Revenge of the Have Nots

Well that did not take long. Last quarter we talked about the haves and the have nots. The market narrowed dramatically and technology, specifically AI-driven technology, was the only area that produced positive results. We knew this was not sustainable, but we had no idea it would change so dramatically so quickly.

If AI is the coolest place to be, then utilities must be the most boring, but not this quarter. For some time now we have pointed out the lack of return in utilities and how it makes no sense whatsoever: These are strong companies with solid dividend yields, as has been the case historically with utilities. However, there is no universe in which we are all driving electric cars and having our work done for us by AI that does not include an enormous increase in electricity production.

Utilities must grow significantly to keep up with the demands of the all-electric future. It seemed like they would lag forever, but this quarter they finally got the love they deserve with a 19 percent return. We often say that it is easy to know what the market will do, but nearly impossible to know when it will do it. Any investors who patiently waited for utilities to do what they should were finally rewarded.

To read the full report, please download the PDF.

~Third Quarter 2024

The Haves and the Have Nots

The headline is simply that the S&P 500 is up once again, yet this misses the actual story of the market in dramatic fashion. We have seen narrow markets before: The Nifty Fifty in the early 1970s; the dot-com boom of the late 1990s; the FANG stocks in the mid 2010s. However, I do not recall ever seeing a quarter when the Russell 1000 Growth Index was up over 8 percent while every other US Russell equity index was negative.

This time seems different than those other times in that the AI-driven Magnificent Seven are not in bubble territory; their businesses are growing at a pace close if not equal to their stock price. This time it seems like the market just keeps overlooking everything else.

Part of this is the same story of Wall Street continuing to see a recession behind every corner, but the actual data keeps saying that is not happening. The other parts of the market, small companies and value companies, have to close the gap. Reversion to the mean is one of the strongest forces in financial markets.

As Keynes famously said, “The market can stay irrational longer than you can stay solvent.” Who knows how long this will last, but it can’t last forever.

To read the full report, please download the PDF.

~Second Quarter 2024

Inflation is back in the news. The latest reading of the consumer price index (CPI) came in at 3.5 percent. Does this mean all is lost in the Fed’s fight and it is time to sell everything? No, of course not. The worry on Wall Street is that higher inflation means that interest rates will go higher, and this will drive stock prices down. We have consistently made two points which still hold true: The first is that it should surprise no-one that the last 1 percent of inflation will be the most stubborn.

This rise from 3.2 percent to 3.5 percent does not mean that the battle is lost, and the Fed must keep rates higher. Nothing in nature goes in a straight line and inflation will always vary from month to month.

The other point we have made is that interest rates are simply trading in a range. We were near the lows of that range when I wrote that and sure enough, now we are heading to the top of the range. Interest rates on the 10-year Treasury are trading around 4 percent; they have gone as low as 3.8 percent and as high as 5 percent and are now near 4.5 percent. This is closer to the top of the range, and they will likely head back down closer to 4 percent once more. Could they break out of the range and keep rising? Anything is possible, but it is not likely. As of now, nothing has really changed. We remain in a range, and we are still on course.

To read the full report, please download the PDF.

~First Quarter 2024

Patience is a virtue.

Patience is a key ingredient to long-term investing success. This past year we have been recovering from the 2022 bear market, and it has been a frustratingly slow process. Things started off looking better, yet it was only seven stocks that were going up while everything else went nowhere or even down. The wind finally came back around, and we ended 2023 with a strong rally. We predicted this and were well positioned for it.

So, how do we know? Experience certainly helps, but there are fundamentals that can help too. Prudent investing is done from the bottom-up. This means we make investment decisions based on each individual investment. It is much easier to analyze a particular company and assess its future than it is to guess where the entire market is going. This is obvious to anyone who thinks about it for a second, yet the standard question we get is, “Where is the market going?” That is what the media focuses on, so that is what people think about.

This is also true in analyzing managers. We need to understand how they make investment decisions and if we believe they have a solid process and are able to execute efficiently. This is far easier than trying to understand what the market will do to them in the short run. That patience leads to long-term success.

To read the full report, please download the PDF.

~Fourth Quarter 2023

Aristotle vs. Galileo

Which will you believe, your sense of reason or your sense of sight? Galileo took two balls, one heavy and one light, and dropped them simultaneously to see which would hit the ground first. Before Galileo and his fellow pioneers of observational science the leading theory belonged to Aristotle who simply used reason to suggest that a heavier object will fall faster than a lighter object. That makes sense, but that isn’t what happened…and the science of Physics was born.

We continue to hear that higher interest rates are going to slow down our economy. It makes sense: higher rates make home mortgages and car loans more expensive. Rates on credit cards will be higher. It must have an impact, right? Logic may say yes, but observation says no. In the 3rd quarter, the economy grew at 4.9 percent, which is far and away the best growth we have seen since the first quarter of 2021. The same pundits who have been predicting recession for what now seems like forever are still at it, and everything is selling off. Rates are up, which means bond prices are down, and stock prices are dropping with them. Will this continue, or will we get a rally until year-end? It depends on the market siding with Aristotle or Galileo – because reason may say that high interest rates equal bad economy, but in reality, it just isn’t working out that way.

To read the full report, please download the PDF.

~Third Quarter 2023