Find Investing Opportunities For The Rest of 2022 (Episode 40)

Yeah, I think I wrote that letter in the middle of June and I think my thesis is playing out pretty well. And really the thesis is every time the interest rate, this is the 10 year now we're talking about could obviously a lot of interest rates are moving off the 10 year us treasury note, but the 10 year, every time it's gone over 3%, the economy has precipitously slowed ever since the great financial crisis. And I think there's really two reasons for that. One is houses and cars have become so expensive that everybody just buys a monthly payment. So therefore anytime it goes over at 3%, you just can't get into a car or get into a house. And there's so many multiplier effects of housing and autos. And as we're starting to see now in the data home sales have really slowed. I think the mortgages came in at the lowest rate in 22 years, new mortgage applications.

So I do think that that there's a lot of signs that the economy is slowing and therefore bonds instead of being your enemy as they were in the first six months should be your friend. Now, there certainly will be some earnings implications of this meaning. We've had a period of the last three or four quarters of terrific earnings, really. I mean, amazing earnings ever since the stimulus kicked in. And so I think that will be over. There'll be some companies like American express that do really well. And there'll be some companies like Snapchat, not so much, but, and in general, I think earnings estimates will be coming down over the next couple quarters. But I think what really caused the equity decimation in the first six months was interest rates going up so much. And therefore the discount mechanism, you know, was the biggest impact of stock prices. So long story short, I think even in declining earnings environment, stocks can do okay if bonds are your friend. And I do think bonds are gonna be your friend.

Well, I think it's an important sentiment indicator and clearly it was frankly pretty hard to come to work every day for the first six months. I mean, I mean, literally it was just, you would just take your breath away many days. And so I it's completely understandable why money managers, professional money managers are pessimistic, you know, because of, of, there was just nowhere to hide and it's quite different than other kind of market meltdowns, like in 2000. So there was a tech meltdown in 2000, but lots of socks did pretty well. Lots of groups did pretty well in, uh, January or through June, other than energy for quite a bit of that. And then it got crushed in June. There was just nowhere to hide. So I think that's why everyone was very, is very pessimistic and that is the kernels of a good rally.

I think for the next six months, 60, 40 portfolio will work. If you think about what can go really wrong, Putin could cut off gas to Europe completely, and that will be, you know, awful for European economies, but I think very good for bonds, not so great for earnings, very good for bonds. So I do think that 60, 40 portfolio in the second half of the year works even under that extreme, you know, environment because the bonds will do quite well. And I think that the reason it didn't work in the first six months was inflation just went crazy. It came in much hotter than anybody forecasted from the federal reserve to most of the wall street economists that I just think people hadn't seen numbers like this in so long. It just, it was just hard to compute, cuz it's really been like since the 1970s. And I mean, I didn't get into the business in the 1970s and I'm relatively old for this business. So I just think there's a lot of people that have never seen anything like this and just couldn't model it accurately. But I do think a lot of the reasons for the inflation will be more transitory than I know that's a terrible word, but you know, will be more transitory than is currently believed from humans. It'll

Correct. And think about what so the biggest surprise was that we didn't know at the beginning of the year was the invasion in Ukraine and that happened February 24th, as I recall. And so energy spiked, agriculture spiked and you know, now fast forward to today is anything better in Ukraine? Not that I can tell there is no progress whatsoever. And energy is, you know, well, you know, is down from where it was before the war is oil prices are low and ag prices have come all the way back down as well. So, you know, you haven't solved any of the problem of getting the grain outta Ukraine, growing the grain growing, which is, you know, 30% of the wheat crop for the whole world came out of, of Ukraine. So it's just very interesting to me that none of the things that the Ukraine war caused have kicked into action have really been solved. And yet the commodity price is saying, you know, things are gonna get a lot better.

I saw that. I saw that, but I think there's been, you know, puts and starts here for a while on. And just because they agreed to something today doesn't mean they can take it back tomorrow. And you know, I mean, I think you really gotta see it, leave the port and, you know, go to Egypt and the middle east and wherever the most of the grain, uh, from Ukraine goes, I mean, the us is fortunately advantageously positioned, but, but the third world is it's not

Them. Exactly, exactly.

Well, I think that's a good, very good point. And obviously, you know, because of what's happened with tech, the spider and the queue is very tech oriented. And so that's gonna have a major impact on the overall index, frankly, just as it did in 2000, I forget what the S and P went down, but I think it was down like, you know, 25, 30%, but there were a lot of stocks that were up in that period and, you know, energy, for instance, you know, when Putin took over one of the reasons he's so popular in Russia, he took over the price. Oil was $10 in 1998. And he came in at 10 and it went to one 40 by 2008. So everybody thinks Putin is a genius because of that tailwind that he had, at least in Russia. I realize people think other things of him outside of Russia, but you know, that was all, you know, if you look at energy stocks to actually did pretty well during that lost decade and as well, did you know, reach to your point also did pretty well,

I mean, I think that you should absolutely, you know, be looking at it both as a volatility dampener and you know, if I'm right, that inflation is peaking and we'll start to March down, maybe not get back to where it was prior to all this, but at least significantly lower than it is today. You know, bonds will be give you some capital appreciation as well. And the interest rates are now on, you know, even high quality corporates and government's not that great, but high quality corporates, you can get five and that's not so bad. So I think that's an interesting area. And then to your point, the, and sort of the equity proxies things like REITs or MLPs also look interesting to me, very above average dividends, some dividend growth, and now reset valuations because, you know, REITs are down as much as the S and P 500 so far this year. So it really has not outperformed despite the fact that recently bonds bonds are working again in the last three, four

Well, you know, unfortunately there's no sort of one size fits all because every investor's different, they got different risk tolerances, different ages, different time horizons, all that kind of stuff. So with that caveat that, you know, please consult a financial advisor before you do anything. I think, you know, know one attractive area would be something like the, a M L P, which is a ETF of LP stocks. And you don't get the, you know, one of the problems with MLPs is that the, is the taxation is really difficult for an individual investor because you gotta track everything individually and the dividends are, are difficult. Whereas this one, you get a regular dividend, so you don't have to do any special accounting to, and I think currently has about an 8% dividend yield should grow. And because, you know, the pipeline area I think is a very attractive area because, uh, you know, it's very hard to get a new pipeline for all the reasons that we know environmentalists don't like it.

And it's just very hard to get a new one. So therefore, anybody who's got an existing pipeline infrastructure has a great asset. And then if indeed we are gonna totally restructure energy in this country, which is something that, you know, kind of looks likely that no matter what happens with Russian Ukraine, that Europe is going to wean themselves from Russian oil and gas over time. So there's gonna be a big impact of on LNG from the United States and how are they gonna get LNG? They're gonna have to have pipeline gas, come through pipelines to the Gulf coast where they'll do electrification. So I think the Outlook's actually pretty bright, both from an earnings point of view and also a dividend growth point of view.

No, it's, there's, uh, lots of ways to slice them. For sure. Yeah. I would agree with you. And I also agree with you, office looks difficult, or at least it's very hard to see the crystal ball of what exactly things look like five, 10 years from now and think about when you're buying a stock, it's a discounted cash flow, a net present value of discounted cash flow years and years in the future. And so what exactly does that look like 10 years? I don't know. So I, but I know people gotta live in an apartment building that it is an asset that's easy to see. It's impossible to move away. Industrial. I think also looks pretty interesting. I think obviously the very short term, Amazon had too much warehouse capacity and that has put AALL on that whole sector. So all the industrial routes are down considerably and actually several have reported very good quarters and gave very good outlook.

So the Amazon space was soaked up pretty quickly. And eventually, as you know, we all get more stuff over time delivered to our house. And, you know, Amazon has been the leader here and now they're doing more and more, same day delivery. Well, everybody else has to do that. That means you need more warehouses closer to people. So I think the outlook there is, is really pretty bright. And I think, uh, most of the people, most of the major players in that sector are doing really well and should continue to do very well over the next three to five years. So those would be two areas. You mentioned self storage, also a very strong area, cuz it's also difficult to develop. Nobody really wants these, these storage facilities in their neighborhood.

Exactly. Exactly.

Well, a couple of reasons they soft drinks and beer have reopening characteristics to it. So it's a little bit way to play offense. I mean, clearly what's different now compared to two years ago is people are traveling. They're moving around, they're going out more, they're going out to restaurants more so that's good for the major soft drink companies. That's also, you know, it's been a very, very warm summer as we all know. Uh, that's great if you're selling beer and that's also, the bar business has actually, you know, come back in a quite a big way. That's also a way to play that. So yeah, I think that's an interesting, and it's somewhat defensive. It's obviously people have enough money to buy a Coke or a Pepsi in any kind of environment. So it's, it's not a, and then those companies now their water companies, their juice companies, they've got all sorts of things going on. But, but I think that just that particular sector, which is, you know, very defensive in terms of the economy and also has some reopening potential that those kind of beverages were not being used in so many places this time, last year. So you have a, should have a good year for, for all those companies,

Great. Exactly. And, and it's continuing, I think that's an area that's where people worry about, okay, what's gonna happen to the second half. You know, Snap's telling you online advertising, not so great, but I think the outlook is brighter for that area.

Well, I can't give individual stock recommendations on this particular podcast. So, but you know, I just think that depends on the person. I mean, I think that they're both certainly valid and if somebody has time to spend on researching individual stocks, by all means, I wouldn't discourage people from doing that. And then of course there's lots of index funds, ETFs, and you know, money managers that will do a nice job as well,

Yeah. Yeah. I mean, and obviously the, you know, what's happened to crypto is, is a good, uh, lesson here, I think where a lot of new investors and it, and you think about it, it was this, the same thing happened with the, I think the internet stocks in 1999, I, I was very much in the business then and you know, people, that's all they were interested in and, and there were a lot of very speculative companies and they did super well. And then there was a big problem on the other side. So yeah, I obviously, you know, that's where if an individual isn't sophisticated, they shouldn't just, you know, do it all themselves and be very narrowly invested in, you know, the very hottest asset class of the day, which last year was crypto.

Right. And I totally agree with you. I mean, especially when you think about, you know, that once again, we go back through history, but you know, a lot of people got turned off from investing because of what happened in 1999 and afterwards they got crushed. And so they just did something else. But if you had a diversified portfolio, if you owned energy, if you owned real estate, as well as some tech the next few years, weren't so bad for you. Uh, and so that's where the importance of diversification comes in.

Sure. Well, I'll give you my email, which is R Williams, uh, spouting rock.us. Spouting rock is an asset manager, Inmar, Pennsylvania, which is a suburb of Philadelphia, but we are multi boutique manager.

Thanks so much. I really enjoyed it too.