Valuentum Exclusive Analysis for the Discerning Investor

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Mar 13, 2023

ICYMI: How Big Is Your "Too Hard" Bucket?
Image Source: Christian Schnettelker. In investing, it's okay to admit that there are some things that investors can't know. It's not a poor reflection of one's analytical ability or a possible shortcoming of one's experience, but rather quite the contrary: Understanding and accepting that some things are "unknowable" is a sign of the quality of one's judgment. Quite simply, certain critical components of the equity evaluation process are more "unknowable" than others. The intelligent investor recognizes the variance (fair value estimate ranges) and the magnitude of the "unknowable" between companies and generally tries to identify entities that have the least "unknowable" characteristics as possible or situations where the "unknowable" might actually be weighted in their favor (an asymmetric fair value distribution).

Mar 9, 2023

SVB Financial, Silvergate Capital, Credit Suisse Reveal Cracks in Global Financial System
Image: SVB Financial looks to be collateral damage of the Fed’s rate-hiking cycle, and we can’t rule out that other regional banks could have also managed interest-rate risk wrong. Shares of SVB Financial have collapsed, and other banks could be facing similar issues that have yet to come to light. Image Source: TradingView. SVB Financial announced March 8 what looks to be an emergency equity offering to the tune of $2.25 billion in common stock and convertible preferred shares. The company also announced that it had sold almost all of its available-for-sale (AFS) $21 billion securities portfolio, which resulted in an after-tax loss of ~$1.8 billion during the current quarter. This looks to be an effort to shore up liquidity while it can, and we would not be surprised to see some bad bets at the bank come to light. SVB Financial’s client cash burn has accelerated, and the executive team noted that the “challenging market and rate environment has pressured Q1 performance, with implications to (its) 2023 outlook.” It’s difficult to know just how bad things are at SVB Financial, but the bank seems to have mismanaged interest rate risks and its asset sensitivity. SVB is reconstructing its AFS portfolio with short-duration fixed rate U.S. Treasuries. Though this may be the right move, the stark scenario for the bank is that if market participants lack confidence in the institution, there is more downside to come.

Mar 6, 2023

Markets Bounce Off Technical Support But Not Out of the Woods
Image: The market-cap weighted S&P 500 (SPY) bounced off technical support last week, both the 200-day moving average as well as the breakout of the downtrend line, but while this may push off any leg down in the near term, we won’t hesitate to “raise cash” on a few newsletter portfolio names if a breakthrough of support to the downside happens. Image Source: TradingView. The 200-day moving average remains a key technical level for the market-cap weighted S&P 500. The risks that the market may break through both the 200-day moving average and the breakout of the technical downtrend line remain elevated, but the past week showed a successful test of technical support levels, in our view, and that means to us markets may avoid any substantial leg down for the time being. We continue to be cautious on the equity markets in the near term, and we won’t hesitate to “raise cash” across the newsletter portfolios if the S&P 500 breaks through its 200-day moving average and the breakout of the technical downtrend line.

Sep 28, 2022

Things Are Bad Out There
The Bank of England’s intervention to stem what might have turned into a “run on the bank” dynamic for pension funds in the country amid a collapsing pound has given rise to the view that the Fed may start to slow its rate of increases amid global uncertainty. We think it’s too early to tell. From our perspective, the Fed remains committed to stomping out inflation, something that it may not truly be able to do, given that interest rate hikes may be too blunt of an instrument to stymie food cost inflation, which remains one of the the biggest inflationary headwinds that is hurting consumer budgets. What is happening on the global stage is quite concerning, and we remain bearish on the equity markets. The bull case may very well be a deep recession in the U.S., where dollar cost averaging in the U.S. markets could be had, followed by sharp interest rate cuts by the Fed, and a return to all-time highs. This is not a time to lose interest, but a time to pay even closer attention to your investments. What you do over the next couple years will have implications on your portfolio 5, 10, and 20 years forward. Let’s keep focused on preserving and building long-term wealth!

Sep 11, 2022

U.S. Housing Market Showing Signs of Weakness
Image Shown: The U.S. housing market is starting to show signs of weakness. Companies involved in the home building business in the U.S. are starting to feel the heat, with the iShares US Home Construction ETF down ~30% year-to-date as of early September 2022 on a price-only basis. The national U.S. housing market has been on fire during the past few years. Sharp increases in U.S. housing prices are now contending with rising mortgage rates, which is prompting the question, are U.S. housing prices heading for a crash? Affordability issues are rampant, with many households now priced out of the market, and signs of weakness are emerging in the U.S. housing market. We think the prospect for rising mortgage interest rates could send housing prices spiraling lower, but nothing like that of the housing crisis of 2007-2009.

Dec 20, 2021

Our Report on the Banks & Money Centers Industry
Image Source: Insomnia Cured Here. Our report on the Banks & Money Centers industry can be found in this article. We’ll talk about how banks make money, and the three most important costs of running a bank. The Great Financial Crisis revealed the tremendous risks of banking equities, and we’ll walk through these risks in depth. We will also cover how the COVID-19 pandemic impacted capital markets and the banking industry, and what to expect going forward. We’ll discuss how to conceptualize where we are in the banking cycle, and how that helps inform our valuation process for banks, which is different than traditional operating entities. The stress tests have helped many of the big banks from pursuing hazardous endeavors during the past decade, and we’ll go into how to think about the yield curve in the context of banks. Investors should expect ongoing the digitalization of banking operations and increased M&A as the competitive environment only intensifies. Our two favorite banks are Bank of America (BAC) and JPMorgan Chase (JPM). These stellar enterprises showcased the resilience of their business models during the worst of the COVID-19 pandemic.

Jul 19, 2021

Bank Earnings Solid During Second Quarter 2021
Image Source: Bank of America Corporation – Second Quarter of 2021 IR Earnings Presentation. After reviewing the second quarter earnings reports of several major US banking institutions, the domestic economy continues to stage an impressive though uneven economic recovery. Net credit write-offs have been trending aggressively lower of late, a welcome sign. Banks are taking advantage of their improving financial outlook and have been aggressively rewarding shareholders via dividend increases and/or large share buyback programs.

Jul 8, 2021

Still Bullish -- Stocks for the Long Run!
Image shown: The 10-year Treasury rate has fallen quite a bit since March of this year, suggesting that inflation expectations have come down in recent months. Image source: CNBC. The S&P 500, Dow Jones Industrial Average and Nasdaq continue to hover near all-time highs, and all appears well. We maintain our bullish take on the markets and believe that we are in the early innings of a long bull market that started following the washout March 2020 during the depths of the COVID-19 meltdown. Stock bull markets tend to average about 4.4 years in duration, with the last one enduring ~11 years, while bear markets are very abrupt, lasting only 11.3 months on average, the last one a very short 1.1 months, according to data from First Trust. We’re about 15 months into this new stock bull market, and we continue to believe increased equity exposure may better serve investors of all types going forward, through both the best of times and the worst of times.

Jun 1, 2021

ICYMI -- Video: Exclusive 2020 -- Furthering the Financial Discipline
In this 40+ minute video jam-packed with must-watch content, Valuentum's President Brian Nelson talks about the Theory of Universal Valuation and how his work is furthering the financial discipline. Learn the pitfalls of factor investing and modern portfolio theory and how the efficient markets hypothesis holds little substance in the wake of COVID-19. He'll talk about what companies Valuentum likes and why, and which areas he's avoiding. This and more in Valuentum's 2020 Exclusive conference call.

May 10, 2021

Inflation! How to Think About Value Duration
Image Shown: Longer-duration free cash flow stocks are more impacted by changes in inflationary expectations and interest rates (up or down) than stable and/or stable and growing free cash flow generators. This example shows the impact of falling interest rates (10%-->5%) on stable versus longer-duration hypothetical future free cash flow streams, all else equal (the opposite would directionally be applicable in a rising interest rate environment). There's nothing 'all else equal' in the real world though. In the event of rising inflationary expectations, we would still expect speculative technology stocks to take the biggest hit. On the other hand, we would expect strong and growing free cash flow powerhouses that can price ahead of inflation such as big cap tech to handle the environment well. Though banks, energy, and the metals and mining sectors may lead the market for some time, we still like large cap growth and big cap tech for the long run. What many may be overlooking is that, for those with pricing power, higher inflationary expectations translate into higher product and service prices, too. Big cap tech (and their pricing power) is well-positioned to handle such an environment. We’re not overreacting in any respect, and we’re not going to chase commodity prices or commodity producers higher. Commodity prices are simply too difficult to predict in almost all cases, and banking entities are far too susceptible to boom-and-bust shocks for us to get comfortable with their long-term investment profiles. All in, we’re sticking with companies with strong net cash positions and future expected free cash flows (and solid dividend health, where applicable). Some of the strongest companies that have these characteristics can be found in large cap growth and big cap tech. Facebook remains our top idea for long-term capital appreciation potential. In the meantime, we’re comfortable watching the market chase a rotation into more speculative areas.