world and rewarding holders of dollars versus nearly all other currencies. With 36 trillion dollars of debt, and this does not include unfunded liabilities, and a greater than expected $1.8 trillion dollar deficit in 2024, the sustainability of dollar strength is, at best, debatable. Supporters would say, oh yeah, what is the alternative? Europe has been awful for decades. South America’s largest country, Brazil, has a leader who is frail (hospitalized for a brain bleed) and is running larger than expected deficits. Mexico just elected a socialist leader whose economic policies do not inspire confidence. In Canada, Justin Trudeau’s government is in huge peril because of a greater than expected deficit of over $60 billion versus an expected $40 billion. Asia is in the middle of a changing Japan and new political leadership. China is suffering from weak domestic consumption and the lingering effects of a real estate downturn. Note we did not bring up the economic policies of an aggressive communist regime. So, we have quite a bit of uncertainty across the globe and many currencies which trade historically cheap relative to the dollar. It smells like opportunity.
Y H & C In December- Tax Loss Selling and Owning More of Current Positions
The noted coach Bill Parcells had a famous saying: You are what your record says you are. His important view, and not to minimize this, was look at the hard reality of what the bottom line was in terms of win’s and losses. Markets are similar in that every day there is a value being placed on an asset. Often, especially in the long term, the quoted market prices do the job of price discovery, meaning it is an accurate assessment. The key point is- It changes all the time based on new information. The ability to collect, digest, evaluate and analyze, and make decisions based on changing conditions plays a critical piece of investment analysis and ultimately, returns on investment. As an example, during 2024 around 200 billion dollars is being spent on investment in artificial intelligence by the largest companies in the world, called the hyperscalers (Amazon, Facebook, Microsoft, Google, etc). What will the return on that 200 billion be? Millions, billions, or trillions, or more than trillions? Currently, markets are saying trillions. We are going to find out in time. Let’s look at some market statistics, shall we?
The S&P 500 trades at 24x expected future earnings in 2025. Historically, it is a higher multiple than the traditional 17-18x. In 2024, 40% of the returns of the S&P came from only 10 companies. We reiterate what we have been saying for a long time, this is a very top-heavy market. Okay, so what am I doing for clients and my firm?
The quest for value is always ongoing, and currently it is centered around taking advantage of currency weakness, as highlighted in the prior section. Between that, and our existing positions, there are plenty of situations which have value. No fartcoin or other cryptocurrencies either! One could argue to our detriment, but I’ll live with that. Looking back, 2024 was a year where large companies held up well. Investments in financials, real estate, and large consumer entities performed nicely. I did not expect things which did not perform well to be sold down as hard as they have been. It provides a potential opportunity based on whether operational performance in the future meets and exceeds both management and market expectations. There is the potential for the double whammy, or as Munger calls it, the lollapalooza effect, meaning better results along with a changing market environment, to impact investors opinion. It can go both ways, not just one. We certainly are going to find. out in due course. Thanks for reading the monthly update. I hope you have a healthy and happy 2025. If you have any thoughts or questions on the update, please reach out and email me at information@y-hc.com.
Finally, if you want an alternative point of view, please take a look-
Y H & C Investments may have positions in companies mentioned in this newsletter. Nothing in the newsletter should be taken as an offer to buy or sell individual securities. 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)