Year In Review

Year In Review

I’ve been getting some requests to start doing quarterly letters again. Thus, with some delay, here’s an annual letter for last year.

For this letter, I’m just going to focus on my main product, traditionally called Symons Value. Considering that Symons Capital is no longer a company and the style hasn’t really been about value since we closed our growth fund decades ago, we decided to rename it. We’re now, at least preliminarily, going to call it the Opportunistic Fund.

That name reflects more what we’re trying to accomplish. Our basic idea, throughout our different products, is that the investing environment is always changing, and we should change with it. Thus, we’re looking for good opportunities, going forward. Sometimes that’s value, sometimes growth, sometimes quality, sometimes something else. The environment always changes, and we try to change with it.

At least on the headline numbers, we did a pretty good job on adapting, as we were up 1.9%, versus the S&P, at -18.2%. That’s a nice spread, but how did we do it?

We largely just tried to cut out the expensive stuff that had been starting to struggle, anyway. Previously, we had a very easy environment, with very low rates and ample liquidity. At the start of the year, that looked like it was going to change, and it sure did. The fragile orchids that could only live in a perfect environment of low rates and ample liquidity wilted, and some of them had become very large. We also focused on what tends to work in these environments. That means focusing on utilities, staples and healthcare, along with a strong focus on quality, durable, frankly boring businesses.

We did well, but there were opportunities to do even better. Our headline number looks good, but I was slow to pick up on a lot of things. For instance, inflation got much, much higher than I expected, and I was slow to see that. That pushed up inflationary assets like energy, but we sold out of energy early in the year.

With the new, larger company we’re now part of, I have access to better tools, and have been using them to develop better systems so it’s harder to be surprised by events like the spike in inflation. I hope to build on our work and performance last year to continue a path to outperformance.

Turning the Calendar Page

Speaking of surprises, we weren’t surprised that there would be a bit of a relief bounce to start the year, but we were surprised about the strength and duration of it. The story is twofold. First, China is reopening, which will stimulate the world economy. Second is that debt ceiling concern has caused the Treasury to flip their original plan of strengthening their balance sheet and instead focus on cash management, which involves flooding the market with Treasury bills. In turn, investors who had been hiding in the Reverse Repo Program (RRP) can now hold those T-Bills instead. Arguably, at least, this has a stimulating effect on the economy.

We’ve seen that in the markets, as the assets that suffered last year have seen a massive turnaround (as you can see with High Beta vs. Low Volatility, above.) Is China and/or the Treasury causing markets to bottom? What’s happened, exactly? According to shops like SpotGamma, Bloomberg, Goldman Sachs, and Morgan Stanley, most of what we’ve seen has effectively involved an aggressive retail surge reminiscent of the 2020-21 period and an incredibly aggressive campaign of 0 Days-To-Expiration (0DTE) call buying. At least historically, those environments don’t cause sustainable moves.

Additionally, the move has lasted long enough that we’ve seen significant shifts in the market. Currently, it’s hard to say exactly where that’s coming from, but Goldman Sachs reports hedge-fund degrossing as having an effect, which would involve selling longs and buying back shorts. Given that highly shorted stocks have been going up and winners have been going down, it seems reasonable something along those lines are going on.

So what do we do from here? Well, has anything really changed? Maybe. Is there anything to do about the China reopening? I don’t think that’s simple to deal with. In theory, for instance, the China reopening was supposed to send oil to triple digits. Instead, it’s dropped down to $73. Traditionally, Chinese stimulus involves a tsunami of funds coming in to their market, but this time they’ve been big on talk, but slow on action. Lastly, this isn’t a consuming giant like the US reopening, it’s a manufacturing giant. Does reopening stimulate potential economic growth or inflation?

The Treasury news seems more interesting to me. First, though, we need to point out too much has probably been made of it. While we had a short-term surge in funding, it hasn’t, and won’t, continue at that pace. The Treasury is likely to be dripping money into the economy over coming months, as we deal with the debt ceiling, but it’s hard to find a point-to-point causation between Treasury and market action. Treasury action could, however, cause both markets and the economy to hold up better than they otherwise might for the next few months.

It should also be pointed out that there’s an aftermath to the Treasury story. When the debt ceiling issue gets resolved, the Treasury will move to refill their General Account (TGA.) As this happens, they will suck liquidity out of the rest of the market.

Looking Forward

Right now, the market seems very comfortable, with 2020 favorites surging and volatility low versus the last year, despite a struggling macro picture that makes the odds of a potential recession seem pretty likely. Admittedly, recession could definitely still be months away, but historically, high stock prices don’t survive a recession. People are building up those orchids again, despite the likely cold front coming.

I’d predict pain, and probably sooner rather than later. As noted above, the start of the year has all the markings of another bear market rally. Honestly, it seems awfully similar to 2001, where an actual Fed pivot caused an impressive bounce that quickly ran into an increasingly troubled economy. The first clear bar in the chart below shows January, 2001. Nice month, not so great after that.

That said, volatility can break both ways. We’re playing dangerous games here, both for bears and bulls. Considering the Fed has yet to get anywhere close to a pivot, it’s easy for me to imagine we could get an even more impressive bounce sometime later this year. On the flip side, markets are making some assumptions that, if wrong, could hurt quite a bit. For instance what if inflation doesn’t continue its steady, downward glide?

This year has started cagey and difficult. Given the many crosscurrents out there, it seems easy to think that will continue. If managed correctly, that means there’s a high potential to differentiate performance, for better or worse. Obviously, we can’t make promises, but we will work as hard as we did last year to handle those twists and turns to deliver a good performance for clients.