Stableford Capital— July Review
The S&P 500 was up 5.5% in July (Figure 1). Nothing gets in the way of this market—Sunbelt Covid-19 resurgence and deceleration of employment gains be damned! Truly though, risk has not gone away forever. It still exists—even in a debt-fed, Fed-driven moral hazard environment. We all know that the Fed is bent on a growth at all costs policy. But it’s hard to completely divorce one’s self from reality when stewarding client’s hard-won capital. Put is down in the column of reluctant participants.
That said, there are a number of good opportunities out there. Banks trading well below book value, REITs with low downside risk and good cash flow, to name a few. But it takes patience. So, we are using a barbell strategy to invest new money where we find value while maintaining exposure to the tech-based beneficiaries of a stay at home world.
The US 10 Yr. rates fell from a really low 0.66% at the beginning of July to a ridiculously low 0.53% at the end of the month (figure 2). With rates this low it is becoming difficult to envision Treasuries in their traditional role as a hedge to equities. At less than half a percent, there isn’t much further to fall for the Ten Year. Investors are keen to the Fed though: while Treasuries remain pegged to the floor by Quantitative Easing (QE), investors are taking down the dollar (and taking up gold, something we have been participating in).
The government intervention has also led to a tight range on interest rates on US Treasuries since March. As of June 30 rates on the US 10 Yr. were 0.66%, nearly unchanged for the month and similar to where they began the second quarter. This is the result of the Fed, whose rhetoric and unlimited buying power have kept rates low after they fell from 1.9% at the beginning of the year (Figure 3). Of course, low rates help the economy a great deal. But they also lead to inflated asset prices. For now, the Fed has bigger fires to put out, but this problem will come back to haunt them (and us) later through moral hazard and falling valuations.
Stableford’s Positioning
At Stableford Capital, we take our financial stewardship responsibility to heart. That includes having educated and informed clients who understand our investment approach, which bears repeating:
We want to invest where we see asymmetric potential returns; upside opportunity with limited downside risk. Specifically, our goal is to:
- Buy high quality, capital compounding companies below intrinsic value (a fancy way of saying cheap vs. the future value of cash flows), with prudent management teams who treat investor’s capital prudently.
- This is no different from the approach we’d take if we wanted to buy a local, non-public company. What are the things we’d look for? A good value, a sustainable businesses. Do you want to own the grocery store with a good reputation, or the fidget spinner retailer that is a fad? Which one will last?
- This is a simple concept, but it requires knowledge, wisdom, and discipline to execute.
- If you build a portfolio of these types of companies, you can feel comfortable in what you own, regardless of what others are telling you about price.
- It is important to note that this equity investment approach is different from investing in commodities or currencies, which don’t have an intrinsic value to fall back on (i.e. no future cash flows). Those are simply trades, with no real intrinsic value. But a well researched stock is different. If the cash flows will continue into the future and you are relatively certain about it, then there still value in the firm.
Be well!
Are you interested in making portfolio changes or getting a more in-depth analysis? Contact Stableford today by calling 480.493.2300 or simply request a free trial of our Market Blast.
This market commentary was written and produced by Stableford Capital, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
