Current thoughts After a Big Rally

​The Satori fund is managed to be an “all-weather” fund. The fund was profitable last year with the S&P down 19% but also this year with the S&P up 17% through 11/13. Despite the S&P being down each of the past 3 months (August, September, October) with a cumulative loss of 8% over that time, the fund has been profitable each of those three months.
Yesterday, the Satori fund had its best return day in over one and half years & beat the S&P which soared 1.9%.

Bullish Goldilocks Outlook through Year-End
In general, we are managing the portfolio on a day by day basis given the volatile daily moves in the stocks (like yesterday) that we expect to continue. 

We are in the seasonally strongest 3 months of the year for the stock market which is November through January (avg up 4% over past 50/100 years) with these additional drivers:

1. increasing hopes of a Goldilocks soft landing given Q3 GDP of 4.6%, a strong labor market & declining inflation
2. a short-term peak in treasury yields at 5%
3. oversold conditions in the stock market in late October
4. more cautious positioning by asset management firms after 3 months and a 10% correction in the S&P through late October
5. FOMO/chasing the longer this stock market rally continues by underweight portfolio managers

Positions Today
We have a barbell strategy with $AMZN and $META of the Magnificent 7 on one end of the barbell…

1. $AMZN- Our largest holding of the Magnificent 7 along w/ $META. We posted about buying Amazon prior to earnings given the stats they published on hiring plans & Prime Day prior to reporting Q3. We believe for all companies profitable growth is the key with interest rates this high and Amazon beat the operating profit estimates by ~40% and guided above expectations for Q4. We love the leverage in their retail business despite not being as bullish on AWS.  We also think they are a share gainer if the economy slows and the consumer comes under more pressure.
2. $META- We unhedged our long position after they reported.  We believe Meta may have the best current balance between valuation and revenue growth among the Mag7 w/ 15% rev growth at only a 23x PE vs the S&P at 6% at a 21x PE for comparison. They are also using AI to help drive monetization of ads & for content recommendation.

… & the worst sectors like the Russell 2K, biotech, solar/semis that are through their inventory correction on the other end of the barbell.

We are increasingly looking for beaten up names with compelling valuations outside of the Magnificent 7 to drive returns through year-end.

1. Small caps- the R2K undercut the lows from 2022 in late October and has compelling valuation relative to history unlike the S&P which is skewed higher due to the Magnificent 7. The Russell is only up 2% YTD.
2. Solar – crushed on higher financing costs & recent policies in California. This sector was down 35% at its lows in October YTD & is still down 30%.
3. Semiconductor names in cyclical downturns – some of them may have finally seen the bottom for fundamentals and their stock price with the end of their inventory corrections.
4. Healthcare – crushed off of weight loss drug concerns & lack of profitability in a rising rate environment.  We have a core position in the weight loss drug players $LLY and $NVO but also have positions in a basket of biotech stocks that are still down 15% YTD after being down 23% at their lows in late October.

Looking into 2024, we believe Goldilocks will meet the Three bears (not something we are worried about today)

1. We see a tapped out consumer. 25M borrowers started to pay back student loans in October after a 3.5 year hiatus. At the same time the consumer will have burned through the $2.5 trillion in excess stimulus accumulated during the peak of the pandemic.
2. The surge in oil prices from $67 during the summer lows will further sap consumer buying power in 2024 and drive inflation in other prices. Higher energy costs through the transmission mechanism of shipping costs & production costs will drive inflation in other areas.
3. We believe treasury yields, inflation and the Fed will stay higher for longer. We would note that the only reason treasury yields seem high is they have been artificially suppressed by central banks for the past 15 years since the Global Financial Crisis. 
   • With rising deficits and interest expense for the US government, we see upward pressure over the longer-term as rising supply of treasuries meets increasingly reluctant buyers.  Over the next year, nearly $2 trillion in new treasuries will need to be issued to deal with the deficit while ~$7 trillion in maturing treasuries will need to be refinanced. This compares to a total size of ~26 trillion outstanding for the US treasury market so this $9 trillion in total is a tremendous amount of supply that will be hitting the market compared to the total outstanding. This will put downward pressure on bond prices and upward pressure on rates.
   • We believe the formal abandoning of yield curve control by Japan in late 2023/early 2024 will continue to push up global bond yields. 
   • With over 40% more job openings than people unemployed this will keep a floor under services inflation.

10-year treasury yields averaged 2.4% over the past 15 years with 2.3% CPI but yields were 5.9% over the past 60 years with 3.9% CPI.
Stock market valuations are high relative to where inflation is.  When CPI has historically been between 3-4%, the S&P trailing valuation has been 17.5x versus 21x today.