Money Management

January 1st, 2023

Market Commentary

This report is for the fourth quarter and year ending December 31st 2022. Stock measures were mixed for the past three months, the Nasdaq declined 6.5% while the Russell 2000 rose 6%. Year to date Equity Index losses averaged approximately 28%. Short term interest rates were sharply higher for the quarter, the yield on the three month Treasury Bill climbed to 4.4% from 2.9%. One year ago the ten year Treasury Bond returned 1.5%, todays yield is 3.9%. Oil and natural gas prices have declined to $80/barrel and $4 ng/f respectively but remain higher for the year. Bitcoin is now below $17000 versus $45000 last year. Residential real estate prices have softened and inventories are improving. Commercial real estate seems stable but dependent upon the slow return of remote employees. Inflation measures are slowing but hot spots remain, especially food. The U.S. dollar is retreating against major currencies, Gold and Silver prices are firm. Third quarter GDP increased 3.2% and unemployment is at near record lows of 3.5%.

There is a traditional investment posture called the 60/40, that’s 60% stocks and 40% bonds. It just posted it’s worst year ever, a loss of -35%. Forget the over analysis about the impending recession which has failed to materialize, there better be an economic depression to justify the overcooked fiasco we have witnessed in 2022. As many times as we have witnessed it we can’t determine if it’s genuine panic or a choreographed Wall Street shakedown. The guarded warnings from front running Investment Bank CEO’s or the preselected guests for Market rallies or sell offs by financial media all seem a lot too “timely” to us. Over 8000 Mutual funds and countless Exchange Traded Funds (ETF’s) further complicate the picture. There is an assumption that because the Market or a security goes up or down that there must be a reason, a flaw, product failure or an accounting scandal etc. The unregulated hyperbole that is todays information sharing system is dangerous. The majority of investors run with a pack, they haven’t a choice, it’s a pooled Fund, liquidated and altered on the way down, diluted on the way up. A chain reaction ensues that takes months to unfold and years to rectify.

The Federal Reserve raising interest rates is undeniably the main culprit for recent volatility. The good news is that we are almost done! The normalized affect on corporate earnings remains to be seen. With the average stock down close to 40%, over kill comes to mind. As usual the most dynamic, fastest growing and over owned stocks have been hurt the most and represent significant opportunity going forward. FANG stocks (Facebook, Amazon, Netflix, Google and many others) led the advance of the last fifteen years and recently were the last to correct. We think likely an exclamation point, to a Bear Market that saw its low months ago and has since painfully revisited same on multiple occasions. Most recently the last few weeks of December. You’ve heard of Ghost Ships…abandoned freighters drifting on the high seas. Now we have orphaned stocks, companies with no analyst coverage and very few shareholders. For those with an understanding, the opportunities are exciting. The last week of trading was thin and listless. Tax loss selling was predominant. The January affect, when small capitalization stocks lead the advance has already begun.

Westerns are back, Yellowstone and 1883 for starters. Makes one wonder what our pioneer ancestors would think of todays generation. Depression, endless government handouts, gender anxiety, ADHD and of course the Tridemic of colds and flus from a group who has lost their natural immunity. From classrooms and colleges to the halls of leadership many young people have been swayed that the American dream is a path of shame and despair. What happened to that good ole midwestern work ethic? If fentanyl wasn’t enough now it’s Adderall the amphetamine of choice for the youth of America (boys mostly). National prescriptions are now at 40 million up 40% year over year. The boys who won’t sit still and stare out the window grew into men and won WWll, now they are drugged. Its estimated 5 million immigrants have crossed the border last year and that 100 million more are eyeing the red carpet. Why is that? When Larry Hagman who played J.R. Ewing in Dallas visited Romania in the 1980’s he was approached by an old peasant with tears in his eyes…. “you saved our country, we watch your show and ask ourselves why can’t we have those things like Americans?” Record low unemployment, record wages. Job opportunities everywhere!!!!! Get out the Dutch oven and Cowboy up America! It’s not that bad. In fact it’s great!!

China’s population has peaked and will start to decline, infrastructure and housing projects are at risk. New York is Lit! the first Cannabis shops are open, 36 total. New Mexico has over 1000. Sometimes Mom and Dad can’t help when your thrown in jail in another country. Turns out Sam Fried of the FTX Crypto scandal is the real deal in the flake department, no corporate structure, celebrity partners, a real pile! The Department of Justice is on it…. vows to investigate Ticketmaster as angry fans want to know why they couldn’t get their Taylor Swift tickets. Adamant calls for An Inspector General for Ukraine as $100 Billion in aide a mystery budget. Buenos Aires is trashed by 5 million celebrants after Argentines World Cup Victory, 10% of population goes nuts! What fun! Congress passes $1.7 trillion spending package, all 4100 unread pages! Building owners banning electric bikes in NYC, over 200 fires from lithium Bike batteries. Shipping costs falling dramatically, from $25k per intermodal container to $9k. Lumber prices down by 75%. Could it be? The head scratcher…Israel’s Netanyahu is back. We thought he just lost. Iran executing young people for speaking their mind.

Financial markets are likely at a significant inflection point. 2022 is being described as the worse since 2008. That would make this a fifteen year event. The period in between was excellent. Investing doesn’t mean buying a stock at the absolute low of a market cycle and then selling it at the perfect time after a three way split. It involves positioning yourself into an assortment of companies (a portfolio) and reaping the benefits of ownership over many years. In our opinion last years pull back has been 40% substantive and 60% fabrication and hype. Markets do not like uncertainty. The drawn out vote counting and the ambiguity of mail in elections has taken its toll. Limited, censured and partisan news flows must stop. We sense ongoing political risk as significant going forward. Disinterest and investor lethargy is not far behind. We think higher/normal interest rates are a positive and that the economy is more robust than thought. Without risk there is no reward. If you think the downside theatrics have been dramatic, wait till you see the upside! Nervous/volatile markets create abnormal price vs value disparities. As common sense returns, changes and forward looking adjustments become more predictable and fruitful. Cloakco portfolios are comprised of a large array of high quality companies and situations emphasizing both growth and income, our investment experience is tenured and far reaching. Please contact us if you would like to discuss your account. A warm welcome to our new customers. We appreciate your business and confidence. Have a great new year!!

Cloak/abq