Y H & C Investments May 2023 Update- Edition 176

Index April 2023 Return Year-to-Date Return  

Dow Jones

34, 051.24 +5.48% +2.87%  

S&P 500

4166.26 +1.46% +8.59%  

Nasdaq

12, 198.61 .04% +16.82%  

Russell 2000

1768.99 -1.86% -.44%  

Oil- 79.31

(Brent) -5.30% -5.40%  

Gold-

1991.00 -.56% +8.76%  

Silver-

25.23 +4.96% +4.61%  

10 Yr. Treasuries-

Yield-3.457% +3.9 bp  100BP=1% +15.97bp  

WSJ/US Dollar Index

96.38% .93% -.19%  

Bitcoin

28, 600 +3.72% +72.54%  

Y H & C GARP Portfolio

(Returns not GIPS Certified)

+2.7% -.3%  

Y H & C Concentrated GARP Portfolio

(Returns not GIPS Certified)

0.0% -1.3%  

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 April 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 April, the Dow Jones Industrial Average gained 5.48%, the S&P 500 rose 1.46%, and the Nasdaq increased .04%.  As 2023 progresses, the most obvious observation about the U.S. economy is the surprising resilience of the consumer.  Spending on service-related activities, think restaurants, leisure, travel, and entertainment, has been strong.  In combination with health care and energy-related industries, the economy continues to meander along, creating jobs and growing at 1-2% annually.  Clearly, interest rate-sensitive industries like housing, autos, commercial real estate, and capital markets, are all areas where the non-stop attack on inflation significantly impacted the volume of activity.  For many in the investment world, the crucial question to consider is the stickiness of inflation.  Essentially, how long will the inflation level be elevated (think 4-5%)?  At those levels, the Fed must keep interest rates higher for longer and the industries with elevated levels of sensitivity are going to find it difficult to see improvement.

The other big story in the financial markets is the evolving difficulty in the banking system.  Over this weekend, it appears First Republic Bank, long considered a very customer-centric and well-run entity, will be forced into a sale by the U.S. regulators.  The speed of decline must be genuinely concerning for government officials as massive institutions (First Republic has nearly $200 billion in assets) are failing in very compact time frames (think days and weeks).  It would not be surprising to see government officials starting to consider ways of restricting deposit flight.  Historically, time restrictions have been used to slow down bank runs.  Another probability is North America could start to see the beginning of a consolidation wave in the smaller and mid-sized banking areas.  There are nearly 5,000 commercial banks in the United States.  Might be a bit many, eh?

As for the capital markets standpoint, earnings are rolling in, and as is typically the case, three-quarters of all companies are meeting or exceeding estimates (shock of shocks!).  Many investors believe the month of May is a time for the beginning of a seasonal decline (sell in May, go away).  Trading volumes often get noticeably light, and volatility can spike on little news.  It is a time when there are long stretches of minimal movement.  You might think of your friendly neighborhood pet rock.  It is also a time when beaten down areas can get more beaten down.  As always, do your own research and be diligent about anything you are considering for a potential allocation.

Global Economic & Financial Markets Outlook-Inflation Remains the Critical Issue Across Europe as Food Costs Stay Elevated! (All country index data provided by Bloomberg, April 30, 2023,)

The primary challenge facing global markets is the persistently elevated level of prices for goods, especially food and energy.  The problem is especially sharp in Europe, where food costs remain twenty percent higher than at any time since 1997.  The same situation holds true for energy.  As a result, the total living costs for households are putting tremendous pressure on most families as incomes have not kept pace with the price spikes in food and energy.  Naturally, the squeeze on incomes affects the prospects for activity, and across Europe, projections are for a .8% expansion in GDP, with inflation falling to a 6.4% annual rate.

Markets are looking past the problems, especially in Europe, as equities have rallied over the last four months.  In the UK, the FTSE is up 5.62% year to date, the CAC (France) is ahead by 15.72%, the DAX (Germany) lifted by +14.36%, the IDEX (Spain) +12.30%, and the PSI (Portugal) rose 5.78%.  Similarly, Denmark (+12.40%), the Netherlands (+10.08%), Switzerland (+6.66%), and Greece (+16.70%) have all shown strong results.  Asia is consistent with these returns with the obvious individual country variability.   China- Shanghai-+7.57%, India -.22%, and Taiwan +10.20% display the range.  In South America, Mexico (+13.74%), Brazil (-5.48%), and Chile (-.46%) are consistent with this theme.  Looking ahead, the war in Russia, the opening and acceleration of China’s economy, and inflation remain central themes to pay attention to.

The Art of Contrarian Thinking-Finding Value Among the REIT Selloff! (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)

There are two categories of investment many are familiar with: capital gain and income.  Capital appreciation is simply buying a security at a lower price and selling it at a higher one.  Income is money you receive from owning a security, whether interest or dividends paid out by a company.  From a stock ownership perspective, capital appreciation is the holy grail as 3, 5, 10, 20, 50, or 100 times your original outlay is the definition of wealth creation.  It is often difficult, and in many cases near impossible to come by.  One or two ten or twenty baggers in an investment career can be all one needs.  You really shouldn’t count on them taking place.  If we turn to income, it should be a much more reliable area of investment because you should be able to depend on money coming in at regular intervals.  The Real Estate Investment Trust (REIT) category is an area that is excellent for income-generating equities.  The income streams are backed by diverse types of real estate ownership.  REIT companies are mandated by law to pay out at least 90% of their taxable income as dividends.  You must be careful as the key term here is taxable income.  The crucial questions to consider when evaluating a REIT are what are the assets they own, how much cash flow the assets produce, and why do I want to own these assets for the long term?

One way to approach the question is by looking at replacement costs.  How much did the assets cost the company?  How and when were they obtained?  Can they easily be replaced and what would the current market value of the assets be today?  By doing your homework, you learn what it is you will end up owning.  The fundamental issue revolves around the durability of the income which the real estate generates.  REIT investing has a risk because sometimes the underlying assets are not as solid as previously thought, and circumstances can change quickly.  You want certainty, so look for a long track record of dividend payouts, low payout ratios, and decades of slowly increasing dividends.  Good areas to consider are farmland, warehouses and distribution centers, energy storage, grocery-anchored shopping malls, cellphone towers, hospital-based real estate, and government facilities.  Owning credit-based REITs is also a suitable alternative as well.

Y H & C Investments- May Update

April is always an interesting month as it revolves around taxes and sending client reports.  In addition, we have earnings season to pay attention to as well.  It is still early in the period, so it is premature to comment on the results.  I attended the Planet Microcap Showcase here in Las Vegas last week and met with quite a few outstanding people.  Next month is the LD Micro showcase in Los Angeles, which is always a wonderful event and a lot of fun.  Last, my firm was chosen to participate in the ValueVail conference in Vail, Colorado in late June.  Being busy is always good and staying active is part of navigating the financial markets.

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)