Portfolio Splits
I have been investing money for clients for over 40 years and it was not long into my career that I questioned rules of thumb like the best portfolio is a 60/40 split of stocks and bonds. I’ve always felt it was better to research deeply investments that were undervalued and would do well going forward. My fear has proven to come true over the years, especially now as according to Bank of America the 60/40 split portfolio is having its worst year in 100 years as the annualized change in its recent year-to-date value was down 34.4%. Year to date we are down a little bit in our portfolio but based on what we have I still believe we can have a positive return come December 31, 2022. With a 60/40 split based on what I see going forward I don’t think that has a break even for at least 3 to 5 years. I still stand behind my statement that rules of thumb when it comes to investing don’t work long-term.
Gross Domestic Product Report
Q3 GDP produced the first positive growth of the year as it increased at an annualized rate of 2.6%. The consumer continues to remain strong enough to produce growth as the consumption category grew 1.4% in the quarter. This was entirely due to the service economy, which was up 2.8% compared to consumption of goods, which fell 1.2% in the quarter. Gross private domestic investment continued to struggle as it fell 8.5% in the quarter. This was largely attributable to the decline in residential investment which fell 26.4%. Investment in equipment and intellectual property products were positives as they grew 10.8% and 6.9% respectively. The change in private inventories continued to weigh on the report as it subtracted 0.7% from the headline number and with the heavy inventories at retailers, I believe this could remain subdued for the next quarter as well. The major highlight came from the trade component which added 2.77% to the headline number. This came as exports climbed at an annualized rate of 14.4% and imports fell at an annualized rate of 6.9%. With the likelihood of the strong dollar remaining in place through the remainder of the year I'm skeptical that we will see another major benefit to trade as we close out the year. The final component, which is Government, was also a benefit as it added 0.42% to the headline number. Overall, I'd say the GDP report was good, especially considering a lot of the fear from people at this time.
Oil Companies
You have heard all the bad news about the big profits that oil companies are making but what you don’t hear is how much they spend and what they are doing for a green future. Both Exxon and Chevron are building offshore wind farms which will supply millions of homes on the East Coast with electricity. They’re also preparing production of hundreds of millions of gallons of fuel which will come from plants, garbage and even kitchen grease. Oil giant BP just spent $4.1 billion acquiring a company that replaces fossil fuel gas from wells with natural occurring biogas from landfills. The oil companies know that the times are changing and while they are accused of paying out big dollars to the shareholders, they are investing their profits for a greener future as well.
Product Shortages
Things have really changed 180° from less than a year ago when there were shortages of products available. Inventories are now so large warehouses are bursting at the seams. The vacancy rate in warehouses in the third quarter 2020 was 5% that has now declined to 3.2%. Currently, businesses are paying more per square foot in warehouses. Last year in the third quarter it was $7.13/square foot, the average has now climbed to $8.70/square foot. What does that mean to you as a consumer? Retailers want to get rid of these items costing them money just sitting in the warehouse. Consumers could see some great sales coming up in the future, keep your eyes open.
Petroleum Reserves
President Biden came out with a plan to replace the Strategic Petroleum Reserve which has fallen to about 400 million barrels. His plan is to lock in a future price to purchase oil at around $72/barrel. I don’t know if he had talked to his advisers about this, but there are no way oil companies will lock in that price when demand is high, and we know that OPEC+ will be cutting production, perhaps raising prices further. The oil companies are likely thinking that oil will probably rise back to around $100/barrel and there is no reason to get a guaranteed lower price of $72/barrel. I do fear that to replace the oil, it will be at a much higher price. My guess is between $90 - $100/barrel. The strategic reserve can hold up to 715 million barrels. I’m not sure what the comfort level is for the country, but I’m sure it’s higher than 400 million barrels.
Tesla Stock
Tesla stock has been no safe haven in 2022 as it has fallen around 45% this year. The recent earnings did top expectations, but third-quarter deliveries, sales and profit margins were short. It is going to come down to future deliveries in the fourth quarter of 2022 and the first quarter of 2023. Tesla has been in bad situations like this before and made it through. Unfortunately, the big variable here is will Elon Musk have to purchase Twitter and spend time away from Tesla. Also, to complete the sale he would have to sell between $5 and $10 billion of Tesla stock.
10-Year Treasury
Just in case you weren’t watching, last week the 10-year treasury closed over 4% actually hitting 4.3%. The last time the 10-year treasury was over 4% was 14 years ago in October 2008. I’m sure glad we haven’t had any bonds in our portfolio!
Cathie Wood’s Ark Innovation ETF
If you’re feeling sad about your performance year to date, just be glad you did not get sucked into Cathie Wood's Ark Innovation ETF. Year to date it is down more than 60% and over the last year it is down close to 70%. She continues to try to talk up the fund going forward but this reminds me so much of the tech boom and bust where fund managers were still touting that things would turn around years later. Overpaying for anything is never a good idea, I do believe her days are numbered.
Job Market
I’ve said I would continue to watch the jobs market because I believe it will remain strong and with that, I do not believe the recession will be that deep. The most recent initial job claims from the labor department was only 217,000 up slightly from the previous week of 214,000. Compare that to previous recessions where jobless claims were above 400,000. You may be hearing on the news about companies like Snap and others that are laying off employees, but Snap's layoff of around 1300 employees is a drop in the bucket compared to the 153-million-person job market. Another reason why layoffs are remaining low is many employers had difficulty finding good employees and their balance sheets are very strong, so they are weathering the storm through a downturn rather than letting employees go and then trying to hire back the good ones. This may also help on the supply issue with production because if we can increase production of goods and services prices will come down and the Federal Reserve can stop raising interest rates to hurt the demand side.