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End of the Recovery and Reflation Trade?
by Team of Grey Owl Capital Management,
The yield curve is a powerful indicator. More powerful than many others as May West reminds us. As the greatest reopening momentum now appears behind us, today, our All-Weather portfolio looks more all-weather than it did earlier in the year.
Quarterly Letter
by Team of Grey Owl Capital Management,
2020 has proven a challenging year for numerous businesses and individuals, Grey Owl Capital Management included. While most domestic stock market indices have fully recovered from the February and March Covid sell-off, many of our accounts are still down slightly on a year-to-date basis through the end of September.
Quarterly Letter
by Team of Grey Owl Capital Management,
What a difference three months make. For the full year 2018, every primary asset class was negative: the S&P 500 lost 4.6%, commodities were down 13.9%, long-dated US Treasury bonds were down 1.6%, and gold gave up 1.9%. Contrast that with the first quarter of 2019 – every one of those assets was up!
Quarterly Letter
by Team of Grey Owl Capital Management,
The fourth quarter of 2018 proved to be one of the most negative quarters for financial risk assets since the current bull market began in March of 2009. The S&P 500 finished down 13.5% and commodities were down an even worse 22.6%. As one might expect, safe haven assets performed well.
Quarterly Letter
by Team of Grey Owl Capital Management,
Despite another interest rate hike in June by the Federal Reserve that raised the target federal funds range to 1.75-2.00%, along with plenty of increased tariff talk and (some) implementation by the Trump administration, the investment world was relatively calm in the second quarter of 2018.
Quarterly Letter
by Team of Grey Owl Capital Management,
The end of 2016 through the beginning of 2018 had been one of the least volatile periods in recorded stock market history. It was THE least volatile by one measure – for the 404 trading days through the beginning of February, the market never had a five percent correction – the longest streak on record.
Quarterly Letter
by Team of Grey Owl Capital Management,
Value investing is under attack. The US equity market is at its most expensive level in history and has spent most of the past six years in the top quintile of expensive. In addition, value equities have underperformed the broad market and more widely growth equities for over ten years.
Quarterly Letter
by Team of Grey Owl Capital Management,
In our last quarterly letter, we discussed seven transactions from early 2017: two buys and five sells. We also provided an update on our then largest position, Express Scripts. There was zero analysis of the economy, asset classes, and central banks. We have been relatively quiet on the transaction front since then.
Quarterly Letter
by Team of Grey Owl Capital Management,
During the first four months of 2017, we were relatively active on the buying and selling front. With a reasonable amount of information to report on individual positions, we will dispense with any broad economic and asset class commentary and dig right into each of the transactions that occurred between January and April.
Q4 Quarterly Letter
by Team of Grey Owl Capital Management,
As we enter 2017 and the beginning of the Trump presidency, the US equity bull market is almost eight years old. In fact, the eight years since the “great recession” has been a bull market not just in domestic equities, but in almost every global financial asset class.
Quarterly Letter
by Team of Grey Owl Capital Management,
US equity indices reached new, all-time highs following Britain’s late-June “Brexit” vote. Yet, domestic equity markets have essentially moved sideways for the past eighteen months. The same goes for global equities. Even the unassertive descriptor “sideways” overstates the case – the full path of US equity markets during the period included three bouts of significant downside volatility.
Quarterly Letter
by Team of Grey Owl Capital Management,
The Grey Owl investment process starts and ends with robust risk management. Our goal with the Grey Owl Opportunity Strategy is to provide equity-like returns, but with lower drawdowns and volatility than the major equity indices. As such, we worry about the downside first. We do not want clients to fear opening their monthly statements, and we certainly do not want to put regular withdrawals at risk, regardless of what the indices are doing.
Quarterly Letter
by Team of Grey Owl Capital Management,
In 2008, most investors were driving a fast car down a country road at night with no headlights. They ignored widening credit spreads and kept their allocation to risk assets too high. Value investors bought financial securities because they seemed cheap relative to book value, and neglected to size the position with any consideration to the idea that these entities had so much financial leverage, a bad quarter could entirely wipe out equity value.
Q1 Letter
by Team of Grey Owl Capital Management,
Grey Owl’s strategies all performed well in the first quarter. The good performance came despite US GDP growth of just 0.2%, continually lowered earnings expectations, and volatile equity and bond markets. Below we discuss the current environment including the now absolute fixation by investors on every Fed comment, our continued focus on an all-weather approach, and our best and worst performing securities during the quarter.
Quarterly Letter
by Team of Grey Owl Capital Management,
Over the past seven months the price of oil has plunged from a peak above $100/barrel to the mid-$40s today. This is just the most extreme version of the market volatility and divergence we began highlighting in our second quarter letter. A cautious investment stance remains the prudent choice.
Grey Owl Q2 Investment Commentary
by Team of Grey Owl Capital Management,
Even after a second quarter rebound, gross domestic product (GDP) growth is barely positive for the first half of 2014. That has not stopped the S&P 500 from climbing to new highs. In fact, GDP growth has been weak for the entire recovery and, while improved, corporate sales and earnings also leave something to be desired. Stock market returns look better still, but only when compared to these weak results. Looking over a longer timeframe, the US equity market is approaching fifteen years of low single-digit returns.
First Quarter Letter
by Team of Grey Owl Capital Management,
The broad equity market displayed a fair amount of volatility during the quarter, but essentially went sideways. This pattern continued through April; 2013s losers became 2014s winners and vice versa. In the broadest sense, bonds narrowly beat stocks on the heels of 2013s thorough drubbing.
Grey Owl Capital?s Third Quarter Letter
2013 was a banner year for the US stock market. Despite equities? meager fourteen-year record of accomplishment, investors, broadly speaking, are limited to short-term memory. Last year?s performance was enough to generate significant enthusiasm for stocks. We continue to believe, the current environment warrants a more balanced approach.
Third Quarter Letter
by Team of Grey Owl Capital Management,
Despite the recent shenanigans in Washington concerning funding the government and raising the debt ceiling, as well as the constant news coverage of the quantitative easing taper that the Federal Reserve may or may not begin, we are going to spare (at least for this quarter) both you and us another long discussion of these very real issues.
Quarterly Letter
by Team of Grey Owl Capital Management,
To begin, let us state that we are tired of writing about macroeconomic issues. We suspect you are tired of reading about them. We would like nothing more than to send out a quarterly letter full of updates on the companies we own and the rationale for individual buy and sell decisions. Nevertheless, we must address the market action following Federal Reserve Chairman Ben Bernankes May 22nd testimony before Congress, where he merely floated the idea of tapering the Feds quantitative easing efforts.
Quarterly Letter
by Team of Grey Owl Capital Management,
In his April 2013 commentary, PIMCOs Bill Gross wrote, PIMCOs epoch1, Berkshire Hathaways epoch, Peter Lynchs epoch, all occurred or have occurred within an epoch of credit expansion What if an epoch changes? What if perpetual credit expansion and its fertilization of asset prices and returns are substantially altered? What if a future epoch favors lower than index carry or continual bouts of 2008 Lehmanesque volatility ?
Q4 2012 Letter
by Team of Grey Owl Capital Management,
During the second half of 2012, central banks turned their massive and coordinated monetary intervention "up to eleven." This is the overwhelmingly dominant economic and market force today. Despite the long-term consequences (which are very real), we believe the central bankers commitment is steadfast. It has and will likely continue to mute both real economic and financial market volatility (at the expense of long-term growth). A deeper analysis of what has changed, our assessment of the impact, and our portfolio response follows.
Quarterly Letter
by Team of Grey Owl Capital Management,
The multiple hurricanes of fiscal deficits and monetary malfeasance are headed our way. Unfortunately, financial market models that seek to assess the magnitude, direction, and timing of economic tempests are far less precise than those of our scientific brethren. So, we prepare for the worst, but we dont immediately evacuate. There are still plenty of opportunities for solid investment returns and we will describe two new investments in the pages that follow. Yet, the risks are real, as we have discussed frequently in these letters, so our overall portfolio structure remains conservative.
Q1 2012 Letter
by Team of Grey Owl Capital Management,
The overall equity markets strong first quarter rally was narrowly focused and, from our perspective, fragile. Cutting to the chase, we think both stocks and bonds are expensive. During the quarter, we used opportunities presented by Mr. Market to trim some of our lower quality positions and to add starter positions in a few high quality businesses. We also added to our short-term, high-yield fixed income holdings, sources of return that we expect to show less volatility but results equal to or better than the broad equity market indices.
Third Quarter Letter
by Team of Grey Owl Capital Management,
We fully expect markets to remain manic and co-dependent. The market cant live without Ben, so a few weeks of weak data and no intervention and well have a selloff. Likewise, as soon as rumors of the next hundred billion dollar intervention surface, traders wont be able to buy equities quickly enough. The situation in Europe is a mirror image. Thankfully, in a world of 20,000+ individual securities there are always pockets of opportunity. We must be prepared for our individual ideas to trade with the market for periods of time, but over the long-haul good things happen to cheap stocks.
Quarterly Letter
by Team of Grey Owl Capital Management,
We remain concerned about the global economy and suspect of broad asset class valuations.However, in a world of tens of thousands of securities there are always opportunities.Absent a significant market correction, we are likely to continue to hold cash or dry powder.We also continue to look to hold assets that can perform well in an inflationary environment, as dollar debasement seems to be the political path of least resistance out of our current problems.The politicians appear happy to solve the problems maana. We on the other hand are happy to make hay when the sun shines.
Quarter 1 Letter
by Team of Grey Owl Capital Management,
QEII is set to end no later than June 30th. Prominent money managers disagree on the impact. PIMCO?s Bill Gross thinks yields are bound to rise as the largest net buyer of Treasuries moves to the sidelines. Gross has sold all of the US Treasury holdings in the flagship Total Return Fund. Jeff Gundlach, formerly of Trust Company of the West and now with DoubleLine Capital, believes the opposite. According to him, yields will fall in the short term because quantitative easing is inflationary. When QEII stops, bond buyers will require lower yields as future inflation expectations recede.
Fourth Quarter Letter
by Team of Grey Owl Capital Management,
In spite of Bernanke?s objective to put a floor on asset prices, including equities, we remain conservatively positioned. Equity and credit markets appear overvalued. In addition, with the U.S. and most developed-market economies significantly more leveraged than in the last 50 years, economic growth will likely be more volatile. Further, many potential exogenous forces could negatively influence public markets: over-leveraged municipalities, the PIIGS, and continued issues in the US housing market to name a few. Finally, there is no evidence that monetary policy can create real growth.
Grey Owl Q3 Letter
by Team of Grey Owl Capital Management,
Uncertainty abounds and all broad asset classes are beginning to look expensive again. Unemployment shows few signs of improvement and business confidence is low, yet the stock market continues to climb the 'wall of worry.' Frankly, we have little confidence in the economy or in the broad stock market. However, we continue to find pockets of value in out-of-favor names across industries and market capitalizations. Macro uncertainty may continue to drive the market for some time, but eventually the weighing machine will win out.
Claims of the 'Death of Stock Picking' Are a Good Sign for Value Investors
by Team of Grey Owl Capital Management,
A recent Wall Street Journal article highlights the macro-driven nature of today?s stock market. Long-time value investors lament the current environment where stocks appear to trade in unison based on unemployment data or European bank stress test results. If stocks are driven by macro factors instead of company fundamentals, stock pickers can?t get an edge. We think stock-picking is very much alive. Call us contrarian, but we couldn?t think of a better sign that fundamentally-driven, bottom-up stock-picking is likely to make a comeback sooner rather than later.
Grey Owl Capital Management's Q2 Letter
by Team of Grey Owl Capital Management,
The equity and fixed income markets are still modestly overvalued. In addition, the economic recovery may only have been a mirage that the slow dwindling of the government stimulus will reveal. The majority of Grey Owl's equity portfolio is made up of 'high quality' companies ? those with consistent earnings growth and low financial leverage. Japanese-style deflation and 1970s-style stagflation are both possible given the slow private sector growth, increasing government regulations, growing government debt loads, and expansive monetary policy.
Quarterly Letter
While the stock market paused briefly to catch its breath in January, risk taking was broadly rewarded beginning in mid-February. As we entered March and passed the one-year anniversary of the 2009 market lows, the market took off again. As if it was scripted, the most highly indebted and economically sensitive companies have performed the best during this rally. Financials, in particular banks, have roared. The market has been fueled by consistent marginal improvements in the economy, which have led to expectations of much bigger improvements in coming quarters.
You Want China to Float the Yuan?
Members of the U.S. House of Representatives sent a letter to the Treasury and Commerce departments urging them to use all available resources to end what they view as damaging currency manipulation in China. These congressmen are pandering to concerned workers, while ignoring the fact that their constituents benefit from current exchange rates whenever they buy cheap goods from China. While a higher RMB/U.S. dollar exchange rate may be politically popular, it would lead to higher real costs, higher inflation and higher interest rates in the U.S.
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