The latest
The Market
Predictable and lackluster is the best way to describe the market for the first quarter of 2022. The market forecasted its current state with a large and growing number of tech stocks going down hard and fast since February 2021. Yet the indexes continued to rise into the end of 2021. In addition, more stocks were going below their long-term moving averages and staying there. It was only a matter of time until the decline caught up to the indexes dominated by a few large-cap names. The highest year-to-date price for the S&P 500 hit on January 4th and I believe that will hold as the high price for 2022. If I am wrong, it will be because Apple, Microsoft, and Google going higher. Outside of those mega-caps, the industries doing well through this turmoil and into today are fertilizer, steel, shipping, defense, mining and metals, and of course oil.
At the very least, it is safe to say that the best this stock market cycle has to offer is behind us. The rallies I see now look much more like bear market rallies than real market strength. If markets continue to operate the way they have over the decades, we are probably 1-3 years away from a robust market in which we will want to get aggressive. Confirming that sentiment, the recent yield curve inversion of the "2's and 10's" is a very reliable predictor of coming recessions. For longer-term stockholders such as ourselves, that is a crucial signal to avoid new purchases as you will most likely be able to buy shares cheaper in the next 12-24 months. If you are a shorter-term investor with sound risk management, you can get some tradable rallies and short opportunities. However, your overall gains will most likely be hard-fought and small relative to recent years.
I continue to see the same overvaluation and exuberance in the private markets that always proceeds a slowdown. That bullish sentiment always goes on longer than I expect. However, a few cracks in the private markets appeared in the last few weeks as interest rates made a sharp leg up. I have heard several stories of commercial properties go under an agreement of sale, only to be retraded for lower prices due to the interest rate spike. That doesn't mean we are headed for a cliff in 2022, but putting this all together means a choppy and hard to invest market. I would expect the market to behave with several days and weeks of positive momentum followed by violent crashes that give back most of their gains. The risk-reward proposition in that scenario is not in your favor, and it is a better time to research your future stock purchases and let the market lay the groundwork for easier and steadier future price appreciation.
Chart of the Month. This chart represents the price of Gold. Buying gold-related stocks right now may be the best investment in the next 1-2 years. The price action in this chart is indicative of the accumulation of the metal which is often followed by a breakout to new highs.
Our Holdings
After reading the above, it is probably no surprise that we are largely in cash. I do not think we have ever been more than 10% invested since starting the fund in July 2021. I am more concerned with preserving our cash than getting aggressive and making money in this market. There are better and easier days ahead and sometimes the best strategy is watching rather than participating. We are also such a small fund that we can easily outperform the market when the time is right.
That said, we do own a few names at the end of March. They include two gold stocks, Newmont Mining and Barrick Gold. We also have Devon energy and Marathon Petroleum. I recently took a small position in Lithium Americas, a speculative play, and sold half of our position after a fast 10% gain and holding half for a larger gain. Finally, we have tiny positions in Wesco and KBR.
Looking Forward
One area of the market that is most interesting to me in which we have no exposure is semi-conductors. The war in Ukraine and tensions with China have coalesced thoughts that globalization can be a huge liability. Manufacturing using higher levels of technology may create a new industrial boom at home. Combining that with personal consumption of autonomous technology and the microchips and software that exploits them is a large area of focus. The semiconductor and most all tech stock s are currently in the dog house on a technical level, but we will add exposure when the time is right. We should get into smaller companies being a smaller fund, but it is also hard to ignore larger companies such as Intel as a possible turnaround story from a wide moat company. Their stock has gone nowhere since the late 90s but the turnaround story, and overall momentum for microchips should not be ignored. It reminds me of Microsoft in 2013; after 15 years of going nowhere, it made a 600% rise in five years. If we buy a long-term deep in the money call option in these bigger stocks with low Beta's, the appreciation can look similar to a small-cap growth stock with little risk. Part of our strategy is to take a fundamental and macro perspective on a company and execute when the technicals indicate a possible dramatic rise. I look forward to putting that strategy to work with a company like Intel if the chips line up.
For the more immediate term, I hope to see Jacobs Engineering show some more strength, along with Raytheon as possible April purchases. I am mostly staying active with these tiny purchases to stay on top of the market and do not expect any sizeable gains or losses. My larger focus by staying active is perfecting our strategy while focusing on the new issue names that have come into the market over the last few years and trying to determine which could be the huge winners in a healthier market. When the market is ready to make its next real ascent, everything will start breaking out and hit 52 week highs. We want to make sure we are prepared and get in the best stocks early in the next cycle to ride the wave the longest.