The Timber Log is a quick overview of Timber Point Capital’s most recent investment thoughts. If you have questions about the content, please reach out to Patrick Mullin. The information contained herein does not constitute investment advice or a recommendation for you to purchase or sell any specific security.


Stagflation argument takes a bit of a hit last week…CPI and PPI data are tame..finally.

  • Stock market rally aided by CPI and PPI data prints…perhaps peak inflation has arrived…
  • Week prior employment report doused the flames of recession talk…
  • Above data points were “good” news but we don’t see a Fed “pivot” to slower rate increases
  • Still expect 50-75bps at the September meeting as Fed targets 3.25% – 3.50% exit rate from ‘22
  • Be mindful about components of CPI…gasoline is 5% while food and shelter are 11% and 32%
  • The price of gasoline declined 11% in July since hitting $5 in June…how much lower can it go?
  • Food prices posted 7th consecutive monthly increase of greater than .9%…increases broad based
  • Shelter, or owner equivalent rent, was up 5% y/y…this understates rental rate increases
  • Redfin rental increases in the low teens % range implies shelter impact could grow in CPI figure
  • Further, August and September 2021 were “tame” inflation months with .25% m/m increases
  • Inflation still running 8%, talk of return to 2-3% in near term are over-optimistic
  • Bond market sold the news of inflation print, rally had gone too far and more wood to chop
  • It will take many months of “zero inflation” to move CPI meaningfully lower
  • Bottom line: Fed unlikely to bring inflation down to 5% by year end…Fed continues to hike

 


The new “bull” market rides on…size and style matters

  • The S&P 500 and Russell 2000 continue to rally in August, have now gained 17%/21% from mid-June lows
  • To put this in context…post Y2K there were three SPX rallies of > 15% between 2000 and 2003
  • Between late 2007 peak and 2009 bottom, there were 6 SPX rallies, 5 in the single digit range
  • Big differences between the two periods and today…Fed was in easing mode…and the Fed’s balance sheet was a fraction of its current size
  • Russell 1K Growth (up 22.5%) has outperformed Russell 1K Value by 900 bp’s since mid-June
  • Russell 2K Growth (up 27.5%) outperforming Russell 2K Value by 800 bp’s since mid-June lows
  • We have liked small caps based on valuation and extreme negative sentiment – we still do but have pared back some of our bet
  • Energy names are still attractive given US and global dynamics impacting supply as well as strong capital efficiency practiced by management teams
  • Sentiment and investor positioning are still negative…there is cash on the sideline and hedging that still needs to be unwound…watching consumer and economic news closely

 


Fixed Income markets rebound but there has been no place to hide in 2022…

  • All segments of the FI market have been difficult in ’22…YTD, the Barclays Agg is down 8.7%
  • Inflation protected securities have modestly outperformed on a YTD basis yet remain down on the year. TIP’s are bonds first, inflation protection second
  • Volatility is the new normal as yield curve steepens again and USD rolls over…inflation expectations in flux
  • High yield spreads narrowed by 100bps QTD as recessionary fears diminished
  • Emerging markets debt is worst performer – no surprise given the strong USD
  • Pandemic programs have helped extend the credit cycle – we believe it still exists, however
  • Credit fundamentals are solid today though banks did build reserves during the quarter
  • We believe credit risk is not resident in bank balance sheets but on off-balance sheet entities
  • Private equity, BDC’s (business development companies), hedge funds and other “shadow” bankers have fueled the economy with covenant light loans
  • That said, we still think the economy is healthy enough to avoid a major stress situation

 


David Cleary, CFA is the President and Chief Investment Officer at Timber Point Capital Management, LLC. Prior to founding TPCM, David served as the Chief Investment Officer at Crow Point Partners. Before Crow Point, Mr. Cleary spent 23 years at Lazard Asset Management where he held a series of senior portfolio management roles over multi-asset and global fixed income strategies. Additionally, he served as the firm’s global head of fixed income, a $26 billion platform. Prior to Lazard, David worked at UBS and IBJ Schroder, mostly in fixed income asset management roles. He began working in the asset management field in 1987 upon his graduation from Cornell University, with a BS in Business Management and Applied Economics. Mr. Cleary holds a Chartered Financial Analyst (CFA) designation.

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