Y H & C Investments October 2024 Update
The only constant is ....
Y H & C Investments: Change, Change, Change
(Return figures in this section come from the September 30, 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)
When you are a die-hard fan of a specific university or sports team, you get used to the same results, year after year. As an example, if you were a New England Patriots fan during the Tom Brady era, you could be pretty confident they would have a winning season and a chance to win the Super Bowl. Over the last ten years in major league baseball, the same has applied to the Los Angeles Dodgers, Houston Astros, Atlanta Braves, and New York Yankees. In college football, Alabama has certainly rolled, pardon the pun. Conversely, being an A’s fan, or a Raiders follower, or a Clippers die hard, well, there have been a lot of ‘maybe next year’s. How does this apply to the financial markets?
Investors do model work to create different scenarios for any kind of financial outcome. The most obvious is earnings estimates for public companies. Often there is a base case (the most probable outcome), the below standard, and above normal possibility. You can apply this concept to any asset category. You have these different likelihoods, and then you get the actual result. Investors often notice the change which is taking place in the pattern of results. It is often referred to as the delta. Most investors evaluate the strict change as a way of measuring performance. If we take it a step further, and dig a little deeper, measuring the rate of change of the change tells us a little more. It is often called the second derivative, which is just a term from calculus. As an example, during the last Federal Reserve Open Market Committee meeting, the assessment was made to lower interest rates by fifty basis points. When they made this decision, it was based on the rate of change of the change in employment numbers over the last few months. Job creation has been slowing dramatically relative to the prior few quarters. Yes, the conspiracy theorists would say the unexpected reduction was political in nature. No denying the timing is interesting after raising or doing nothing for four years. Hmmm, does seem a little fishy, doesn’t it? We will give Jerome and the crew the benefit of the doubt and go with Aretha Franklin’s approach, ok?
Looking ahead, the big daddy arrives in a little over a month. In the only debate, I would note there were no questions asked about the thirty-five trillion-dollar debt (only on the balance sheet) and current two trillion-dollar deficits. Gold and silver at decade highs speaks to the skepticism investors have about any fiscal discipline by the US Federal government. Hard to see how that changes no matter who gets elected. On Tuesday, the potential closing of all eastern seaboard ports could take place because of a labor strike. It could cost the economy upwards of five billion dollars of lost activity per day. That is with a B. The value of the US dollar remains the biggest vulnerability of our capital markets, and global capital markets. As for predictions, no way, no how. I repeat, when a one and fifteen team plays a zero and sixteen team someone wins. It does not make the winner a good team.
Spanning the Globe: Interest Rates In Focus! (Return figures in this section come from the September 30, 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)
The recent election in Japan brings in a new leader who appears to prefer a more Asia-centric, less China focused approach for the global economy. The continued rise in interest rates in Japan means a stronger Yen, which leaves the Yen carry trade on track for persistent unwinding. Speaking of big Red, the powers that be in China gave it their best Mario Draghi, ‘Whatever it takes,’ moment by lowering rates on everything that moves. Hedge fund legend David Tepper, who hasn’t had nearly that kind of success as the Carolina Panthers owner, reacted immediately by declaring everything in China is a buy. In Europe, the European Central Bank continues to follow the lead of the Fed and lowered rates again. In the UK, the Bank of England chopped by twenty-five basis points in August and kept rates at 5% in September. Following the interest rate moves of the major central banks keeps an investor attentive to global bond yield differentials and the commensurate effects on various capital markets across the globe. As yields change, investor sentiment moves in various degrees, with current feeling more enthusiastic as lower always helps the mood. Aretha strikes again.
Y H & C In September- Industry & Holdings Update: Winning with Fido and When, Not If!
(Return figures in this section come from the September 30, 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)
In looking at the capital markets in the United States, September proved to be a strong month as the Fed’s surprise fifty basis point cut ignited animal spirits and investors bought stocks aggressively. The fifty-basis point move lower dramatically helps the market value of the held to maturity loan books of all banks. It won’t help their future net interest margins, but I suspect they will be just fine. With respect to our holdings, real estate, financials, and consumer discretionary related positions all benefited. A while back, I remarked on a position in a pet care related retailer we took for a few clients. It is private equity backed and traded at a ten-year low. The retail sector was out of favor and its performance was shunned on a more discerning consumer and transition to new leadership. It is considered a value stock, another area seen as avoid at all costs. The challenge in buying situations which are unwanted is operationally it takes time to change business performance. In today’s modern market, algorithms dominate trading and anything with fundamental issues to future growth gets shunned, or even worse, shorted at every turn. However, when it is bought very cheap, and there is any improvement, which there was, well, you can fill in the blanks.
In the smaller part of the portfolio, one of our largest positions reported a meh quarter and the stock did not move, which was expected. The company still posted healthy operating profits and net income so that adds to the book value. Underneath the hood, though, there are quite a few ongoing operational projects which should be completed by year end with the goal of helping growth and margins in future years. With our smaller companies, finding situations where it is only a matter of time before the desired result arrives is part of our approach. We don’t know when it is time to get rewarded. Often, it can take a few years of a company working towards a much stronger operational situation. Maybe it involves digesting an acquisition, or changing the supply chain, or building a tangential segment. It could be a change in a management leader or implementing the plans on new contract win. Maybe it’s consolidating facilities, or something logistical in nature. It is my job to understand what is taking place beneath the hood, so we know why we continue holding the position. If the analysis is correct, the patience to stick with it ultimately is justified.
With that in mind, if there is any justice in the financial markets, the small and microcap area will eventually shine. Historically, the sector trades at a premium, not the vast discount which currently exists. In prior cycles, interest rate policy changes have an outsized effect on the sector because of lower financing costs, an uptick in mergers and acquisitions, and improved sentiment towards the segment. Reversion to the mean indicates when capital flows move in the small direction, the effect is noteworthy.
Looking ahead to October, it is usually another volatile month which can be loaded with drawdowns. It often turns out much better than expected. Investors are waiting to see the election results, and once the outcome is determined, more certainty typically improves the willingness to deploy capital. There are a few online conferences, and the LD Microcap conference is at the end of the month, which is always the most well attended event of the year, and a lot of fun. I very much appreciate your interest and if you have any questions or comments, please say hello at information@y-hc.com. Thanks for your continued support! I hope you have a great month and enjoy Halloween!
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)