• The stock market is filled with individuals who know the price of everything, but the value of nothing.

    Philip Arthur Fisher

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Iron Capital Insights

Our insights, reflections and musings on the most timely topics relevant to managing your investments.


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  • Iron Capital Insights
  • December 29, 2023
  • Chuck Osborne

Out with the Old, In with the New

We have written all year about the frustration of false narratives and a misleading S&P 500, yet it has ended on a much brighter note: Patience has paid off, and finally the onslaught of solid economic data paired with slowing inflation has made the bears change their tune. What will 2024 bring us?


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  • Iron Capital Insights
  • November 20, 2023
  • Chuck Osborne

Foundation

If I have a gift as an investor, it is to always question the narrative and favor reality. This trait, thanks to my parents, has served me well during my more than 30 years in the investment industry. It is also why I have found 2023 to be so frustratingly maddening. Yet it is Thanksgiving once more, and we have much for which to be thankful.


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  • Iron Capital Insights
  • November 3, 2023
  • Chuck Osborne

Listen Carefully

What was the most important moment in Jerome Powell’s post-Fed meeting comments this week? When a reporter asked about the Fed staff removing recession from their forecast, Powell responded, “It is hard to see a recession when one looks at the data.”


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  • Iron Capital Insights
  • October 3, 2023
  • Chuck Osborne

Aristotle vs. Galileo

Which will you believe, your sense of reason or your sense of sight? Today 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, so it must have an impact, right? Logic may say yes, but observation says no.


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  • Iron Capital Insights
  • September 21, 2023
  • Chuck Osborne

Broken Record

Wall Street is also a broken record today. The Fed met this week and held rates steady, but indicated that they will keep them where they are for longer than they previously thought. The market reacted negatively, and the pundits are once again yelling, “Recession is coming, recession is coming!” But is it?

  • Goodbye 2023 and hello 2024. To say that 2023 has been challenging would be a gross understatement, so I am not sad to see it go. A new year always brings hope for new beginnings.

    We have written all year about the frustration of false narratives and a misleading S&P 500, which has become dominated by just seven stocks. However, we must admit that it has ended on a much brighter note. Patience has paid off, and finally the onslaught of solid economic data paired with the slowing of inflation has made the bears change their tune. Of course, admitting that you are wrong is a very hard thing, so most pundits have moved from “a recession is certain” to, “we are headed for a soft landing.” What does “soft landing” mean? It means one can admit we are not headed into a recession while not admitting that he has been completely wrong for 18 months.

    Not only have we rallied, but it has been a broad-based rally to the end, unlike earlier in the year. We have been saying for some time that small company stocks look more attractive than the large technology stocks that have dominated in 2023, yet the market continued to ignore them, until they didn’t. Through December 19, the one-month return for the Small Value index is 12.72 percent, and for the Small Growth index it is 12.46 percent. The Large Growth index, which has dominated, returned 5.63 percent over the same period. Small Value, which we have been very keen on, is now up 14.45 percent YTD. Should it finish there, many will look back at 2023 and say, “Chuck, why the frustration? Yes, that is a lesser return than the S&P 500, but it is still pretty good. Don’t be such a sourpuss.”

    True enough, but this is what lay people often miss: the year-to-date return is now 14.45 percent, but 12.72 percent of that happened in just the last four weeks. This is how stocks actually move. They do not go up steadily at a 14.45 percent rate for 12 months; they go nowhere for long periods, and then they jump. This is both why it is impossible to time the market and why it is so tempting to try to time it anyway.

    We often say that it is actually fairly easy to know what the market is going to do, it is just impossible to know when it will do it. Small company stocks were too attractively valued to not eventually get some love, but they stayed that way for a frustratingly long time. This is why investing requires patience. It is good to end the year with that patience paying off.

    So, is this it? What will 2024 bring us? Many are saying that the market has come too far too fast and is too expensive. They are right if the market is defined as seven large stocks in the S&P 500. Interestingly, the S&P, led by those seven stocks, is slightly above where it was at the beginning of 2022, the year of the bear market. However, a well-diversified global stock portfolio that includes the S&P but also small companies, international companies, and value stocks, is still roughly 8 percent away from getting back.

    We are optimistic heading into 2024. We do believe the rotation away from large technology stocks and into everything else will continue. That may dampen the return of the S&P 500, but we don’t have to invest only in the S&P 500. We would not be surprised to see a January correction as investors take profits in what worked in 2023, but those proceeds are likely to go into the other areas of the market. That would be healthy.

    In the end, 2024 will be what it will be, and we will have to face the reality of what is even if that isn’t what we think it should be. Prudent investing takes patience. After all, we are in it for the long haul.

    Happy New Year!

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Out with the Old, In with the New

  • Is it true? If there was one thing that was absolutely forbidden in my house growing up, it was telling a lie. Whatever we had done wrong that led to the interrogation would pale in comparison to being caught in a lie. Punishments would increase tenfold if we attempted to lie our way out of trouble.

    As a child I didn’t always appreciate what my parents were doing, but I realize now that they were providing me a foundation built on the hard rock of truth. If I have a gift as an investor, it is the trait to always question the narrative and favor reality. This trait, which my parents instilled in me at an early age, has served me well during my more than 30 years in the investment industry.

    It is also why I have found 2023 to be so frustratingly maddening. This year the market has been dominated by narrative and has largely ignored reality. However, as the facts keep piling on, the cracks in the narrative continue to widen. Eventually, truth will out. The narrative here is that we are heading for a recession because interest rates have risen. Every quarter this year Wall Street economists have predicted anywhere from zero to negative economic growth, and every time they have been embarrassingly wrong. The initial reading for last quarter was GDP growth of 4.9 percent.

    Instead of celebrating and rejecting the narrative, the pundits said this must mean that inflation is still high so the Fed will do more, which will cause an even bigger recession…except that consumer prices were flat month-over-month in October, and producer prices actually fell. This means the year-over-year numbers were also lower than expected.

    The market finally seems to be catching on. We have seen a strong rally that has also been broad-based. Small company stocks are up strongly over the last week, which bodes well. We knew this would happen eventually, because our view had the strong foundation of being built on actual data. The truth matters.

    It is Thanksgiving once more, and we have much for which to be thankful. I am primarily thankful this year for the strong foundation that my parents gave me. We lost my 92-year-old mother on October 23, and my 94-year-old father followed her this week. One of the nurses who cared for them said she couldn’t believe the downturn in my father over the past month, and we explained that he was a 94-year-old man with a broken heart. In life, like in investing, we must take the good with the bad. There is no return without risk, there is no joy without suffering, and there is no gratitude without loss.

    I will be sad this Thanksgiving, but that doesn’t mean that I am not extremely thankful. In keeping with our tradition, here is my list:

    ~ I am thankful that we base our investment decisions on facts and not narratives.

    ~ I am thankful for the strong foundation that my parents provided for my four siblings and me.

    ~ I am thankful that college basketball has begun, and that Duke has already lost a game.

    ~ I am thankful for our two children, who are keeping my wife and me very busy.

    ~ I am thankful that our son is getting his driver’s license and will be running errands for the family very soon.

    ~ I am thankful for my family, immediate and extended.

    ~ I am thankful for all of my friends.

    ~ Of course, I’m always thankful for Mama’s pumpkin cheesecake, though she hasn’t made it herself in several years, and this will be the first she isn’t here to enjoy it. I don’t think she will mind me eating her slice.

    ~ I am thankful for my Iron Capital team, whose loyalty, diligence, and excellence have helped Iron Capital reach the milestone of 20 years in service to our clients.

    ~ Finally, I am thankful for you, our clients and friends. Your trust in Iron Capital is our greatest asset and we value it every day of the year.

    Happy Thanksgiving!

    Chuck Osborne, CFA
    Managing Director

    ~Foundation

  • What was the most important moment in Jerome Powell’s post-Fed meeting comments this week? I believe it was when a reporter asked about the Fed staff removing recession from their forecast. Powell responded, “It is hard to see a recession when one looks at the data.”

    Last quarter began with the so-called blue-chip consensus of economists predicting 0 percent growth; actual growth was 4.9 percent. That announcement didn’t seem to matter, and the narrative on Wall Street remained that we must go into recession because of interest rate hikes. Earnings have been much better than expected with 78 percent of companies outperforming expectations. That didn’t faze the narrative, however, and only 38 percent of companies have seen their stocks rise on earnings. The broken records that have been wrong for this whole cycle kept insisting that gloom and doom are right around the corner.

    Then Jerome Powell said, “It is hard to see a recession when one looks at the data.” Maybe, just maybe, reality will trump narrative just this once. If so, the market should rally for a while. I know most people either do not pay attention at all or if they do, it is just to the S&P500, which most in the media refer to as the stock market. That index, which is heavily skewed by a handful of extremely large technology companies, is down approximately 8 percent from the beginning of 2022. However, global markets as a whole are still down almost 20 percent. We have become accustomed to the market dropping rapidly and then bouncing back rapidly, but this bear market dropped, then had several false starts on rallies, but has stayed down.

    What is frustrating about this is that company earnings and the economy as a whole have not stayed down. Stocks are supposed to forecast roughly six months in advance, yet stocks bottomed after the two quarters in a row of negative GDP growth in 2022, which was mysteriously not declared a recession. Since then, the real world has been slowly recovering. Company earnings as a whole have re-entered growth – slow growth, but growth. The GDP growth numbers have been between 2 and 5 percent every quarter since, yet the market continues to stay depressed.

    While most pundits focus only on the S&P500 whose value is skewed by a few very large companies, most stocks are priced for a recession while we are actually growing at 4.9 percent. Banks are priced as if we are in a crisis, and we are not. Energy companies are priced as if oil were at $40, and it is above $80. Utilities have acted as if no one in America is paying their bills even while we have less than 4 percent unemployment. I could go on and on.

    Perhaps this is finally the time where the market wakes up and realizes that it has gone too far to the downside and stayed down too long. We had the recession already; we are not going into a new one. We will keep our fingers crossed. If the rally fails once more, then we just have to stay patient. I’m sure that some pundits who have seemingly risked their careers on the persistently wrong calls for a recession will stay at it. However, some may have actually listened. Recession is hard to see for anyone who is actually looking at the data.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Listen Carefully

  • 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 from the Leaning Tower of Pisa 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.

    Today 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, so it must have an impact, right? Logic may say yes, but observation says no. The Atlanta Fed GDPNow data reported through October 2 shows GDP is growing at 4.9 percent, which would be far and away the best growth we have seen since the first quarter of 2021.

    The pundits who predict gloom and doom will point to high oil prices and now the longer-term interest rates that have risen rapidly. We recently pointed out that oil and interest rates were simply trading in a range, and what happened in the last few months is that they went from the bottom of that range to the top of that range. This has held true for oil thus far, however, interest rates have broken through the old high of 4.3 percent on the 10-year Treasury. They are now up to 4.7 percent, and this is scaring the market.

    The same pundits that have been predicting recession for what 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 it. Will this continue, or will we get a rally until year-end? It depends on whether the market sides with Aristotle or Galileo: reason may tell them that high interest rates equal bad economy, but it just isn’t working out that way in reality.

    This leads to what is one of the most frustrating years in the market that I can remember, as narrative is trumping reality. We thought we had moved past this and the market was in rally mode, but here we are again with two negative months in a row and a horrible start to October. This market drop is happening as inflation continues to decline and the economy is growing faster – in other words, it doesn’t make sense.

    Of course, it doesn’t have to make sense, at least not in the short term. As Keynes so famously said, “The market can stay irrational longer than you can stay solvent.” We believe this will pass, and as soon as companies begin to report earnings and let Wall Street know that the world is not ending, then the rally should resume. That is what the data tells us should happen; if it doesn’t, then we will need to be defensive. It is good to be correct, and we have been for this entire cycle thus far, but one cannot fight the market.

    © samvaltenbergs

    Hopefully, the market sides with Galileo and starts to actually observe what is happening in the economy. That would lead to a lot less gloom and doom and should lead to a strong rally into year-end. Last week a friend of mine said something that pretty much sums this up: He said he could go home and turn on the news to learn about how horrible the world is with catastrophes looming on the horizon, or he could go outside and see first hand how wonderful the world is and how fortunate we are to be here. In other words, we can all be a little like Galileo and just observe the world around us, or we can sit a listen to the Aristotles, who never let their lack of vision get in the way of their logical narrative.

    We’ll choose the former.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

     

    ~Aristotle vs. Galileo

  • Vinyl has made a comeback. My almost 13-year-old daughter, like all the other cool kids, has a record player in her room and is collecting actual albums – lots of classics; she loves the Eagles (like her father), but new music too. I don’t think she has scratched any of them yet, but as soon as she does, she will be introduced to that wonderfully annoying repeat of the last note: the sound of a broken record.

    © LFO62

    Wall Street is also a broken record today. The Fed met this week and held rates steady, but indicated that they will keep them where they are for longer than they previously thought. The market reacted negatively, and the pundits are back out once again yelling, “Recession is coming, recession is coming!” But is it? They have been wrong for more than 18 months now, but could they be right this time?

    We are not in a recession now, that is for sure. The Atlanta Fed’s GDPNOW tracker says that, based on data thus far this quarter, the economy is growing at 4.9 percent. At the beginning of the quarter, the “Blue Chip” consensus view of economists was that we would grow at 0 percent; the most optimistic economist said we would be growing at just over 1 percent, while the most pessimistic said we would be shrinking with worse than negative 1 percent growth. As the quarter has gone on and data has come in – the data that indicates we are actually growing at 4.9 percent – the consensus has been forced to creep upward and is now just under 3 percent. There is more data to come, and it could bring down the 4.9 percent, but it would have to be pretty horrific to take it all the way down to 3, let alone the 0 where they started.

    This has been the same pattern for a year now, on the heels of two negative quarters in a row of GDP growth…which, for some reason, was determined by the pundit class to not be a recession, even though that was the very definition of a recession forever. I tease, but this is an important point. I truly believe this denial of the recession that took place last year is what makes this otherwise intelligent group seem so incompetent. They look at the interest rate environment and believe that means we must have a recession; they just fail to admit that we had it, when in fact we had two recessions within two years, which is quite unique and not good.

    Today we are still recovering – slowly for sure, but we are in the recovery phase of the economic cycle, and this is being ignored. The other thing that is being ignored is the growing evidence that central banks, including our Fed, simply do not have the power over the economy that they once did. Our economy today is driven by technology and services. These fields do not require the large-scale borrowing of money that the old manufacturing economy required and therefore are just not as sensitive to interest rates. We spoke about this in Episode 2 of our podcast.

    Yes, the Fed was too slow to act when inflation began to rise, but the Fed had been historically loose with monetary policy for almost 20 years at that point without triggering inflation. It was the return to Keynesian stimulus through extraordinary government spending which caused inflation to spike, as it had done in the 1970s. It is energy policy, not interest rates, that is causing the high price of oil, as it did in the 1970s.

    The focus on the Fed is misplaced. We need to focus on Congress, who needs to get its act together and actually pass a budget. If we do end up in yet another recession in 2024 it won’t be because of interest rates; it will be because of irresponsible fiscal policy.

    In the meantime, the market should get back to being focused on what is actually happening in the companies whose stocks make up the market. While the S&P 500 index looks expensive, it is because of the undue influence of seven mega-companies. The price-to-earnings ratio for the S&P 500 is 22.6, which is expensive, but the price-to-earnings ratio for our core portfolio is 16.6, which is pretty normal. The majority of stocks in the market are not overvalued. A growing economy means growing company earnings, so reality indicates we should be moving up. Why aren’t we?

    The downside to vinyl records is that they are easy to scratch, and once they do, my daughter will soon learn that they get stuck and keep repeating until we manually move the needle. September is a historically bad month, and no one has the courage to move the needle, so we keep listening to this broken record. But October will come, and the needle will get moved. Until then, patience is in order.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

     

     

     

    ~Broken Record