“What gives you opportunities is other people doing dumb things ... In the 58 years we’ve been running Berkshire, I would say there’s been a great increase in the number of people doing dumb things, and they do big, dumb things.”
- Warren Buffett, Co-Founder, Chairman, Berkshire Hathaway
Happy Monday,
April was a sideways month with the S&P 500 increasing 1.5% to 4,169. This was a reaction, in part, to the start of the Q1 ‘23 earnings season where earnings overall have been better than expected.
On a YTD basis, there has been a clear mismatch between value investing and emotional/meme investing. The trailing PE ratio of the S&P 500 is currently 18.37, and it is projected to increase to the low-20s as earnings begin to fall short of expectations later this year. This is far higher than the historical S&P 500 average of 14.92, which would logically point to a 20%+/- correction coming sometime in the second half of 2023.
This is a by-product of still-stubborn inflation that has driven the Federal Reserve to continue to increase interest rates more than expected in 2023. In addition, we now project a longer “pause period” where rates will stay higher for a longer period than first envisioned, before beginning a slow gradual reduction of rates in 2024/2025.
We are also taking our queue from the Bond market where rates have increased significantly in early 2023 (6-month T-Bills now yield 4.9% with no state income tax burden). As fixed rates go higher, more investors are moving capital allocation in that direction to reduce equity market risk.
Here at PointFour Capital, we are adept at seeing the big picture since we have been at this for many decades, thus we largely avoided the 20% meltdown in 2022. In April, the value of our public portfolio increased by nearly 1.0% as we sought to reduce risk and wait for better entry points in the future. Overall, in the first 4 months of 2023, the value of our public portfolio increased by 3.2%, which lagged the overall S&P gains for the same period, but we would rather hedge our portfolio now in advance of the market pullback we expect later in 2023.
We accomplished our YTD performance by acknowledging early on what the market had been signaling for many months. That is, the 10-year “growth at any cost” movement was about to end … and we would be ushering in a return to value-based investing. That all came to pass in 2022 and we are investing accordingly in 2023 using long/short/macro bets to stay one step ahead of the market.
We are here for the long term and making a profit and avoiding the latest fads means something to us. Our perspective is that we will mind our own business in 2023/2024 and get ready to shift capital allocation at some point as inflation gets closer to the Fed target rate of 2.0% and other opportunities present themselves.
One of the anticipated upcoming opportunities is the commercial real estate market. We anticipate a significant meltdown in this market as defaults increase later this year, especially in the “B” and “C” class office building sub-segment. We are currently building a strategy to take advantage of this expected dislocation.
Remember that every significant market shift usually involves an over-correction, and we expect that this will happen here, so we’ll look to take advantage of the coming over-correction and set ourselves up for a great 2023/2024 and beyond!
Thanks again for your consideration and ideas. Have a great 2023!
Best,
Vincent M. Oddo
Co-Founder & Managing Partner
PointFour Capital, LLC