The Timber Log – 9/2/22

by | Sep 2, 2022 | The Timber Log

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.

  • September not starting on a happy note as all asset classes continue to fall on the back of Fed Chairman Powell’s comments at Jackson Hole.
  • Powell’s speech was half the length of last year’s at only 8 minutes because there truly was very little new to say…it was rumored that Powell did not want to make a speech, at all.
  • The Fed remains committed to quelling inflation. Fed would rather have a temporary economic slowdown than a structural inflation problem.
  • YET forward indications are that inflation IS slowing down.

 

  • Money supply has peaked; Commodity prices are falling; Supply chains are opening up – all point to falling inflation on a going forward basis.
  • YET, it will take several months for headline inflation rates to get near the Fed’s target of 2%.
  • Fed pivot is currently off the table and expectations are for a 75bps tightening in September.

 

  • So, it appears that we will get through the inflation problem but will the pending economic slowdown continue to negatively impact markets?
  • Since Powell’s speech ALL major asset classes have fallen sharply.
  • No surprise that risk on assets such as stocks and high yield sold off but so have risk off assets such as US Treasuries and gold.

 

  • Despite the grim macro-economic environment, we have continued to emphasize small cap equities as a source of potential value and excess return.
  • The quip on small caps is that they lead markets into a recession and lead markets out of a recession.
  • During June of this year, on a valuation basis, the S&P 600 traded back to its COVID lows of roughly 11x forward earnings. Possibly, small caps have already discounted the slowdown….
  • Subsequently, small caps have outperformed this quarter with the Russell 2000 index up 8% versus the S&P 600 up 6% for the quarter.  

 

  • The dollar remains the king currency reflecting among other things the sad state of affairs for international economies and markets.
  • European growth expectations have fallen sharply amid a broken, hopeless energy system.
  • Japan remains demographically challenged and economically stagnated.
  • China continues to struggle from COVID shutdowns, slowing economic growth and a growing real estate and banking problem.
  • EM as an asset class has lagged for over 10 years and now trades at nearly a 40% valuation discount to US equities.

 

What is our bottom line:

  • Is there a potential for a market reversal?
  • Yes, extreme valuation differentials create opportunities.
  • YET, the dollar likely needs to peak for this opportunity to be realized.
  • AND, the dollar is not likely to peak until the Fed takes it’s foot off the accelerator.
  • AND, the Fed won’t do that until a meaningful improvement in inflation is realized.
  • It all boils down to watching for signs that inflation is on a glide path lower.

 

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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