Market Update & HCM Response June 2022

Executive Summary

(Full Video Below)

How we got here (click to view):

Everyone knows the economics 101 definition of inflation: too much money chasing too few goods.  Since the real estate crisis that started in 2007, central banks around the world have kept rates low and money plentiful.   That created the situation of “Too Much Money”. As a result of the Covid shutdowns, supply issues surrounding both material and labor have created shortages. Finally, energy and food supplies have been further restricted because of the Russia- Ukraine war, resulting in “Too Few Goods.”

HCM’s preparation involved reducing equity risk exposure in February 2022.

Reinvestment Trade (click to view):

During the week of June 13th, HCM reinvested the cash we raised in February.  These funds were diversified among three different equity positions in reaction to extremely oversold market conditions. This is not a “Bottom Call” but rather a recognition that we made a profitable defensive move in February that could be redeployed at much lower prices with a good chance, based on historical indicators, of seeing gains within our twelve-month trading window.  If gains are realized sooner profits may be taken, depending on the economic environment.

Extreme Oversold Levels (click to view):

Historical observation suggests that when most stocks are trading below their 200- and 50-day moving averages, reflex rallies often occur.

Drawdowns (click to view): 

Our recent reinvestment trade involved three different asset classes that have sold off rather dramatically in 2022 and could be ready for a bounce, as seen twice this year already (once in late March and again in late May into early June).

Fair Value (click to view):

Fair Value is the Holy Grail of investing.  The old axiom, “Buy Low, Sell High” refers to buying below fair value and selling above it.   The trouble is Fair Value is a moving target based on the cost of capital and the investing public’s appetite for risk at any given point in time.  Different levels of earnings valued at different P/E multiples will generate differing opinions of “Fair Value” and therefore differing opinions of good times to buy and sell.

What’s Next (click to view):

HCM’s risk appetite will increase or be suppressed as the future reveals itself concerning recession, interest rates, employment, and the direction of inflation.