Market In A Snap! November 28th – December 2nd, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5004,071.71.13%-14.57%
Nasdaq Composite11,461.52.09%-26.74%
Russell 2,0001,892.841.27%-15.7%
Crude Oil$80.344.95%6.48%
US Treasury 10yr Yield3.494%  

Source: Wall St. Journal

Market Recap

Fed Governor Powell gave a speech on Wednesday laying out the current challenges in bringing inflation back down towards its 2% “ish” target (1).  In general, the tone of the speech was hawkish (see the link below if you want to read it).  However hawkish he appeared for the bulk of the speech, traders reacted very positively to his closing paragraph.  Mr. Powell mentioned that given the full effects of the rapid increases in interest rates are yet to be felt in the economy.  It was this sentence that got traders racing to press the buy button. “It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down”.

The Nasdaq Composite rose nearly 5% on Wednesday alone. It kind of shows you how the market is desperate for some comfort that rate hikes are coming to an end.  It wasn’t only the US equity markets that reacted positively.  Credit Markets, specifically longer maturity bonds rallied, with the yield on the 10-year US treasury note dropping below 3.5%.  It was over 4.2% less than a month ago. That may not seem like a lot, but it is.  With that, the US dollar weakened, and international equities responded positively. 

The employment data released Friday kind of confirmed what the Fed was saying about the full effects of rate increases still not fully reflected in the economy.  Economists were predicting 200,000 jobs added for November. It came in at 263,000, signaling a pretty resilient labor market. (2)

Yet, on the corporate earnings side, analysts are sharpening their pencils and reducing their earnings targets for corporate America in Q4.  According to FactSet, analysts have lowered their Q4 earnings for the S&P 500 by 5.6%.  Historically, the average decline is around 2.1%.  This decline was larger than the 5-year, 10-year, 15-year and 20-year average.  Only two sectors had positive earnings growth estimates, with energy leading the way. (3)

What does this all mean?  First and foremost, the economy is slowing.  Inflation is lasting longer and straining household budgets.  The stock market is not pricing in a recession.  Economists are still all over the spectrum.  Some see a recession coming in 2023 while others see the economy “just missing” a recession.  Regardless, when earnings decline so do the multiples investors are willing to pay for those earnings.  Investors love to pay high multiples for growing earnings.  They pay less for slowing earnings, and even less for declining earnings.  The weighted average forward (i.e., 2023) Price to Earnings multiple on the S&P 500 is around 17 times. If earnings start to really come down, the multiple could easily approach 15, if not lower.  That could mean a tough year ahead for the markets, despite already enduring a tough time this year. 

  1. https://www.federalreserve.gov/newsevents/speech/powell20221130a.htm
  2. https://www.wsj.com/?mod=wsjheader_logo
  3. https://insight.factset.com/larger-cuts-than-average-to-eps-estimates-for-sp-500-companies-for-q4-to-date

Chinese Protests Take a Bite out of Apple’s Stock Price:

China is still battling Covid-19.  Lockdowns are still in place in many parts of the country. People are tired of it. Many have taken to the streets to protest the never-ending lockdowns.  Apple relies on China for a large portion of their iPhone production.  Q4 shipments could be down close to 15 million units.  Some analysts have even mentioned the unthinkable; a potential revenue decline in 2023.  Granted, Apple has had slight revenue declines in the recent past, but the stock wasn’t as richly priced as it is today.  It currently trades for 24 times earnings.  A pretty rich premium to the S&P. This premium has been warranted in the past.  You can even argue that it may have been valued too cheaply in 2015.  Apple is a large component of all three of the major US indices.  It is owned and loved by many analysts and individuals.  It has made many people very wealthy.  Apple’s market cap is $2.35 trillion now.  It was valued at nearly $3 trillion in early January.  In January of 2106, it had a paltry (sarcasm noted) market cap of $570 billion.  That is a ton of wealth creation. It’s been the largest component of the S&P 500 since 2011!  That is a long time.  Before that, Exxon Mobil was the largest, and held that post from 2005 until Apple took over the top spot.

We have been conditioned to believe that Apple will always be “Apple”.  No company has every dominated corporate America indefinitely. Zero!  The iPhone launched in 2006 when Apple had a market cap of roughly $60 billion.  Since that launch, Apple remained a product innovative juggernaut. The new Mac laptop, the iPad, the Apple watch. All amazing products that have changed lives. That pace of innovation is likely finite. Apple will likely remain one of the larger Corporations in America for a while, but don’t expect the same share price growth that we’ve witnessed over the past 15 years. 

https://www.wsj.com/livecoverage/stock-market-news-today-11-29-2022/card/apple-stock-falls-after-analyst-s-iphone-warning-38Ul4JdPl3YUXSLvXyqh?mod=Searchresults_pos5&page=1

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! November 14th – November 18th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,965.34-0.69%-16.80%
Nasdaq Composite11,146.06-1.57%-28.76%
Russell 2,0001,849.7-1.75%-17.62%
Crude Oil$80.09-9.73%%6.31%
US Treasury 10yr Yield3.829%  

Source: Wall St. Journal

Market Recap

After an explosive week in the markets last week, it was no surprise to see the markets take a bit of a breather this week.  We did get some more encouraging inflation data this week, with the US Core Producer Price Index dropping below 7% for the month of October. On Friday, we got US Existing Home Sales numbers, and, as expected, they were lower.  Sales were down almost 6% for October and nearly 30% for the year. These are not prices, just sales of actual homes.  With mortgage rates near 7%, the market has all but frozen over in many parts of the country.  Both buyers and sellers seem to be in a holding pattern, with neither willing to budge. 

Equity markets have had a nice bounce from the end of September, with the S&P 500 gaining a little over 10%.  US Small caps fared slightly better, nearly notching a 11% gain.  Even the fixed income markets have been in positive territory, with the US Bond Aggregate Index returning a little over 1.25% since October 1st. Investment Grade Corporate Fixed Income securities did even better, returning nearly 4%.  Part of this can be attributed to the declines seen in the 10 Year US Treasury Note, which have seen their yields decline from the 4.3% area down to roughly 3.8%.  That seemingly small move in yield is meaningful, both for longer maturity bonds and equities. 

We are a solid week and half past the mid-term elections, and there were some surprises. The Democrats seemed to defy the odds and retain control of the Senate.  It will either be 50 or 51 seats, depending on the Georgia election runoff results. But that won’t matter, as the Vice President has the deciding vote in the Senate.  Many of former President Trump’s endorsed candidates didn’t fare very well.  The Republicans will have an interesting decision to make when it comes to who will represent the party in the next national election.  Governor DeSantis of Florida had a monster victory and looks poised to be a potential candidate. Mr. Trump announced that he’ll be running again. We shall see.

We haven’t mentioned much about crypto currencies, but the sudden unraveling, and subsequent bankruptcy, of FTX this week has splattered the headlines and warrants a paragraph.  Pushing aside your thoughts on crypto, what we should focus on is this pervasive defect in our DNA that continues to get people into (financial) trouble.  Part of it is greed yes, but more importantly is the assumption that successful people who are investors have done the due diligence to vet the investment and that should be good enough for the rest of us.  From what we know at this point, there appears to be a fair amount of fraud.  How some of this was overlooked by some heavy hitters is always amazing to me. According to Forbes, at least 20 billionaires got caught up in it.  Once one person has apparently “done the work”, the next person says they have too, but its really basing their opinion from what they heard from that person. As the chain of these people grows in length, it appears that everyone has vetted it, and, if its good enough for the first 10 billionaires then it should be good for the next ten.  It reminds me of the fraud that happened in San Diego last year. Gina Champion-Cain ran an enormous Ponzi scheme, purportedly investing in liquor licenses and promising a rate of return that was much better than was available from other types of private lending.  Some smart people got left holding the bag.  I know this firsthand because her investment opportunity was shown to me while I was at my previous firm.  I had spent months trying to vet her business. I met her twice. She didn’t seem like a fraud. But then again, who does until they’re caught?!  She couldn’t answer some very basic questions of mine, so my due diligence just kind of hit a wall and I had pushed it to the sidelines until she and her team provided the information.  Well, it never came. The next time I heard her name was on local TV one morning announcing her arrest. I’d be happy to share the story in greater detail at our holiday party if any of you get bored (which you won’t! Ha-ha).

https://www.forbes.com/sites/mattdurot/2022/11/11/at-least-20-billionaires-got-burnt-by-sam-bankman-fried-and-cofounder-gary-wang/?sh=6819b4be6c52

China Continues to Struggle with Covid:

New Daily Cases Jump as the Government lifted some restrictions.  Without a vaccine, lockdowns have been the main line of defense.  They seem to be, according to a Wall Street Journal article, in a battle between excess measures and irresponsible loosening of those excessive measures.  There is just no easy answer.  It is tough for Americans to imagine that the pandemic still exists. We’ve emotionally moved on from it, but it is very real in other parts of the world. 

https://www.wsj.com/articles/chinas-new-daily-covid-cases-jump-above-24-000-11668762243?mod=world_major_1_pos2

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! November 7th-November 11th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,992.935.9%-16.22%
Nasdaq Composite11,323.338.10%-27.62%
Russell 2,0001,882.744.60%-16.15%
Crude Oil$88.86-4.04%17.8%
US Treasury 10yr Yield3.842%  

Source: Wall St. Journal

Market Recap

The market finally got the inflation data it so desperately wanted on Thursday.  The Consumer Price Index (“CPI”) clocked in at 7.75% annualized for October.  It was a disappointing 8.2% the previous month.  Markets participants witnessed the best day for equities since April 2020.  The Nasdaq Composite was up a whopping 7.35%.  Even the fixed income markets had a huge day, with the Bloomberg US Aggregate Bond Index gaining nearly 2%. That is a massive move in the credit markets.  As you can see from the chart above, all the major US indices are down for the year and still have a way to go.  It should be noted that we are still in a bear market and rallies (which are simply called bear-market rallies) are often more dramatic than rallies during a bull market.  One day doesn’t make a trend, but it goes to show you how sitting out of the market when you have a long-term time horizon can be costly to your returns.  We’ve cited on more than a few occasions how sitting on the sidelines for only a handful of days can have really hurt your returns.  Just think of Thursday’s crazy day.  If the long-term average annualized return for the S&P 500 is ~ 9 to 10%, missing a 6 or 7% return day can all but dash your hopes for the year.  Many of us want to time the market.  This should show you the perils of doing it wrong.  And, worse than that, if you did seem to time it right once, you may be emboldened to do it again…and again.  Eventually it will catch up to you. It is time “in” the market that matters most.  Granted, it also must include having a diversified portfolio that matches your time horizon.

We can’t forget to mention two other important news items. One, is the mid-term elections. It’s been a closer race than many thought. As of Friday, many races are still too close to call.  Odds are still in favor of the Republicans taking the House.  In the Senate, the Democrats have gained a seat and it’s coming down to the wire. If Republicans take both chambers, it will create gridlock which is normally favorable for markets. The other newsworthy note was that Ukrainian forces successfully pushed Russian troops out of Kherson, which was the only regional capital in the south of Ukraine that Moscow had seized.  The Ukrainian resolve has been impressive.  Hopefully, the conflict is closer to the end than the beginning.

https://www.wsj.com/articles/many-house-races-too-close-to-call-as-republicans-make-gains-11668162601?mod=us_lead_story

https://www.wsj.com/articles/ukrainian-forces-gain-on-kherson-as-russia-retreats-11668158517?mod=world_lead_story

Traditional Energy Companies are in the Green Energy Game:

Koch Industries, one the largest private companies in America, is getting into battery technology.  Many of us think of traditional energy companies as climate deniers or evil entities hell bent on destroying our planet in pursuit of profit.  I believe that, in the end, they are energy agnostic. They see where things are going. They want to be suppliers of energy in whatever form the market wants.  In the case of Koch’s investment in battery storage, its not for electric vehicles but rather for storing energy transmitted from wind and solar farms.  Both wind and solar can be intermittent. Having the ability to store energy in large batteries can go a long way to making renewable energy a dependable source for the US power grid. 

Image: wsj.com

https://www.wsj.com/articles/koch-teams-with-startup-to-build-giant-battery-factory-in-georgia-11668131957?mod=business_lead_pos4

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! October 31st – November 4th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,770.55-3.35%-20.89%
Nasdaq Composite10,475.25-5.65%-33.04%
Russell 2,0001,799.87-2.55%-19.84%
Crude Oil$92.524.71%22.64%
US Treasury 10yr Yield4.167%  

Source: Wall St. Journal

Market Recap

As expected, the Federal Reserve raised interest rates another 75 basis points this past Wednesday.  As we’ve stated countless times in previous weekly updates and on our podcasts, it should not have come as a surprise.  Inflation needs to come down. Until it does (in a statistically meaningful way), nothing is going to change.  We should welcome some kind of normal interest rate environment anyway.  The zero-interest-rate-policy was a sugar rush for risk assets. It felt good but it wasn’t healthy.  We need a return on our money when we park it in a savings account. We need to be incentivized to save. Saving is good. A healthy economy relies on savings.  Banks lend those savings to people who want to borrow and invest in manufacturing and the service industry.  Printing money and offering no rate of return on it just promotes speculation.  That rampant money printing is hopefully of a bygone era. In the meantime, the Fed has to battle inflation.  8% is much too high but getting back down to 2% may be a tough target to reach in the short term.  Unemployment will have to rise.  The economy will continue to slow and possibly contract.  Runaway home prices will be another thing of the past.  Getting back to some kind of normal economy is hopefully in the cards.  It’s been so long that many of us don’t know what a normal economy looks like. 

Source: Google Images (Denis Tangney Jr / Getty Images)

Unless you are a diehard fan of baseball, willing to endure 162 games spanning the spring and summer months, fall ball is where its at.  There’s something about it that appeals to me and yet, I can’t quite put my finger on it. I loosely follow it during the summer, but when the pennant race is on it has my attention.  Maybe its seeing ball players act like kids again.  The enormous salaries become an afterthought.  It’s as thought they are back in their neighborhood makeshift baseball field dreaming of winning a world series with one swing of the bat.  Its great seeing everyone, players and fans alike, loving the chance to call themselves World Series Champions. 

As you have likely asked yourself with previous weekly updates, what does this have to do with investing!?  Well, truth be told, not much really.  Not directly anyway.  Like baseball, investing is a marathon, not a sprint.  Baseball owners hire general managers to run the team.  Every team has needs. Some need better pitching.  Some need a better short-stop.  The team needs to stay healthy and hopefully be able to compete down the stretch and earn a playoff spot.  Over 170 games are played, when you add in spring training, just to make it to the playoffs.  And from there, it becomes a bit of a sprint, where emotion, momentum, and some luck can get you to the world series.  That annual journey takes more than six months of dealing with injuries, trades, and weather that can cut your season short at any point. And, if it does, there’s always next year.  Teams are often building towards a run for a championship ring or dismantling their team and rebuilding for the future.  Everything about baseball is geared towards the long-term. Only during that fall push for a championship does all that long-term planning come to fruition.

Investing is similar.  You need a plan.  You need a long-term horizon. You’ll need some flexibility because things will change.   At times, reaching your goal may seem like its agonizingly far away. Eventually, it’ll be within reach.  So, like the long baseball season, enjoy the journey.  Isn’t life all about the journey anyway? We worry about the destination, but there isn’t a destination without a journey.

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! October 24th – October 28th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,901.063.95%-18.15%
Nasdaq Composite11,102.452.24%-29.04%
Russell 2,0001,846.926.01%-17.41%
Crude Oil$88.373.8%17.12%
US Treasury 10yr Yield4.016%  

Source: Wall St. Journal

Market Recap

The last full week of October is in the books and what a week it was. It was an earnings-extravaganza. It was also full of economic data. It would be fair to say that both earnings and economic data were mixed. Some good stuff in there. Some OK-is stuff and some more than not-OK-ish stuff.

GDP came in at 2.6% for the third quarter. Not bad. Certainly not recessionary. At least not yet. Housing was THE big drag. Housing is having a tough time finding its footing (yes, pun intended). Homebuilders are pulling back on construction. Buyers are increasingly skittish, as are the banks’ lending to them. Sellers are living in the past. Living in a bygone era of being able to sell a house above ask, inspections waived, and within days, if not hours. That is what happens when mortgage rates triple! Yes, triple. Mortgage rates topped 7% this week. It has been decades since a seven handle entered the conversation.

Other economic data came in this week. Without boring you on the minutia of all the data points, suffice it to say that things aren’t collapsing. We’re still in expansion territory, however the rate of expansion is slowing. Consumers are slowing down when it comes to buying “stuff.”  And this is reflected in sentiment indicators as well as corporate earnings. Google, Microsoft, Amazon, and Facebook, all disappointed investors this week. The biggest miss came from Facebook, and Amazon. Apple was the lone bright spot in tech-land. We love our devices and all the attachments that come with living in the Apple biosphere.

There were plenty of companies that had solid earnings like Caterpillar. The maker of enormous yellow machines that you see building roads, hauling stuff to and from mines is widely considered an economic bellwether. They couldn’t’ be busier. The company grew revenues by 21%, earnings by 49% and posted operating margins that were well above the level seen in the same quarter last year. It kind of flies in the face of the constant recessionary drumbeat we’ve been reading about.

So, what’s the point? Glad you asked. We need to be aware that the world of business is dynamic. We can’t be conditioned to believe that what worked for the previous 10 to 15 years will work the same way over the next decade or decade and a half. It might shock some readers to read this but the ten largest companies in American today will not likely be the ten largest in a decade from now. Look at Facebook. Or Netflix. Both were massive disrupters in their industries. And investors made boatloads of cash. Take Facebook. Was basically THE only social media company for over a decade. They actually HAD to buy Instagram. It was too big a competitive threat not to. Now you have TikTok, Snapchat, and a host of other social media sites. When Netflix was in its infancy, it completely changed the way we consumed movies. Blockbuster was stuck in the old world with no way to survive. Now you have Amazon Prime, Disney Plus, and a host of other platforms that compete with Netflix. Netflix redefined that industry, and again, investors were paid handsomely for it. That is now over. The heyday of triple digit subscriber growth and buying content for peanuts is long gone. That is not to say Netflix is a bad company or that they won’t earn decent returns for investors in the future. They simply won’t deliver anywhere near the returns they did in the past. Let’s not cling to the past. Let’s move on. Adapt. Understand that capitalism is the machine that eats itself in order to nourish, replenish and strengthen. 

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! October 17th – October 21st, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,752.754.74%-21.26%
Nasdaq Composite10,859.725.22%-30.59%
Russell 2,0001,742.243.56%-22.41%
Crude Oil$85.13-0.49%12.83%
US Treasury 10yr Yield4.224%  

Source: Wall St. Journal

Market Recap

Equity markets capped off a strong week Friday by rallying immediately after the Wall Street Journal reported that there might be some deliberation amongst Fed officials about the path of interest rates after the expected 75 basis point hike at the next Federal Reserve Open Market Committee decision on November 2nd.  This kind of information must be taken with a huge grain of salt. For one, the Journal was quoting one governor’s comments that was made weeks ago. It just kind of smells. Yes, Fed officials are always being asked for a comment. And yes, they all have egos. They all want to be heard. The media will put all these sound bites, and hand-picked data points into their pretzel-making machine and spit out its own twisted narrative. I’m not saying it isn’t factual. It’s just misplaced. In the end, it’s just conjecture. Guessing. Hoping. Maybe even praying. However, there will come a time when the Fed stops raising interest rates, and possibly even cuts rates. Today’s action shows how eager the market is for a Fed pivot.

https://www.wsj.com/articles/fed-set-to-raise-rates-by-0-75-point-and-debate-size-of-future-hikes-11666356757?mod=hp_lead_pos2

The IRS Makes Changes, Thanks to Inflation:

Look for meaningful changes to tax rates in 2023, thanks to a four-decade-high inflation rate. Income tax brackets, standard deductions, annual gift tax exclusions, and even estate tax thresholds are all moving up. All of them are increasing by 7%. Individual taxpayers in the 22% federal tax bracket will see that limit increase from just over $89,000 to $95,375. The standard deduction for married couples will jump to almost $28,000. The annual gift tax exclusion increases $1,000 to $17,000. The estate tax limit jumps to $12.92 million from $12.06 million per person, and nearly $26 million for a married couple.

 For us working stiffs, we should see lower tax withholdings as soon as this coming January.  

photo: wsj.com (Chip Somodevilla/Getty Images)

https://www.wsj.com/articles/inflation-causes-irs-to-raise-tax-brackets-standard-deduction-by-7-11666116021?mod=article_inline

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! October 10th – October 14th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,583.07-1.55%-24.82%
Nasdaq Composite10,321.39-3.11%-34.03%
Russell 2,0001,682.4-1.16%-25.07%
Crude Oil$86.08-8.21%%13.39%
US Treasury 10yr Yield4.008%  

Source: Wall St. Journal

Market Recap

To say it was another volatile week for equity markets must seem like a bout of déjà vu. Stocks fell to start the week, fell even harder Thursday morning when disappointing CPI data was released, only to completely reverse course and finish higher. In fact, the Dow Jones Industrial average fell 500 points in the morning and rose a whopping 800 points later in the day to mark the largest single day swing (in points, not %) on record. The week finished with the broader markets finishing lower Friday. Given the stickiness of inflation and the increased probability of a more aggressive rate hike in December, it wasn’t a surprise. The Fed is 100% committed to getting inflation under control and that means getting as aggressive as possible with rate hikes. With CPI coming at 8.2% for September, it was in line with the previous month but higher than the markets wanted. The good news was that supply chain issues have eased, sending core inflation across the goods sector down to 6.2% or so. Unfortunately, inflation in the services sector more than made up for that decline. You can chalk it up to wages. Service sector jobs have seen steady wage growth. The Fed is aimed at increasing unemployment. The neutral rate of unemployment is about 4%, meaning that is what the Fed sees as “normal”. Anything lower means the economy is running a little too hot. Chairman Powell and his team take out their blunt instrument called “interest rate policy” and try to bludgeon it. Raising rates should slow economic activity. Slower economic growth should slow job growth. Slow job growth and you hope you can dampen the upward pressure on wages. Which, in turn, should slow inflation. That’s the playbook. The Fed is willing to accept higher unemployment and even a recession.

Over the next 30 days, we’ll have a pretty good handle on corporate earnings for the third quarter as well as guidance for the fourth quarter in addition to the mid-term elections.  Earnings are still expected to grow, albeit at a much slower rate that projected three months ago. The Republicans are expected to take the House and possibly the Senate. That would likely spell gridlock the remainder of President Biden’s term. Gridlock is actually good for markets.

https://www.wsj.com/articles/global-stocks-markets-dow-update-10-14-2022-11665745241

The San Diego Padres Roster – an Analogy for Your Investment Portfolio:

The Padres’ pitching staff is stellar. No doubt. Their closer, Josh Hader has, in my mind, the most stressful job on the team. He sits around all game until, if they’re winning, gets the call in the 9th inning to preserve the victory. Eight innings of baseball determines whether he’ll be needed or not. In total, He only pitched 50 innings during the regular season. The entire regular season has 1,458 innings, not including any extra innings. So, Hader is used less than 4% of the time yet his role is as important, if not more, than most of his teammates. And what did it cost the organization to have a pitcher take the mound for 4% of the time? $11 million this year. Seems like a lot, but it’s only 4.6% of the entire payroll. I guess you could say his playing time vs his salary is somewhat in-line. Interesting you might say, but what does it have to do with an investment portfolio? Plenty.

Baseball, like investing, is dependent on statistical analysis. Building a team is like building a portfolio. You can’t play without a pitcher, or a catcher, or first basemen. You need 9 players on the field. From there, you need the best player for that position that offers the best risk/reward in addition to how well he fits into the team’s game by game strategy. The manager is playing a live game of chess. He starts with a gameplan but has a set of alternate moves he can make when conditions change. For example, if the game is close and the opponent’s best hitter is up next, it might require a pitching change. That kind of thing.

It’s not dissimilar to investing. To do it correctly, you need a starting lineup. Stocks, Bonds, Real Estate etc. The next task is to figure out how much of each? Too much of one asset class causes a hole in your lineup. If your investment opponent is inflation, the kind of stocks and bonds you need are slightly different than when your opponent is an economic recovery. You need a long-term game plan as well as the ability to make changes when conditions necessitate it.

Like the importance of Josh Hader’s 4% contribution to the team is, so might your 4% withdrawal rate be as equally important. Some changes required might seem small, but they can have a meaningful impact. It’s all a balance.

https://baseballsavant.mlb.com/savant-player/josh-hader-623352?stats=statcast-r-pitching-mlb

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! October 3rd – October 7th

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,639.661.51%-23.64%
Nasdaq Composite10,652.40.73%-31.91%
Russell 2,0001,702.152.25%-24.19%
Crude Oil$92.7616.33%22.94%
US Treasury 10yr Yield3.891%  

Source: Wall St. Journal

Market Recap

It was another Yogi Berra week. Yogi was famous for his one-liners. “It’s like déjà vu all over again” is one his most quoted. It’s an appropriate quote for this week’s market behavior. The market keeps trying to front-run economic data that would support a Fed pivot. Pivot? Yeah, pivot, meaning the Fed would see fit to stop aggressively raising rates. Lower rates should be good for risk assets. Or at least a stop to the rate hike path they’re on. Today’s employment data hit traders overt head again, showing resilience in the face of a tough economic environment. The labor market isn’t slowing enough, and people are leaving the job market, decreasing the labor participation rate again. Its just not what traders wanted. As a result, the dramatic rise in markets on Monday and Tuesday were almost erased. We’ve witnessed this whipsaw action for months now.

We are close to kicking off 3rd quarter earnings season. Traders are waiting with bated breath for the results. Earnings are slowing…at least that’s the prediction. How much slower might be one question. An even more important question would be what does the fourth quarter look like? What kind of guidance might the over-paid corporate CEOs give? It would be a stretch to think they’ll be upbeat. Cautiously optimistic maybe? Possibly. If you’re an energy executive, earnings should be good, and the message should be positive. If you’re a consumer discretionary CEO, the mood may not be so rosy. CEOs in different industries will have their own set of challenges and opportunities to deal with, and more importantly, communicate with investors. How the market respond is really a matter of what expectations are going into earnings versus what expectations are after earnings. At a high level, it isn’t a stretch to think there’s at least a hint of pessimism heading into earnings.  If things are even less pessimistic, the markets could rally. If investors can adjust their lens to look at the bigger, long-term picture, one quarter will look rather blurry and unimportant relative to the long-term view.

Comparing Personal Finance to Oil Companies?

Oil tycoons of the past never turned down the opportunity (& risk) of digging a dry hole, so the saying goes. How can the behavior of oil companies teach us about personal finance? Plenty apparently. Years ago (specifically – 2011 to 2014) oil prices remained steady at $100 to $110 per barrel, just as we’ve observed this year.  Despite those prices, oil companies bled money. Free cash flow was negative. Free Cash Flow for oil companies is really the same as a household calculating how much money was saved over the year when comparing income to expenses. Households may have been making good money, and even received a raise or two along the way yet this bump in income was more than offset by an even higher level of spending. Hence free cash flow negative.

Great, but where is this going? Things changed….for the better. And it didn’t take a raise. It just took financial discipline. Oil companies got religion. Financial discipline was forced on them. The capital markets (the people who have the money to invest or lend to energy companies) were tired of handing over cash to spend-a-holics. Taking all that cash from drilling and buying more land, digging dry holes, and applying a rinse and repeat behavior became too much to take.

The message was clear. “We are demanding that you get your financial house in order.”  Take that cash flow and do a few things with it. One, pay down your high-cost debt and get your debt levels to an appropriate level. Two, start paying a higher dividend. Three, buy back some of your shares. And then, and only then, go and invest some of that excess cash into replenishing your reserves. And that’s exactly what has happened. Financial discipline, whether forced upon you or from a change of behavior stemming from the stark realization that the current path is unsustainable is what the doctor ordered. See the parallels?

If you look at the chart, there are three pieces of data. The grey area shows the production of oil over the past 12 years. The blue line is the hypothetical growth of investment in the S&P 500 Index. The orange line is the hypothetical growth of investing in the energy sector of the S&P 500. See how the blue and orange lines diverged around 2014? Consistent negative free cash flows from energy companies had a material effect on your money if you invested in those companies. Only after they got religion and started behaving like the stewards of capital they should have been all along, did that sector start to earn decent returns. Getting a household to employ the same game plan will create the same thing. More money left over to invest or save for a rainy day in addition to not depleting your assets so they can compound will get households looking more like the right side of the chart.

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! September 26th – September 30th

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,585.62-2.91%-24.77%
Nasdaq Composite10,575.62-2.69%-32.40%
Russell 2,000 1,664.72-0.89%-25.86%
Crude Oil$79.670.3%5.61%
US Treasury 10yr Yield3.813%  

Source: Wall St. Journal

Market Recap 

It was another down week for markets.  September has been, historically, one the worst months, if not the worst month, for stocks, and the last week, in particular, being the worst week of the year.  When you couple that with rising mortgage rates, Hurricane Ian, rising bond yields, you have a recipe for rough waters.  On top of that, unemployment claims came in lower than forecast, signaling to investors that the Fed will keep its foot pressed to the floor on its rate hike pedal. 

As we like to preach to our clients, it’s just math.  When markets are expensive, future expected returns are lower. When markets correct, the math flips. Future expected returns increase. Over the medium to long term that has always been the case. 

Hurricane Ian and Your Investments:

In no way are we minimizing the devastation that Hurricane Ian caused in Florida, but this photo is probably what the stock market feels like.

Hurricane Ian made landfall on the west coast of Florida this week causing massive damage to the state.  The storm surge and ensuing rainfall from Ian as it made its way across central Florida caused upwards of $40 billion in insured losses according to early estimates reported in the Wall St. Journal.  It could shave off 0.3 percentage points off the country’s Q3 economic growth.  As someone who lived in Florida, the dearth of major hurricanes over the past decade had really created a lot of complacency amongst residents. Too many false alarms.  The boy who cried wolf syndrome.  

In reality, the long-term economic effects are really not that much.  Everything gets rebuilt, newer and (hopefully) better. This is not intended to downplay the emotional damage inflicted on those affected Floridians.  Natural disasters leave indelible marks on the psyche.

All that aside, there are important investing lessons that can be learned from Hurricane Ian.  The two that come to mind are preparedness and diversification.  Many residents weren’t equipped to weather the storm. They didn’t have proper storm shutters, or back-up power sources and even decided to stay put, not understanding the impending risks barreling across the Gulf of Mexico.  What about diversification?  I know firsthand of someone who had a home in Ft Myers along with three investment properties that he relied on as income in retirement. All in the same location. Parts, if not all, of those properties are scattered across the state in various forms of sticks and twisted metal. Prime residence gone.  Income gone.  Do you see the parallels?  In investing, you need to prepare for market crashes like you’d prepare for natural disasters that will happen when you live at sea level along the coast. You need cash on a monthly from your investment portfolio?  Make sure your withdrawal rate is conservative. Make sure you have shorter-term, safer investments that you can draw from over the next year or two.  Lastly, know that owning a bunch of investments doesn’t mean you hare diversified.  Make sure those investments are providing you with exposures to various risks and offer different return characteristics, so you don’t end up losing a significant portion of your nest egg because it was all concentrated in the wrong asset class.

https://www.wsj.com/livecoverage/hurricane-ian-florida-updates-live-2022-09-29?mod=hp_lead_pos7

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! September 19th – September 23rd

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,693.23-4.65%-22.51%
Nasdaq Composite10,867.93-5.07%-30.53%
Russell 2,0001,679.59-6.60%-25.20%
Crude Oil$79.43-6.99%5.28%
US Treasury 10yr Yield3.69%  

Source: Wall St. Journal

Market Recap – The First Week of Fall”ing”:

Major US equity indices sold off hard this week, with the Dow Jones Industrial Average putting in a new low for the year. It hasn’t been just the US. Global growth fears that have roiled markets across the globe. Unfortunately, the only two things not falling are mortgage rates and inflation (well, not falling fast enough). Mortgage rates are nearing 7%. That ain’t a misprint. Blame it on inflation. Blame it on Powell. Blame it on Rio. Whatever the reason, stuff’s getting expensive.

Fed Governor Powell has a simple message for the consumer. Stop buying stuff! The sooner we bring down inflation the sooner we can get out of this mess. Every time the market rallies, I can just picture Mr. Powell in front of his Bloomberg terminal thinking, “Oh yeah?!  You think I’m bluffin’?!.”   He’s told us we’re going to feel pain. He’s told us inflation is enemy number one. He’s told us he’ll accept a recession. He’s told us he’d accept higher unemployment! And yet, we are bewildered! About what? How much clearer can he be? INFLATION HAS TO COME DOWN. AND, UNTIL THEN HE’S GOING TO ADMINSTER THE MEDICINE WE ALL KNOW WE NEED BUT DON’T LIKE UNTIL WE’VE RID OURSELVES OF THE INFLATION DISEASE. Like any Doctor, he doesn’t know when it’ll take effect, but he knows it will eventually cure the disease.

Given current mortgage rates, homes are expensive. Prices don’t yet reflect 6.5% to 7% rates. Yet, stocks and bonds, relative to where they were priced a year ago, are cheaper. However, we all see the two differently. If homes were priced daily on an index like stocks and bonds, they would seem riskier. Conversely, if stocks and bonds were priced like homes, they’d look less risky. Do you see the ambiguity here? Buying a home may be an emotional experience, but it isn’t much different than buying stocks and bonds. The only real difference is that there is a daily TV channel dedicated to reporting the ebbs and flows of stocks and bonds and experts opining on the next calamity around the corner. We all know that renting a home and putting all your savings under your mattress is not a financial plan. Owning a home that you can afford, spending less than you earn, and investing in stocks and bonds over a long-time horizon, and not buying high and selling low will get you to financial independence, yet we seem to face some existential crisis that challenges this fundamental understanding at precisely the worst time.

Source:  The New Yorker:  Artist: David Sipress

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.