MY MARKETS
MARCH 2023
“ALL THE PROPAGANDA ABOUT BANKS ASIDE, U.S. TREASURY BILLS, NOTES AND BONDS REMAIN YOUR SAFEST OPTION”
The month of March has brought new meaning to March Madness; no, not basketball but Banking. As the FED continued to raise the Fed Funds Rate, banks enjoyed the luxury of huge deposits costing them virtually zero. At this same time our esteemed regulators and overseers (The Federal Reserve System and the U.S. Treasury) have been praising the soundness of the banking system. But, due to lack of management everyone has overlooked the Asset side of the ledger. Deposits are Liabilities to a bank and can come and go as the depositor wishes. To make a profit the bank makes loans, most of which have a term of months, or years in duration. In many, if not most, cases there may not be sufficient credit-worthy loans to be made vs the huge deposits, so said bank will invest in bonds (usually U.S. Treasury and Agency Bonds or Mortgage-Backed Securities).
The PROBLEM occurs when the bank, in all their Greediness and Financial Expertise (actually Lack Of), extends the maturities of their bond purchases to get that little bit of extra yield that the yield curve usually affords with longer maturities. As yields continue to rise, bond prices begin to decline and in most cases the liquidity of the longer maturities begins to fade a bit. So, now we have a Deposit base which can come and go at will and to offset that we have a loan portfolio which is longer in maturity and a bond portfolio that is declining in price and may even be a bit less liquid. To make matters even worse, with interest rates at or near zero (which they were for almost a decade) many large depositors loaded the boat with deposits far in excess of the $250,000 limit for FDIC (Federal Deposit Insurance Corporation) Guarantee.
Along comes inflation (actually it has been very prevalent for quite some time, ie. years) and the FED decides it is time to fight for the betterment of the people (yeah, you bet). The only tool that they really have is the ability to raise interest rates, reserve requirements, or shrink money supply, all of which will hopefully slow the economy by making financing more expensive. As interest rates begin to increase, depositors find a better use or need for their cash and begin to withdraw their money. Now the bank must either have excess cash on hand or liquidate their loan or bond portfolio to provide the depositor with his cash. But as rates have increased the bank may have fairly severe losses in their bond portfolio and many of their loans may be in trouble of even paying off; the bank could easily become insolvent. To exacerbate this problem in today’s technological world one does not have to stand in line to demand his money from the bank, he or she only has to click the mouse on their computer. Hello Silicon Valley Bank on 3/10/2023, and Signature Bank on 3/16/2023, both Insolvent.
Obviously, this is an over-simplification of the economic and financial situation the U.S. Banking System is currently faced with. Our Government has been Financially Irresponsible for years; both Republican and Democratic administrations. The U.S. is currently facing a $32Trillion Debt with interest rates climbing and a fairly large portion maturing within a very few short years. The cost of the interest on that $32Trillion was $213Billion and rising for 2022. Congress is Hell-Bent on spending and can never see the need to cut Costs or the Bureaucracy. Job #1 for every Congressman/Congresswoman is to Get Re-Elected, and they will spend or do whatever is necessary for whatever group they can persuade to support them.
Interest Rates are a major toss-up right now, at least until the banking debacle settles down or takes another hit and more is known about inflation. I continue to utilize 30–60-day Treasury Bills (Full Faith and Credit of the U.S. Government) with yields of 4.00% to 4.95% and roll the maturing positions over as they become due (much safer that a Bank or a Money Market Fund, many of which contain poor credit assets). At some point we may decide to lock in a higher yield for a longer duration if rates reach the 6.00% level or higher. These higher yields and the uncertainty of the banking sector and overall economy have prompted us (MSA CAPITAL MANAGEMENT) maintain Treasury Bills of at least a 30% level or higher with our equity accounts.
The economy, amidst all of this uncertainty and volitivity, continues to point toward a recession, which hasn’t technically occurred as of now. In reviewing the 12-13 major Sectors of the S&P 500, the majority of the charts remain down 50%-60% from the Jan. 2022, high and up 20%-40% from the lows of Oct. 2022. Price tells the story, and the charts never lie. We want to see the overall trend heading north before we participate any further. Earnings and Revenue continue to be very mixed and overall weak as unemployment remains steady according to the government (and those numbers are questionable). Layoffs are becoming more prevalent by the day. Far too many observers are placing too much confidence in Chairman Powell pivoting and beginning to drop rates. Inflation remains above 6.00%, a very long way from the goal of 2.00%.
We live in very troubled times and in our view, we wish to remain quiet and on the conservative side waiting. We continue to believe that the safest investment is the U.S. Treasury Bill with shorter maturities and the Full Faith and Credit of the U.S Government. If you have any questions or wish to comment on the above, please contact me.
Sam Altimore
Owner/Principal
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MY MATKETS
FEBRUARY 2023
The first two months of 2023 can easily be described by simply examining the U.S. Treasury Yield Curve which is highly influenced by Inflation. Logically, higher Inflation equals Higher Interest Rates, which equals Lower Stock Prices. The Interest Rate Market is being pushed higher by the FED with their feeble attempt to control Inflation which is Rampant. If the truth were known, and all the government adjustments done away with, Inflation would be closer to 10.00% rather than 6.1%. Of course, the FED is oblivious to the fact that minor increases in interest rates are also inflationary (that is as long as the end user can pass that added expense on to their end buyers) until the rate becomes onerous to the borrower and he can’t adjust his prices more. Of course, this is foreign to the FED, which consists of Academicians and life-long government bureaucrats who have never worked in the “real” world.
As can be seen above, the Dow and S&P were up approximately 2.00% and 1.00% respectively and the NASDAQ was actually up approximately 6.00%. The NASDAQ has been powered, for the most part, by tech companies, many of which have had horrible earnings and, in many cases, declining sales. If one examines the longer-term charts, all three indices are trading below the major moving average lines, which is generally not good. Additionally, the “meme” stocks have come back to life and in many cases advanced way beyond reality. At last count, over 60% of the S&P 500 were still trading below the 200-day moving average and over 50% remained down at least 50% from their highs of the beginning of 2022 but are up approximately 25% from their lows of October 2022.
The big question, of course is, have we hit a bottom? And for that question, I have no idea; I refuse to attempt to project beyond what I can see or know. I do not know the future! I know, that is a shock; but what I do know is where we are today and where we have come from. Today’s prices continue to appear high for my liking. Looking back at where prices have been over the immediate past prices appear to be on the decline. As I stated earlier, the three major indices are all below the 200-day moving average and have recently broken below the shorter moving averages as well. The major question now is will these moves down from approximately the middle of February continue and if so with how much intensity. The next week or two may well be defined by the last couple of weeks, and that would not be good.
In light of all the uncertainty, higher interest rates and poor earnings and revenue reports, MSA CAPITAL maintains its posture of being overly conservative. We continue to hold at least 30% cash (T-Bills) in all accounts and may well increase that percentage. Currently we are restricting our Fixed Income purchases to no more than 2-3 months and in Treasury Bills only. We adhere to these limits because:
A) Treasury Bills are now yielding approximately 4.30% - 4.50%
B) Treasury Bills are Full Faith & Credit of the U.S. Government (Yes the Government can go broke (actually already is broke) but the will be the last on the Totem Pole to default on payment
C) Treasury Bills are the MOST LIQUID investment in the universe.
The FED meets the middle of March and will definitely raise rates by .25 Basis Point; but don’t be surprised if they raise by .50 Basis Points (if they have an ounce of brains, they will raise by .50 Basis Points.
We live in very troubled times, politically, economically, and financially; but, I do have hope that common sense and logic will come back to be the norm, once again.
If you have any questions or comments, please do not hesitate to contact me.
Sam Altimore
Owner/Principal
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MY MARKETS
JANUARY 31, 2023
The Interest Rate market has increased in yield in the shorter end (less than one year) as the Fed continues to stay the course of raising rates to battle inflation. That said, the longer maturities have actually declined in yield as the markets seem to believe that we are “out of the woods” as far as the economy is concerned. Given that scenario, the equity markets have reacted in a positive manner. January has been one of the better January’s on record even as earnings that have been reported are mixed and revenues, current and projected have not been as positive. Many companies are projecting a weaker first half of 2023 with the second half improving somewhat. I am never very confident about future projections, as no one has the ability to know the future; thus, most projections beyond today or tomorrow are “guess work” at best. Keep in mind, how many experts knew that there would be a pandemic, or a massive storm or hurricane: no one. I am always very amused by the likes of people like Jim Cramer on CNBC who constantly makes all sorts of predictions and estimate as far out as a few years; the guy is truly a clown and has a horrible track record. Markets are determined by price and whether someone wishes to buy or sell a particular security; multiply that by the hundreds of thousand participants and you have a market move.
The one exception to the above is the interest rate market and that is restrained to the FED FUNDS RATE which the Federal Reserve Board sets. The remainder of the interest rate curve is determined by Buyers and Sellers and their actions. The Yield Curve as shown above shows the discrepancy in the pricing of short-term (one year and in) and the remainder of the curve, more than one year in maturity. The FED has stated that they intend to stay the course until they meet a 2.00% inflation rate; I am not sure how they intend to accomplish this task with a $31Trillion U.S. Government Debt and more than another $1Trillion on the way with the projected new budget. With a considerable amount of U.S. Treasury debt maturing over the next 12 to 18 months and rates remaining higher the deficit has no place to go but higher.
None of this can be good for stocks. With rates at or near zero for the past almost decade, everyone took advantage and borrowed whatever they could of “free money”. As this free money debt matures, much of it will have to be refinanced at higher rates unless business has boomed for that company, and they can pay their debt in full. Looking back, stocks hit their low on 3/23/2020 and rallied to an all-time high on 1/04/2022. Since that high point, stocks declined 20% to 30% (depending on the individual company) and hit an interim bottom on 10/13/2022. Since October of last year, the individual indices have recovered approximately 20%, but over 50% of the S&P 500 remain down close to 50% from the highs of 1/04/2022. “Earnings are disappointing everywhere, ok? This is one of the worst streaks in earnings we’ve seen in quite a while,” Mike Wilson, chief U.S. equity strategist at Morgan Stanley, said yesterday in an interview with Bloomberg Television. “People are now saying, ‘oh, it’s better than feared’. . . That’s like saying a tornado ripped through your house and saying, ‘oh well, it only knocked out the bedroom.’ The earnings are bad.”
When looking at a chart of the three major indices, they have all three have been trading below a 45% down trend-line. That has changed over the last few weeks as daily prices have moved slightly above those trend lines. If prices can maintain this positive movement sideways for a while, we may be persuaded to commit a modest percentage of assets to the equity market. My primary concern remains higher interest rates, inflation and poor earnings and revenue vs last year; time will tell.
Sam Altimore
DISCLAIMER: This message (including any attachments) is confidential and/or privileged. It is to be used by the intended recipients only. Any unauthorized use or dissemination of this message, in whole or part is strictly prohibited. I may at any time be Long, Short, or Arbitraged in any of the securities mentioned above. In addition, I may close out any position, at any time, that is mentioned above. This information is private and intended for use only by those who receive it directly from the author. These are not recommendations and the information should be used at the risk of the reader.
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MY MARKETS
YEAR-END, 2022/DECEMBER 2022
INTEREST RATES
With inflation running wild at 9.1%, the FED, without admitting any fault, begins to attempt to fight inflation. The FED caused the vast majority of the inflation with years of “free money”, keeping Fed Funds at or near 0.00%, yes ZERO PER CENT. With the advent of “free money”, every imaginable, crazy idea that could be created (finance for free) was set into motion. Speculation through SPACs (special purpose acquisition corporations), Coins of every nature, and just plain over-leveraging in almost any field were created. Solid growth businesses borrowed, simply to borrow (after all it was free). The Government sent free checks to those who really had no need for them. The incentive to work went bye, bye.
Finally, the FED woke up and Jay Powell, suddenly wants to become Paul Volcker of the 2020’s. Of course, remember, he attempted this in 2018-2019, but became a weak sister and reversed back to free money after a “blip” in the stock market: no guts, no glory.
This time around he is taking a hard-core stance and says he will not back down until inflation falls back to his target of 2.00%. Have you ever computed what 2.00% inflation does to a dollar? At 2.00% a dollar decreases in value approximately 18.00% over a ten-year period: why not shoot for 0.00% inflation and let Interest Rates be determined by supply and demand. Of course, a lot of Phd. Economist at the Fed and elsewhere would probably be out of a job: good riddance, I say.
Be that as it is, 2022, has been on a steady course of increasing interest rates and inflation remaining high. Fed Funds has moved from 0.00%-0.25% to the current rate of 4.25%-4.50% and moving higher. Fed Chairman Powell continues to stand on moving rates higher for longer until inflation decreases significantly: time will tell.
With all the bubbles bursting (Cyrpto, SPACs, Tech, & others) inflation continuing to hold at high levels, and Interest Rates increasing, the equity markets have taken a heavy hit, and poor earnings are beginning to come to the forefront. Will Powell hold his stand or weaken as he did in 2019? My best bet is that he folds at some point. Paul Volcker, he is NOT!
Beginning in late summer/early fall, MSA CAPITAL began raising cash (Treasury Bills) in equity accounts. We continue to utilize Treasury Bills (very short maturities) as interest rates continue to rise. Where do we see Rates moving to? It is my opinion that Fed Funds should be somewhere between 6.00% and 7.00%; will we get there, only Mr. Powell knows. At somewhere between the 6.00% and 7.00% level, the Five-Year Treasury should approach 7.50% to 8.00% which would force us to commit a certain percentage at or near those maturities. For now, we continue to stay one to three months in maturity as higher rates bring lower dollar prices, particularly as one moves further out the curve.
Of course, the Federal Deficit remains a constant concern as it has crossed through $31 Trillion. Higher Interest Rates increase the Deficit with higher Interest Payments. The Government will not even attempt to cut the deficit, regardless of all the hype one hears. The Interest Payments continue to be a greater per centage of GDP (Gross Domestic Product) annually placing more and more strain on the annual budget and taxpayers. Interest Rates will continue to dominate the scene in 2023. Watch for a pivot by the FED and Free Money returning.
EQUITIES
2022: The Year that started great and ended poorly. The S&P 500 peaked on January 4, 2022, at 4,818, only to end the year at 3,861, a loss of 957 points or -19.86%. During the course of 2022, there were five major moves down in the S&P with each down- move resulting in five rally-backs, but short of the previous high. Late in July, early in August the S&P appeared to be ready to move ahead with a move from 3,610 (the current low at the time) to approximately 4,324; but, only to a new low of 3,491, before reversing and ultimately closing the year at 3,861. A very ”whip-sawed” year to say the least, and certainly not a pretty picture.
The year was filled with “bubbles” bursting and the FED increasing interest rates. Tech and growth stocks do not do well with increasing interest rates. As I have discussed in the Interest Rate section of this commentary, Fed Funds have moved from 0.00% - 0.25% at the beginning of the year to a year-end level of 4.25% - 4.50%. Of course, the SPACs (special purpose acquisition corporation) have taken a major HIT, with many collapsing 50, 60, &100%. Issuance of SPACs was the hot deal in 2021 and early 2022, only to almost total diminish from the middle of the year to year-end. It is estimated that approximately $2.00Trillion have been lost by Billionaires during 2022, with approximately $30Trillion in losses for the entire market. Close to 30% of equity money has left the stock market during the year; much of that has gone to Treasuries which now have a decent yield.
P.E. Ratios have come in dramatically from the mid-to-high twenties (and higher) to the mid-teens, and much lower in specific sectors. The pandemic years (particularly in China) along-side the Ukraine-Russia war have also placed many industries totally off- track. Here in the U.S. “Domestically Made” appears to be coming back in favor, but that type of change takes time, sometimes years, not months. Add to this the Biden Administration attempting virtually destroy the Petro-Chemical Industry in the U.S. and you have a huge problem. To make this situation worse, Biden then begins depleting the Strategic Oil Reserves; to replenish oil deficits, Biden begins buying oil from foreign socialist countries: makes no sense to me.
So, where do we go in 2023? Only a liar will tell you he knows the answer to that question. Of course, after about six months there will be some who took a shot in the dark and will declare that they called the bottom, or the top. All I can admit to is that the high of 4,818, set on January 4th of 2022, will be very difficult to return to in the coming year. I have included a screenshot of the S&P 500 below which shows the 2022, price action. I do not see the current trend reversing anytime soon. Over the course of 2022, MSA CAPITAL has raised cash (Treasury Bills) in the majority of accounts that we manage. The level of cash varies in each account depending upon the risk factors and objectives of each individual account. As mentioned above in the Treasury section, we continue to keep our Treasury positions very short while the FED remains in an Interest Rate raising mode.
If you have any questions or would like to discuss the markets, please feel free to contact me.
Sam Altimore
Principal/Owner
MSA CAPITAL MANAGEMENT, PLLC
REGISTERED INVESTMENT ADVISOR
Sam Altimore
Principal/Owner
7215 Chartwell Circle
Fair Oaks Ranch, Texas 78015-4745
PH.) 713-628-7550 830-357-8280
MSACAPITALMANAGEMENT@icloud.com
DISCLAIMER: This message (including any attachments) is confidential and/or privileged. It is to be used by the intended recipients only. Any unauthorized use or dissemination of this message, in whole or part is strictly prohibited. I may at any time be Long, Short, or Arbitraged in any of the securities mentioned above. In addition, I may close out any position, at any time, that is mentioned above. This information is private and intended for use only by those who receive it directly from the author. These are not recommendations and the information should be used at the risk of the reader.
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MY MARKETS
NOVEMBER 2022
U.S. TREASURY YIELD CURVE
Interest rates and the FED have been the name of the game this year. With inflation running at or near 8.00% for the majority of the year, the FED is finally attempting to correct their errors of the past ten years or so. As can be seen in the table above, rates are up across the board since the first of the year as well as for the month of November. The FED forced rates to zero to prevent a recession as well as hoping to save the economy from the pandemic and government shutdown. Basically, free money (at 0.00%) allowed excesses in virtually every sector of the economy. Zombie businesses were created, excessive leverage was available to one and all. People and businesses borrowed money that they really didn’t need. Along with this the FED created a $6 Trillion balance sheet by buying up virtually every Treasury Issued, and quite a few Mortgage Backed Securities. These actions flooded the monetary system with excess money which was spent lavishly and created pressure for goods and services which were not in abundance; creating inflation.
The FED has never learned that Interest Rates, are inflationary as they are rising. Most businesses and services will simply pass on the higher rates as a cost of doing business until they approach pricing their product or service out of reach for their buyers. But that does not happen in the early stages of raising rates. Also consider that when rates are being raised from a zero percent level, the first several rate increases remain well below what is considered a hinderance or excessive.
Consider that the average mortgage rate prior to 2022, was 3.00% + or – a bit. Those rates, which are typically priced off the ten-year Treasury allowed many to speculate in the housing market as well as allowing many marginally qualified buyers to actually buy. Unfortunately for those who bought adjustable-rate mortgages, higher rates will not be pleasant when time too adjust rolls around. Typical 30-year mortgages that went for 3.00% or so at the beginning of the year are now somewhere in the 6.75% to 7.00% range; yes, double.
The FED is now saying that they may well slow the pace of raising the rates, but they will hold strong with the higher rates longer that originally thought. This will not bode well for the economy which remains questionable at best. And even though the FED continues to “HOPE” for a soft landing and mild, if any, recession, they need to wake up from their Dream World; we are already in a recession and inflation remains close to 8.00%, by their measure.
I continue to look for Interest Rates to move higher over the next three to six months, then we will see what the damage is. MSA CAPITAL MANAGEMENT continues to hold a relatively high per centage of cash (ie. Short Treasury Bills) all of which matures within three months.
EQUITIES
The equity markets have actually fared well during the month of November. The Dow Jones increased approximately 5 ½% for the month while the S&P was up 5.30% and the NASDAQ increased by 4.03%. These numbers are welcomed by all, but it must be pointed out that many individual securities actually bit the dust during this same period. Numerous bubbles have been burst; the SPACs, the NFT’s, the Coins, and even many of the Tech standbys. The number of individual stocks that remain down 20%, 30% and some 60 or 70% continue to struggle. The Dow Jones which led the pack during November remains down -4.81% from 12/31/2021. At the low point of 2022 the Dow was down to 28,660; the high of the year was on January 4, 2022, when the Dow topped out at 36,952. The month of November was an excellent month when one considers that from the low of 28,660 on October 13th to the November month-end of 34,589, an increase of 5,929 points or 20.68%.
Now, all that said, The S&P and NASDAQ did not fare quite as well; they did good, just not that good. The S&P had a low of 3,491 on October 13th and closed the month of November at 4,080, an increase of 591 points or 16.87%, which is certainly not shabby. The NASDAQ also hit its low of 10,440 on October 13th while closing the month of November at 11,468; a gain of 1,028 points or 9.84%.
This has all been very positive, but does it take us out of Bear Market Territory? That is obviously the Million Dollar Question. I believe these moves are obviously very positive, but one must keep in mind that we continue to face higher interest rates which could indeed throw the U.S. economy into a deeper recession. Recessions do not generally do any favors to company sales and earnings, particularly if accompanied with unemployment. Although employment remains fairly strong, there are cracks beginning to appear with rather large lay-offs. If people aren’t working and earning, they generally are not spending….that does not help sales and earnings of companies and service providers. On a side note: why do we never hear of Government layoffs and unemployment?
We continue to hold several equities which have held up quite well and we are always looking for new, or old names that are priced with value and are trending to the upside. As we have stated in previous issues of MY MARKETS, we would prefer to see the general markets move sideways for a period of time allowing the weak holders an opportunity to leave and a base built by the price action. The price action of November has not gone un-noticed and may well be the beginning of better days ahead. But as stated earlier we will continue to monitor the FED and the Interest Rate Markets and the effect on the equity markets.
If you have any questions or comments, please contact me; I welcome all comments.
Sam Altimore
Principal/Owner
DISCLAIMER: This message (including any attachments) is confidential and/or privileged. It is to be used by the intended recipients only. Any unauthorized use or dissemination of this message, in whole or part is strictly prohibited. I may at any time be Long, Short, or Arbitraged in any of the securities mentioned above. In addition, I may close out any position, at any time, that is mentioned above. This information is private and intended for use only by those who receive it directly from the author. These are not recommendations and the information should be used at the risk of the reader.
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MY MARKETS
OCTOBER 2023
The markets are all being controlled by Interest Rates. As can be seen in the chart above, Interest Rates accelerated during the month of October, moving to highs going back 10-12 years and longer. The Yield Curve remains inverted (2-year Treasuries higher than 10-year Treasuries) which indicates that we are in a recession, regardless of what the governments says. Virtually every recession in the past has been preceded by an inverted Yield Curve. The FED meets again on November 1-3 and will announce another .75 Basis Point increase in the Fed Funds Rate to 3.75% - 4.25%. This move is one of the most rapid increases in the Funds Rate in history. The Fed Funds Rate was .25% (1/4 of 1.00%) in March of this year. Obviously, the Funds Rate has been higher, actually much higher, but it took longer to get there in the past. A Funds Rate of 4.00% is not that big a deal, as the Funds Rate has normally been in the 5- 6% range in the 70’s, 80’s and part of the 90’s, but the rapid change from .25% to 4.00% has created a bit of a shock in the economy as well as the markets.
Why are interest rates such a big deal? Most businesses borrow money for a myriad of reasons, the largest being to buy goods and supplies for their end-product. As one might expect, as rates move up, the cost to produce goods and services rise, forcing business to raise prices to make a profit (sounds like more inflation to me).
The Fed felt compelled to drive Interest Rates to zero and create Billions of excess Money Supply in tandem with the advent of a “pandemic” and government shutdown of business. The Government, not to be outdone by the Fed, decided to pass out free checks to the public and businesses (most of which did not need them) creating more excess. With all the excess money in the system and business attempting to re-start, Demand simply out-paced Supply; basic economics 101. Thus, in marched Inflation with a vengeance. Now the Fed is attempting to cure their errors of excess with excessive interest rates. Just as supply is getting closer to meeting demand, the Fed forces increased pricing with that supply by raising interest rates; they will never learn.
Rates may begin to top out as the recession sets in during the first quarter of 2023, but don’t hold your breath, no one knows what the Fed will do next. Interest rates are what keeps the markets and economy alive or dead.
During the first two to three weeks of October the equity markets struggled to find a comfortable level as many companies set new 52-week lows. Higher interest rates have not been good to tech stocks as many have recently set new lows, some as much as 40 to 50% declines. During the latter part of the month a number of the tech leaders began to move sideways and form small bases. As earnings reports began to trickle out it has become apparent that many companies have reduced their forward guidance to make their earnings look a bit better and possibly allow them to beat expectations of their current reports.....it basically didn’t work as many stocks reacted negatively after brief upward moves.
The S&P has registered an increase of approximately 7.97% during October versus approximately a 19% loss for the year. The S&P had registered a loss of approximately 27% from year-end 2021, to the low of 3,491 on 10/13/2022; a loss of 1,275 points. With the economy on the edge and equities showing declines, there has been talk of the Fed slowing their Interest Rate increases toward the end of the year, this has created a relatively positive move in equities during the last 10 or so days of October. Whether this comes to fruition or not is yet to be determined, time will tell.
We remain cautious with higher-than-normal cash (Treasury Bills) positions. We continue to wait for consolidation to work through the markets as well as waiting on the outcome of the elections and the impact that may have on the markets.
If you have any comments or questions, please do not hesitate to contact me.
Sam Altimore
Principal/Owner
DISCLAIMER: This message (including any attachments) is confidential and/or privileged. It is to be used by the intended recipients only. Any unauthorized use or dissemination of this message, in whole or part is strictly prohibited. I may at any time be Long, Short, or Arbitraged in any of the securities mentioned above. In addition, I may close out any position, at any time, that is mentioned above. This information is private and intended for use only by those who receive it directly from the author. These are not recommendations and the information should be used at the risk of the reader.
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MY MARKETS
SEPTEMBER 2022
First, let’s look at Interest Rates. Interest Rates for the last decade have been driven by the FED; and basically, driven into the ground at or near zero on the short end of the yield curve. With Interest Rates at or near zero, virtually anyone could borrow money at very little cost. Cheap, or free money encouraged all sorts of careless investing and spending. Money supply ran rampant as the FED bought Treasury Bills and Bonds creating a Balance Sheet of $9 Trillion. Many needless companies were created with virtually little or no earnings and in some cases not even any revenue. All of these actions, with the addition of Billions of Free Dollars from “Covid” giveaways caused numerous “bubbles” in the marketplace, driving prices higher than logical valuations would merit.
Approximately a year-and-a-half or so ago, the FED woke up and determined that Inflation was becoming a problem, but only in a Transitory fashion. Quite honestly, I agreed to a great degree. Coming out of the Covid “lockdowns”, with a great deal of “Free Money” in hand, demand on all fronts, was outstripping supply which had been cut back severely due to the lockdowns mandated by the Government and the CDC. Very quickly it became obvious that this was going to be much more than Transitory. Money Supply, low-to-no Interest Rates, and a sizzling hot stock market; what could possibly go wrong? Jerome Powell and the FED finally woke up and decided to do something; but they were, and are, so far behind the curve that it is truly questionable that they have a chance at all.
Interest Rates, in an Inflationary environment are, in themselves, even more Inflationary, at least as long as rates follow inflation rather than being higher than the Inflation Rate. Interest rates are a “cost of doing business”, and as long as business sees the ability to sell their product, they will simply pay the rate and, when possible, pass that increase on to the customer…….at least as long as they can without the customer balking. Obviously, this method will eventually play out as the cost becomes too much, thus the beginning of a recession. The FED, with all their PhD.’s and total lack of practical business, continue their efforts by allowing their $9 Trillion Balance Sheet to run off (or mature) creating a liquidity problem just as a recession is being cranked up and valid companies are beginning to need liquidity.
Add to this a Federal Deficit of approximately $31 Trillion due to the lack of discipline by Congress (Yes, Republicans and Democrats alike), with interest rates moving higher; at some point the cost of higher interest rates will be intolerable in servicing the deficit. Therefore, the FED will either have to back-track and begin lowering rates or simply continue to fight inflation with higher rates and less liquidity, causing the recession we are already in, to become even deeper and more severe.
The equity markets have taken a toll, particularly over the last quarter. At last count, over 60% of the S&P 500 were trading below the 250-day moving average. Most of the “Coins”, SPACs, and tech stocks are down anywhere from 40% to 60% with many of the “no-revenue” stocks either in bankruptcy or trading at or near zero. The rage of the era, SPACs, have all but gone away; hopefully, rationality is finally coming back to the equity markets. Most of the “coin” stocks and ETF’s are down 60% to 90%; as far as I am concerned: GOOD RIDANCE!
At MSA CAPITAL MANAGEMENT we have raised our cash allocation in most accounts to between 20% and 35%, depending on the individual account and the Risk Tolerance of each account. The equities we continue to hold are, for the most part, longer term holdings and in all cases, basic industries which are essential to the overall economy. The cash allocation of these equity accounts may well rise even further, depending on the overall action of the equity markets.
As for Fixed Income, our holdings are all in U.S. Treasuries and have maturities of 1 to 1 1/2 Year or less. Any and all new acquisitions in Fixed Income will be U.S. Treasury Bills of three months or shorter (mostly shorter) until we see the trend in Interest Rates reverse or stall. At some point Interest Rates may well become worthy of longer maturities, at much higher Rates.
This is a lot to digest, and we are at a very crucial point in the markets. We do not claim to have all the answers, but over the last 55 years we have seen a lot of the same errors that are being repeated, over and over. And this time around, there are many new twists and turns. If you have any questions are comments, please, do not hesitate to contact me. I am always open to new, and even old ideas.
Sam Altimore
Principal/Owner
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MY MARKETS
AUGUST 2022
Interest Rates are the dominate factor with the markets today. With inflation running over 9.00% (or higher in real life) the Fed has taken the task to “kill inflation” by raising interest rates. As is shown in the above table, the One Month Treasury has moved from 6/10 of 1.00% to 2.40% from the beginning of the year through August 31, 2022 (the largest move ever in U.S. history of interest rates on a percentage basis). Of course, keep in mind that it was the Fed that created the majority of this inflation by manipulating rates to zero percent while hoarding a balance sheet of $9 Trillion Dollars, all created out of thin air. This same time frame saw money supply go through the roof as our Government sent free checks to virtually everyone, again, created out of thin air. Thanks to our Federal Government and the Federal Reserve we are now faced with a Federal deficit of over $31 Trillion Dollars. And who will pay for this? Yes, you and I and our kids and grandkids.
The biggest risk of all this is that the Fed will overshoot what is needed to calm inflation and will continue to raise rates after inflation subsides. Additionally, the Fed has begun to reduce their balance sheet by allowing maturities to expire without replacing those securities; this action will reduce liquidity in the monetary system causing rates to increase further. For the most part, inflation has peaked. Take a look at commodities, corn, wheat, lumber, copper, oil, gold and silver; they have all rolled over and are heading south. Will these prices drop off the face of the earth, absolutely no, and they may have a few adjustments to come just as they did on the way up.
The Fed has a habit of being late to the party and then staying too long. Do not be surprised if interest rates are driven higher as inflation slows and even drops due to recession. The government may not officially declare our economy in a recession but it is very difficult to challenge two back to back quarters of negative CPI, as well as an inverted yield curve. The impact of employment is very difficult to weigh on this situation right now as there are abundant jobs available and tons of people not seeking those jobs. But keep in mind as many other factors begin to deteriorate, such as housing, used car sales and the price of oil, how many of those job openings will remain.
The lack of supply of goods and services that the economy faced over the last couple of years due to the pandemic and lockdowns appears to be fading, with a few exceptions. The largest supply deficit that exists now is able-body workers. As the free checks from the government are spent and credit cards are maxed out, workers may be more willing to accept the jobs that are available; let’s just hope that the economy stays strong enough to support those potential jobs. All in all, look for interest rate to move higher, my estimation is that the Fed will raise the Fed Funds rate at their September meeting by another 75 Basis Points.
Mr. Powell keeps speaking of a “soft landing” but consider that we have inflation of over 9.00% and interest rates at all-time lows; a soft landing will be difficult, probably impossible. The day before Mr. Powell’s Jackson Hole speech on August 26, the S&P closed at 4056. By August 31, the S&P was down approximately 244 points or 5.81%, in only four
trading days. The true test will now come as the S&P approaches the 3850 level where there appears to be modest support.
Earnings have been relatively good with more than 3⁄4 of the S&P reporting. That-said, a number of companies did reduce their expectations, allowing them to beat the consensus. A great deal of the “garbage stocks” have already been corrected in the market; spacs (special purpose acquisition companies), zombie companies (companies with little or no earnings and sometimes very small revenue), and several crypto companies. Many of these off-the-run companies are down 50%, 60%, 75%, and even more.
One of the final shoes to drop in forming a market bottom is housing; and that has begun. Listings are being reduced by significant amounts as buyers are backing away. Higher interest rates accompanied by higher prices have finally caused buyers to shy away. There are rumors, emphasis on rumors, that a number of mortgage companies are either laying off employees or shutting down. Of course Bank of America is different, they are beginning to offer some folks no down payment loans.....can’t wait to see how that works.
This coming week, 9/6/2022, will be a very important week; price action will be closely watched and, could well determine the next major move in the equity markets. We have raised a small amount of cash in most accounts and will be paying very close attention to this week’s movement.
Please do not hesitate to call if you have any questions.
Sam Altimore
Principal/Owner
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