Y H & C Investments September 2022 Update- Edition 169

When the going gets tough, the tough get going...

Index/Asset

July 2022 August 2022 Year to Date 2022

Dow Jones +5.62% -4.42% -13.29%

S&P 500 +7.97% -4.82% -17.02%

Nasdaq +11.35% -6.73% -24.47%

Russell 2000 +9.11% -3.39% -17.87%

Oil -9.37% -2.21% +17.85%

Gold -1.40% -3.37% -5.83%

Silver -.44% -10.84% -23.55%

10Yr Treasury

January 1- 1.631% July 31-2.651%

-24.3Bp +48.9BP +168Bp

U.S. Dollar +.66% +2.05 +13.26%

Bitcoin-Jan 1, 2022-46, 055 August 31, 2022 20, 187

+26.26% -13.47% -56.43%

Y H & C GARP Model +6.18% -29.08% https://interactiveadvisors.com/yhc-investments?portfolio=long-term-garp

Y H & C Concentrated GARP -2.46% -11.80%

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Y H &C Results Are not GIPS Certified and dependent on third party calculations. They are time weighted

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U.S Economic & Financial Markets Outlook-Powell’s Jackson Hole Speech Emphasizes Inflation Fight As Investors Realize Rates Must Head Higher! (Return figures in this section come from the August 31, 2022, editions 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 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 August, the Dow Jones Industrial Average gained %, the S&P 500 rose %, and the Nasdaq increased.  Jackson Hole, Wyoming is known for its dramatic landscape and abundant wildlife, including plenty of elk, deer, moose, swans, geese, and eagles.  Because of this natural beauty, it makes perfect sense global central bankers would choose it as a yearly conference location.  You see, the bankers only choose the best of the best for their get togethers.  During his speech last week, Chairman Powell reiterated the Federal Reserve Board’s commitment to fighting inflation.  With year over year prices still hovering around nine percent, there is no practical way the Fed can stop raising interest rates any time soon.  With the customary data dependent rhetoric, the Fed chair and board members appear unified in the urgency of slaying the inflation problem.  So how is it going so far?

On the surface, some economic data can be cherry picked to provide evidence interest rate tightening is starting to have the desired effect.  Housing prices remain elevated, but transaction volumes are down dramatically.  Mortgage rates at 5.5-6% make an enormous difference to home buyers, especially when compared to the 3% rates which existed for so long.  The core personal consumption expenditure price index, which excludes food and energy, rose 4.6% year over year and only .1% month over month.  The entire PCE index saw a year over year increase of 6.3% in July versus 6.8% in June.  Still, with the 10-year Treasury note trading at 3.0%, there is clearly more wood to chop for Jerome and his Fed heads.  Enjoy the views while you can. 

With the respect to the different sectors which make up the US economy, I noted earlier the weakness in housing.  The retail sector has seen severe softening, especially in the clothing and soft goods area.  Media and entertainment also has slowed, and big layoffs are rumored at Snap and Discovery Time Warner.  Energy prices remain elevated and with domestic shale producers and offshore drillers reluctant to change their capital expenditure disciplines, the lack of supply continues to contribute to a very tight market.  Health care remains steady while the auto sector remains very weak, showing a 10-15% annual sales decline. 

Capital market activity remains light as well, especially the equity underwriting and advisement subcomponents.  Fixed income and currency trading markets continue to be volatile.  The IPO market is shut for venture capital exits, too.  With only four months remaining in the year, there is a strong possibility the current environment will remain in place until 2023. 

With respect to the equity market, August volumes are always light, and it makes for a very thin market with one sided trading patterns.  September and October are traditionally months where there is heightened volatility and when major selloffs have historically occurred.  Often, the elevated fear gives much more to worry about than the eventual outcome.  With market sentiment extremely poor, the prevailing theme is a lack of buying interest.  One should expect the large trading swings to continue.  It gives nimble investors a chance for short term profits while long term investors continue to have the opportunity to build positions in companies they want to own. 

Global Economic & Financial Markets Outlook-Not Much Working Across the Globe Other than Energy! (All country index data provided by countryeconomy.com, August 30, 2022)

With central banks around the world pivoting to fight inflation, the higher interest rate environment has created difficulties for equity markets.  Other than countries which are energy exporters, most equity indexes are 10-15% in the red (year to date).  The biggest issue facing markets is the soaring price of natural gas and its effect on electricity prices.  Across Europe, estimates show a 500% increase in electricity costs versus last years levels.  Many countries are considering subsidies to help lower income families manage through the dramatically higher expenses, especially during the upcoming winter.  More important is considering a long-term solution for this situation as natural gas and oil reserves will be drawn down over the winter and must be replaced.  On that note, Shell CEO Ben van Buerdan recently warned the energy conditions across the globe, and especially Europe, will be with the world for a long time and won’t be solved in an abbreviated period.  Another issue for international markets is the continued strength of the dollar, up double digits in 2022.  Looking ahead, inflation, interest rates, and energy remain front and center for all markets across the globe. 

The Art of Contrarian Thinking-Leverage Your Success and Knowledge by Building on Good Decisions! (YH & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

Let’s face it: the current stock market environment is tough.  Over the last twelve months, many enterprises have seen their equity values drop thirty percent or more.  With inflation at decade level highs and interest rates climbing, pessimism for owning stocks increases by the day.  How do you overcome the gloom by making successful investment decisions?

You focus on your past success.  What business or industry do you really understand?  The more knowledge you have about a sector and specific business, the more you can ignore the market narrative.  The same thing holds true for specific geographic regions.  As an example, growing up and living in Las Vegas, I am familiar with what takes place here.  The same situation applies to specific areas in Southern California and across the West Coast.  The knowledge which has been built up in the past is applied to unique circumstances which are currently occurring.  Remember, you are concerned about the future and growing the value of your assets three, five, ten and twenty years from now.  Today’s market environment will be long forgotten in a few years, maybe in a few weeks or days.  Use your accumulated knowledge to your advantage to make investments which may benefit you for many years into the future. 

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Y H & C Investments- September Update

In August, with so many companies reporting their quarterly results, it is important to spend the time digesting those results.  For me, it means taking the time to read and listen to conference calls and company presentations of entities we own.  Larger companies typically have earnings estimates which the actual results must be compared to.  Earnings guidance is what this is referred to, but it is long been known that most companies are good at lowering the bar and magically producing results which appear much better than expected.  Congratulations, you fooled absolutely nobody.  This quarter’s execution is looked at in the context of what is happening strategically in terms of competitive positioning.  I look for consistency and repetition.  Boring is good.  I want to hear the same things over and over.  Great businesses produce results year after year. 

On a personal level, again I want to thank my clients for their continued support.  Interacting with people who trust you with their hard-earned money is an ongoing commitment and one I accept and relish.  Investing is important in it helps people do what they want to when they want to do it. I also appreciate those of you who recommended my services to your friends.  It has helped a great deal so if you know of anyone who needs some investment help, please keep me in mind.  

Thanks for reading the newsletter this month!

(Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

Y H & C Investments Weekly Blog & Monthly Newsletter
Y H & C Investments Weekly Blog & Monthly Newsletter
Authors
Yale Bock