Money Management

July 5th, 2023

Market Commentary

This report is for the second quarter ending June 30th, 2023. Stock index returns were varied during the three months. The Russell 2000 was flat, the Dow Jones Industrials rose 5%, the Nasdaq Composite gained 17% and the S&P 500 added 13%. For the year we estimate an overall advance of approximately 15% for the broad Market. Interest rates are higher, short Treasuries now pay 5-5.5% and the benchmark ten-year yields 3.9%. The price oil is down 12%. Precious metals are down slightly but remain higher for the year. Bitcoin rose to over $30k, that’s a 30% increase for the quarter and 90% year to date. Homes are not getting any cheaper while commercial real estate is now a wait and see prognosis. The economy is growing at an annual rate of 2-2.5% as measured by the GDP.

The largest five companies in the S&P 500 have increased in value by almost 3 Trillion dollars just this year. These five now comprise approximately 25% of the total weighting of the S&P. Similar comparisons apply to the Nasdaq composite, where a handful of stocks have produced a 30% YTD return. From our perspective the traditional stock indexes are losing significance. The downside metrics of the average stock were not reflected (-40% for the broad-based Russell 3000) during the Bear Market. Conversely the upside metrics for the average stock have been overstated during the current Rally. The perception is further skewed by press coverage which highlights the same. The lay investor is left with the impression that he lost more than most during the downturn and now there’s a raging Bull Market and he is still waiting at the train station. Financial reporting smells as bad as the rest. From promotion to click bait they will scare you badly on the downside and then quickly pivot as they highlight the winners on the morning show. What’s disarming is that everyone speaks with authority. The dollar will rise, no the dollar will crater, the at home movement will cause the office market to crash. AI will take over the world, rising rates have made housing unaffordable. And of course, everyone’s favorite… Recession!! Its ok, we are here to help.

Market volatility is quite something. When the froth is high, 5% intraday moves are almost common. As a transition occurs it can become nonsensical. One last body blow to dishearten the few remaining stalwarts. For most lay investors, stock price action is perceived as a report card on one’s holdings. If that were the case, then Facebook was failing when their stock price went to $90 seven months ago and it is succeeding wildly now that it trades at $300. Keep in mind that this is a corporation valued at 750 Billion. The truth is that very little has changed. Now imagine the price swings that occur with small growth companies that are undiscovered and unloved! We are not in a recession; corporate America is fine. The U.S. represents 1/4 of the world economy and 60% of the G-7 nations, the same as in 1990. Amidst all this stability and continuity, we’ve had to endure years and hours of doomsday prognostications. Do this, do that. De-risk, take shelter etc. all for naught. 🎵 Its summertime, The fish are bitin and your stock portfolio is good lookin. 🎵 Relax, spread out the picnic blanket, read the Sunday funnies and have some fried chicken.

Now happening, nature gone wild, North Carolina scientists say the ocean is thriving, increasing Great White shark population a result of an over abundance of wildlife. A Killer whale named White Gladys is leading a pack of Orcas attacking sailing yachts off the coast of Spain. Twenty-five ships sunk. Tech titan Greg Carr spends 100 million rehabbing million-acre Mozambique nature reserve, now called a sea of wildlife! Formerly drought stricken southwest and California are wet. Reservoirs overflowing, ski areas stayed open thru May! The Rio Grande is at 4x it’s normal flow, the snowpack is still melting. Education revamp, college enrollment continues to decline. Apprenticeship programs up over 50%, carpenters, electricians etc. even J.P. Morgan and McDonalds. Earn and learn! Social Security Administration is expanding. Trouble paying rent, need groceries? Apply now to the SSI / Supplemental Security Income Program! Wanna see what anarchy looks like? Witness France and Port-au-Prince Haiti! Over 1660 gangsters killed by vigilantes. More retailers resorting to Russian retail model. Cashier behind the plexi glass. May I take your order? Walmart closes another Chicago store, politician chimes “there will be no place left to shoplift”. Now estimated that Mexican cartels have executed more than 160k since 2006. Decorated Air Force veteran Dave Grusch now a whistleblower, claims recovered UFO ships and creatures a reality for decades! RFK Jr. blames 36 million kilograms of weed killer Atrazine applied to crops annually as the cause of sexual dysphoria and birth dearth! Had enough? 😊

David Rubenstein founder of the Carlyle Group gives a calm assessment of economics going forward. He sees two more moderate rate hikes then interest rates coming down in 2024, combined with moderate growth. As the stock Market recovery matures it will broaden. Yes, there are sectors and names where valuations are expensive. However by and large we think it is just the beginning of a very productive period for investors. Initial public offerings have been nonexistent. We are once again amazed by the value and opportunity that presents itself in todays securities markets. There are baskets of Real Estate Trusts yielding more than 12%, also large numbers of former glamour growth companies trading at single digit multiples and low PEG ratios. The current excitement and hype surrounding Artificial Intelligence is warranted. Software and hardware capabilities are expanding exponentially. Another dynamic cycle has reaffirmed confidence in our investment approach. Broad diversification and separately managed accounts allow our clients to participate in opportunities not available with standard investment fare. Going forward the Geopolitical drama will only increase. Public financial markets will not be for the faint of heart. Dramatic price swings are here to stay. However, for those with conviction and good guidance the opportunity is large. The equity markets have become less efficient, prices less representative of underlying fundamentals. That spells opportunity! The phrase shooting fish in a barrel comes to mind but that would be brazen. There are too many variables beyond our control. Let us know if we can help. Questions/consults, real estate, and employee benefits.

Cloak/abq

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