Market decline

The biggest market decline in 54 years

Very few filings last week as we navigated through the data desert in the first weeks of the calendar quarter. During this period, there is a lot of news as companies issue press releases and talk about their numbers, but the specifics are where the value is.

The higher rate of inflation and the higher interest rates associated with it have led to lower asset values. News headlines proclaiming the biggest market decline in 54 years miss the most important element of this.

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Q2 2022 Hedge Fund Letters, Talks & More

ValueWalk’s August 2022 Hedge Fund Update: Coltrane Gains 225% Shorting

investWelcome to our latest issue of ValueWalk’s hedge fund update. Below, subscribers can find an in-text excerpt and the full issue in PDF format. Please send us your comments! With Coltrane gaining 225% in shorting technology, Quant Fund Fort getting caught up in volatility, and Hedge Funds tackling struggling startups. Q2 2022 Hedge Fund Read more

Long-term bond yields have risen from 1.7% to 3.25% since the low point in early December. The value of long Treasury bills fell by 27%. This is the biggest fall in the price of Treasury bills ever recorded!

Haven of Treasuries

In every other stock market decline in history, Treasuries have acted as a safe haven. They provided an opportunity for investors to defend their equity portfolio against the downside and this became the basis for asset allocation.

Recently, asset allocation failed causing great damage to pension assets (and counting!). In December, when bond yields bottomed out, inflation was 6.8% for a spread (real loss for investors) of 5%.

However, with inflation measured at 8.6%, the real loss for bond investors remains above 5%. Interest rates will have to rise much further before a rational investor buys long-term bonds.

Can inflation fall?

Alternatively, inflation could decline. No doubt the wave of viruses has exaggerated everything now. The huge sales implosion in the first quarters of the virus was followed by a huge sales explosion in 2021.

The virus surge has now peaked and growth is largely down. But, so far, not down sharply. Broad equity indices are down but less so than long-term bonds and industrial and energy stocks are up.

The wave of business growth set in motion by the virus will continue to cloud the growth picture for the next few years. We are moving from an era of consumer domination where free money encouraged people to go into debt, to an era of rebuilding after years of underinvestment in infrastructure.

Globalization has run its course, and the resulting benefits (low inflation and rising corporate profits) are likely to conversely depress living standards in the United States and make the retirement of baby boomers miserable.

All about oil

The timing of all of this once again comes down to oil prices. The price of crude has moderated over the past few weeks and at the start of next year, at current prices, the inflationary effect of rising energy prices is fading.

The energy sector was particularly shaken by the virus which caused sales growth to drop to -28% at the low point to rebound to 52% today. During this period, capital expenditures (investments in new production capacity) increased to 14% of sales compared to the low point of last year.

This recent surge in energy development will contribute to supply growth two years from now, suggesting that energy costs will continue to rise.

Look for rising profit margins

To protect our assets during this difficult time, we must insist that all companies in our portfolio achieve a gross profit margin up. Only rising growth will protect our portfolio from the negative effect of rising interest rates.

At best, the current outcome will be a sharp and broad-based decline in growth that could lower inflation and reduce the likelihood of higher interest rates. The decency of the virus wave, budget cuts in the face of inflation, the wealth effect, the rising cost of money, all of this could lead to a sharp drop in growth.

Market Outlook

In the current update, the Securities & Exchange Commission (SEC) filing update is complete and all stock decisions have been postponed. As we see companies file their financials with the SEC in the coming weeks, we’ll be sure to provide sell decisions if growth drops.

In summary, business growth is exceptionally high and falling more frequently. Inflation should remain high and interest rates will continue to rise. Falling growth and rising interest rates are a terrible combination for stocks and asset values ​​in general.

Maintain portfolio companies with strong sales growth and rising profit margins (big green MoneyTree in a golden pot)

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market decline

market decline

market decline

market decline

market decline

market decline