Performance Report: 03/31/2024
All performance data for our strategies is net of all fees and expenses. All performance data for indexes or other securities is from sources we believe to be reliable. All data is as of 03/31/2024.
Investment Strategy
MAP: Full ($500k+)
MAP: ETP (<150k)
S&P 500 Index2
Balanced (AOM)2
Global Balanced2
Jan. Return
5.0%
4.3%
3.1%
1.9%
2.3%
YTD
(0.6%)
(2.0%)
10.2%
4.2%
5.2%
Inception1
40.0%
23.1%
78.4%
21.5%
37.4%
VORR3
.791
.432
.789
.406
.478
We had a really nice month in March. We still have some catching up to do to match the YTD returns of our benchmarks, but, since inception, my strategies have maintained their advantage over our benchmarks.
Currently, I'm encouraged by the action in our portfolios. I am seeing some of the securities we own gaining considerable momentum. Since the inception of my strategy, gains have come in fits and starts. We endured a three-month pull-back which wrapped up in February. Hopefully, March was the start of a fit of returns that will continue for a few months. Pullbacks such as we suffered at the beginning of the year are frustrating but we always follow through with a nice rally. My risk management procedures have helped me control losses when the market is moving against my investment themes while the MAP continues to identify low-risk entry points as the market starts to turn in our favor.
Stock Market Update
An expensive stock market just kept getting more expensive in March. Here is Dr. John Hussman's take:
The stock market presently stands at valuation extremes matched only twice in U.S. financial history: the week ended December 31, 2021, and the week ended August 26, 1929.
Given these two moments in time were horrific times to be invested in US stock indexes, will the market correct again or will it continue higher acheiving the most extreme valuation ever? Neither outcome would surprise me. Some weak inflation data, maybe a resolution of one of the major military conflicts taking place in the world right now, or some other catalyst could easily spark the inflationary flame that is fueled by the FED's perpetual money-printing machine. But even if the stock market rises to even higher highs, that does not change the fact that broad-based stock market indexes are obscenely expensive and the long-term outlook for holding equities is far below average. To add some more perspective, CNN posted a piece titled, "Warren Buffett's favorite market indicator is flashing red".
What’s happening: Widely known as the “Buffett Indicator,” it measures the size of the US stock market against the size of the economy by taking the total value of all publicly traded companies (measured using the Wilshire 5000 index) and dividing that by the last quarterly estimate for gross domestic product.
The resulting ratio is supposed to tell us how fairly priced stocks are by providing a simple gauge of whether the market is overvalued or undervalued relative to economic output. If the stock market is growing a lot faster than the economy, that could be a sign of a bubble.
Buffett’s Berkshire Hathaway says that a reading of 100% is fair, if it’s closer to 70% stocks are at a bargain price, and if it’s anywhere near the 200% mark, investors are “playing with fire.”
The indicator is currently sitting near a two-year high, at nearly 190%.
The last time the indicator was this high was in 2022, when it hit 211% and the S&P 500 dropped by 19% over the next year.
Historically, when the stock market hits such extreme valuation levels, the subsequent correction is substantial. A 50+% decline in this environment should not be s surpise. But the FED is determined to make sure that doesn't happen. I contend the only thing that will stop the FED's monetary binge is if multiple foreign nations agree to stop accepting US dollars. Our economy and the stock market are wholly dependent on our nation's ability to export inflation (i.e. US Dollars). The UAE broke free of the US dollar late last year and we know Russia did at the onset of the War with Ukraine. Other nations like China and Brazil are proactively distancing themselves from US dollar hegemony. If a sufficient number of foreign nations move away from the US dollar, either the FED will have to limit the amount of monetary inflation they create or the US populace will have to live with an elevated amount of price inflation. Either scenario would seriously hamstring the stock market and Wall Street. Wall Street does not consider this scenario as even remotely possible despite that it's happening right under their noses. They lived with the same foolish naivety about Covid in early 2020, about interest rates in 2021, about the housing market in 2008, and concerning tech valuations in 2000. When obvious risks are ignored, it's usually a good time to play it safe.
Commodity Market Update
Commodities have fared well the past month. Some are breaking above resistance levels like gold, others are establishing positive momentum like oil, while others appear to be climbing the proverbial "wall of worry" such as natural gas and wheat. In last month's update, I addressed the stark dislocation across the commodity space which I chalk up to nefarious forces.
In this update, I want to address the multiplier impact on a stock that produces a commodity when that commodity increases in price. The consensus says that when a commodity increases in price, the stocks of companies involved in the production of said commodity should increase even faster. Let's consider gold as an example. To make the math simple, I am going to assume that it costs $1000 to mine an ounce of gold (the commonly accepted figure is $1200 but for this example, I'm going to use $1000). Until its recent breakout, gold has traded in a range between $1700 and $2000 for several years. At $2000, the gross margin of an ounce of gold is $1000. Let's assume for this example, a mining company has fixed costs that equate to $500/ounce of gold they mine. Thus, at $2000/ounce, the profit the gold mining company would earn would be $500/ounce.
Let's say gold appreciates 25% to $2500. The gross margin for each ounce mined jumps 50%, from $1000 to $1500. And the profit for the gold miner jumps 100%, from $500/ounce to $1000/ounce. Thus, a 25% increase in the price of gold translates into a 100% increase in profits for the mining company.
Now that gold is trading at all-time highs, about 20% above its average range over the past three years, then gold mining stocks should also be at all-time highs. But that is not the case. Here is a rundown of the current price of a few prominent mining stocks, their all-time high price, and when the all-time high price was established.
Ticker
NEM
AEM
AU
KGC
PAAS
Current Price
$36.43
$61.30
$22.17
$6.16
$37.16
All-time high price
$79.68
$80.52
$53.22
$23.98
$15.25
Year established
2021
2020
2006
2008
2020
There is a myriad of legitimate reasons why mining stocks would be trailing the price of the underlying metal. Most of these companies will be saddled with a large amount of debt as mining is heavily capital-intensive. Most of these companies would utilize various hedging strategies that would cap the price they receive for their commodity in the near-term. Finally, there are environmental and political issues that must be accounted for. But even considering these variables, gold miners should not be trading 50% below their all-time highs, which several of these are. In 2007 and 2014 when oil hit new highs, the stock for oil companies hit new highs. When ag products hit new all-time highs in 2022, ag-centric stocks hit all-time highs. Yet, many of these mining companies are more than 50% below their all-time highs which cannot be explained by the reasons above.
The stark underperformance of the mining companies is most likely due to the simple fact that the majority of stock market participants have not bought into the bullish narrative surrounding gold's latest rally. Wall Street bankers who are married to the FED have yet to accept that foreign central banks are buying gold at a record clip. China's buying alone is off the charts. Domestic investors are ignoring the fact that foreign governments are breaking free of the US dollar in a way that hasn't happened over the past 100 years when the world went on strike against the British pound.
Eventually, investors will jump on the bandwagon of not just gold mining stocks but the stocks of all commodities due to benefit from a weakening US dollar. Recently, we have seen what happens to AI chip makers when the market turned bullish on AI. During covid, we saw what happened to healthcare stocks. When energy prices peaked in 2014, energy stocks enjoyed a momentous rally. Then there was housing stocks in 2007 and tech stocks in the late 90's. Wall Street is known for chasing fads and gold simply isn't a fad yet. When it does become one, gold and other commodity-based stocks could see gains equal to several times the gains in the underlying commodities.
As always, please do not hesitate to call me at 512-553-5151 if I can be of assistance.
Best,
Matt McCracken
1) Inception date of 4/30/2019
2) All benchmark prices are obtained through the Yahoo!Finance website. S&P 500 Index is calculated using the index price. AOM is the iShares Core Moderate Allocation ETF. Global Balanced is calculated using a 40% allocation to the S&P 500, a 40% allocation to BND, and a 20% allocation to IEFA.
3) VORR is our "Value over Risk Ratio": Calculated by taking the total return divided by the sum total of all negative months. Ideally, the ratio represents how much loss an investor has to endure to get X gain. A negative RORR score implies there is more risk in the investment than return.
IMPORTANT NOTE: I had to remove the MAP - MIN strategy as there were only 2 accounts invested in it from inception and both accounts are now engaged in a different strategy. Thus I do not have a continuous account history to base since inception returns on.