Quarterly Letters
Third Quarter 2024 – In a stagflationary environment such as we are in now, gold, equities and commodities are set to do well. For the first time this year we are increasing our exposure to commodities and increasing commodity equities and emerging markets while decreasing our exposure to fixed income. Our cash position is low.
Second Quarter 2024 – Over the last quarter, we increased exposure to fixed income and rate sensitive assets such as utilities. We have pared back exposure to the most cyclical equities and increased exposure to lower-volatility sectors such as healthcare. We hold various idiosyncratic risk-assets such as gold, India, insurance, momentum, and emerging markets. Our cash position remains relatively low but continues to provide a meaningful yield.
First Quarter 2024 – Equity market performance has broadened significantly since 2023. We are the most invested we have been in several years and concomitantly our cash position is at its lowest level over those same years. We added exposure to commodity indices, gold, uranium, emerging markets, India, China, insurance, crypto and momentum. The graphs in our latest quarterly letter reflect some of the market and economic data analysis that led to our current investment posture.
Fourth Quarter 2023 – In this letter we review numerous economic factors that have led us to our cautious but open-minded investment stance. While our cash allocation remains large, it is lower than it has been in recent quarters as we have added numerous idiosyncratic risk assets such as insurance, utilities, crypto, and India to name a few.
Third Quarter 2023 – The economy has held up better and longer than most believed possible to the consternation of the economic punditry whose consensus shifted from hard landing to soft landing and now no landing. Herein, our economic analysis explains why we are cautious for now, but open-minded and ready to adjust.
Second Quarter 2023 – Our All-Season portfolio finished the second quarter with large positions in safe-haven assets such as cash, bonds, and precious metals. Narrow breadth in market participation causes us to limit our exposure. On the economic front, US retail sales, industrial production and both US and Euro Area Purchasing Manager indices are no longer just decelerating but are now contracting. We see opportunity in Japan as the Japanese economy is accelerating and valuations are modest.
First Quarter 2023 – We harken back to the steep decline in the S&P 500 when the debt ceiling debate last climaxed in the summer of 2011. And today, as seen in a dramatic chart, it costs more to insure US Treasury bonds via credit default swaps. We have positioned our All-Season portfolio for a risk-off environment given this uncertainty, combined with continued contraction in the Purchasing Manager Index (PMI), the ever-increasing inversion of the yield curve, and expected downward revisions in corporate earnings estimates.
Fourth Quarter 2022 – Despite the recent market rally, we hesitate to declare the end of the bear market as we have yet to experience the high volume selling that signals investor capitulation. Factors that drive the caution in our investment positioning include contractions in the PMI indicating a shrinking manufacturing economy and lowering of the S&P 500 full year 2022 operating EPS. Our “safe haven” positions, particularly cash, are the largest they have ever been.
Third Quarter 2022 – The June to September quarter saw declines in all four primary asset classes: US equities, long-dated US Treasury bonds, gold and commodities. Our All-Season portfolio sports an historically high cash position. Preservation of capital is paramount given today’s economic and market conditions.
Second Quarter 2022 – Our cautious stance continues for the third straight quarter. We believe current conditions warrant patience and preservation of capital until we see the telltale signs of the end of an equity bear market. Please be sure to read our analysis of market internals, corporate profits, and economic growth to understand the circumstances necessary to cause us to shift to a more aggressive, risk-oriented investment posture.
First Quarter 2022 – In the Grey Owl All-Season portfolio, our “safe-haven” positions are the largest they have been in years while our equity positions are small and focused on low-volatility and staples. We explain why by examining Selling Pressure, Buying Power, deceleration in the Purchasing Manager Index (PMI), and the highest Consumer Price Index (CPI) since the early1980s.
Fourth Quarter 2021 – Inside we discuss current economic, market and interest rate trends through the lens of Strauss and Howe’s, The Fourth Turning. Acknowledging there is little that can be done to eliminate the cycles themselves, the Grey Owl All-Season portfolio has shifted to a decidedly more “all-season” stance. Our “safe haven” positions are the largest they have been in several years while our equity selections focus on low-volatility and staples.
Third Quarter 2021 – Through a series of charts and graphs, we make the case that the recovery trade is back, and the reflation trade persists. With increased volatility we maintain aspects of our All-Season portfolio, however with the reacceleration of economic activity and the continued rise in inflation we believe a slightly more aggressive posture will perform well into year end.
Second Quarter 2021 – Several economic and market indicators are “yellow lights.” Numerous charts and graphs illustrate our observations; namely the steady flattening of the yield curve, weakening market internals, a modest increase in credit spreads and a chart which indicates real economic growth likely peaked last quarter while inflation could continue to accelerate through the fourth quarter of 2021.
First Quarter 2021 – All-Season portfolio currently tilts toward cyclical investments that should continue to thrive as growth and inflation accelerate. We hold many individual securities that are particularly leveraged to the economic reopening. Using many charts and graphs, we explain why we expect continued economic and market strengthening through the second quarter. We highlight Jefferies Financial Group Inc. as one company of many that flourished during the pandemic.
Fourth Quarter 2020 – Learn what led us to invert our asset allocation ratio of risk-on/risk-off assets in our “all-season” portfolio from 37/63 to 63/37. We expect to invest heavily in risk assets when growth and inflation accelerate and to favor an increased allocation of risk-off assets (cash and hedges) when growth and inflation are likely to decelerate. Additionally, we have determined that the secular growth trends of cannabis and crypto currency have a place in our portfolio.
Third Quarter 2020 – The extreme volatility in the market brought on by Covid-19 followed by the substantial and almost immediate government relief, caused us to implement refinements to our investment process. Namely we saw that in certain cases further shortening certain aspects of our investment time horizon could lead to improved results.
Second Quarter 2020 – Here we revisit the themes of the continued high levels of uncertainty the pandemic has wrought on the US and global economies, the progression of government programs and the reaction of the financial markets. We approach our discussion through the lens of Robert Shiller’s most interesting theory, narrative economics, which runs counter to the Efficient Market Hypothesis premise that market prices instantly reflect all available information. We review many of the portfolio adjustments made last quarter with ample explanation of the rationale backing our decisions.
First Quarter 2020 – While we have learned a great deal about Covid-19, much is still unknown. We have seen the initial responses of government officials, but we have yet to understand the full long-term effects of their decisions. In our new world of unbounded unknowns, protecting capital is paramount. In this letter we describe how we are currently positioned for the future and why we believe a conservative posture is warranted today. Factors we consider include potential long-lasting changes in consumer and corporate behavior, unemployment, supply chains, the bond market, global trade, the dollar and government intervention.
Fourth Quarter 2019 – In this letter we delve into four areas where our investment process is meaningfully different than it was just two years ago. While we still like value, we now systematically avoid those mathematically cheap stocks that have “left-tail skew”, we focus on sentiment and to some degree technical factors while patiently waiting for the appropriate signal to place a trade, we expanded the factors that contribute to our equity allocation threshold, and we broadened exposure to a variety of asset classes.
Third Quarter 2019 – Gold, long-dated US Treasury bonds, and equities moved higher while commodities declined. S&P 500 volatility extended into early October when the index started a rally that continued through the end of the month. This rise is consistent with two of our favorite indicators of market sentiment, credit spreads and market breadth – these signals have been consistently benign for some time. Gold, another important indicator, is signaling a significant change and a meaningful pickup in inflation, possibly indicating that the value investment style will return to favor.
Second Quarter 2019 – Various catalysts unlocked hidden value in four of our portfolio companies. Two of the companies, Allergan (AGN) and Caesars Entertainment (CZR) received acquisition offers. Howard Hughes (HHC) hired an investment banker to pursue “strategic alternatives” and Disney (DIS) announced the launch date and price of Disney+, its new Over-the-Top streaming product. We opportunistically used the stock price spikes to sell our positions in AGN, CZR and HHC. We continue to hold DIS.
First Quarter 2019 – Herein we offer insight into our value oriented investment process and the factors behind our buy, sell and hold decisions. Our purchases of Facebook (FB) and Expedia (EXPE) and partial sales of Booking.com (BKNG) and TripAdvisor (TRIP) serve as backdrop to our methodology. We also closely examine Jefferies Financial Group (JEF), our largest individual position, concluding that JEF is undervalued on a price to book value basis which we believe limits downside exposure while offering significant upside potential.
Fourth Quarter 2018 – Volatility ruled the market creating many investment opportunities. During Q4 2018 we initiated a position in Caesar’s Entertainment (CZR) and added to our holdings of Allergan (AGN), Booking.com (BKNG), Jefferies Financial Group (JEF), Labcorp (LH) and MSCI Momentum ETF (MTUM). We also trimmed our position in TripAdvisor (TRIP). In total, we increased our equity exposure by approximately 17%.
Third Quarter 2018 – Portfolio activity this period included the sales of Zoe’s Kitchen (ZOES), Express Scripts (ESRX) and iShares MSCI Emerging Market ETF (IEMG) and the purchases of Jefferies Financial Group (JEF), Tencent Holdings Limited (TCEHY) and the iShares 20+ Year Treasury Bond ETF (TLT). For each transaction, we discuss the rationale that drove our decisions.
Second Quarter 2018 – Amidst the relative calm of the investment world in the second quarter of 2018, we initiated positions in IMAX Corporation (IMAX) and Zoe’s Kitchen, Inc. (ZOES). Herein we provide background and insight into the favorable conditions that led us to establish positions in both of these companies.
First Quarter 2018 – Despite its long term stellar performance, Berkshire Hathaway (BRKB) has experienced multi-year periods when returns declined or moved sideways. As a backdrop to our discussions of Express Scripts (ESRX) and Leucadia National Corporation (LUK), we review three periods when Berkshire performed unevenly. Recently announced major capital transactions for both ESRX and LUK spurred us to examine their returns over our holding periods. And in the case of LUK we posit where its future path may lead.
Fourth Quarter 2017 – The fourth quarter of 2017 was solidly included in the longest historical stock market streak (404 trading days) with nary a 5% correction. But by February 2018, investors were awoken from their long slumber by a 10% correction. Volatility has returned to the market. Given the milieu of an expensive stock market, our challenge is to earn a positive absolute return in the short term without putting principal at risk in the long term. In our latest quarterly letter we revisit certain features of our “all-season” strategy with insights into how that will influence our investment decisions in the weeks and months ahead.
Third Quarter 2017 – The last 10 years have been challenging for value investors as value returns have been overshadowed by those of growth equities and the broad market in general. However, when examined over longer periods, value investing often wins the day. In our latest quarterly letter we review value investing returns over numerous time periods and make the case for continuing with value investing despite its more recent difficulties. We also describe four ways we have found to enhance our process allowing us to include a wider selection of securities as potential investments. Who would have thought that momentum investing could be an effective compliment to value investing?
Second Quarter 2017 – In this letter we reference works by famed investors which predict low to negative absolute returns over the next several years in many major assets classes with US large capitalization stocks among them. Reasons given for the low expected returns include numerous valuation metrics at or near all-time highs, unprecedented distortions caused by central bank policies and a massive shift to passive investing in the last 10 years. Despite these real and legitimate concerns, we explain how we implement our strategy with a view toward achieving absolute returns in the short term without putting principal at risk long-term.
First Quarter 2017 – We have had a fairly active start to 2017 and therefore devote most of this letter to a discussion of our transactions in LiLAC Group (LILA), TripAdvisor (TRIP), Independence Realty Trust (IRT), Colony Northstar Inc. (CLNS), Annaly Capital Management (NLY), Hanesbrands (HBI) and Elekta (EKTAB-SE; EKTAF). Additionally, we offer an update on Express Scripts (ESRX), one of our largest holdings.
Fourth Quarter 2016 – Narrowing credit spreads and our new president’s economic proposals for tax cuts and deregulation could support the continuation of this almost eight-year old bull market. Yet, prices appear ahead of fundamentals. The S&P 500 increased 21% from 2013 to 2016 on a 1% decline in earnings over the same time frame. We recently purchased Hanesbrands (HBI) and TripAdvisor (TRIP) and discuss our thesis.
Third Quarter 2016 – In this letter, we discuss the hidden value in Leucadia National Corporation (LUK) and Express Scripts (ESRX) and how it could be unleashed in the coming months. We also explain why we recently increased our positions in gold and gold mining stocks. Additionally, we highlight four interesting real estate investment trusts (REITs) trading at substantial discounts to their net asset values. This quartet generates an average weighted dividend yield above 10%.
Second Quarter 2016 – In the last quarter, the amount of sovereign debt at negative yields doubled to $16.8 trillion. Investors responded by plowing into equities (dividend payers primarily) and gold. Yet, despite hitting new all-time highs, the equity markets have barely moved beyond where they were 18 months ago. In this letter we explain why we have determined that any additional risk we take will be incremental, paced and judicious.
First Quarter 2016 – Herein we explain in words and graphically why we have adopted our most defensive positioning since 2008. While volatility does not always foreshadow a market decline, we show that current stock market activity depicts patterns consistent with a market topping process. High equity valuations and signs of investors becoming risk averse, like what we are seeing today, can however portend market corrections. And when we marry these observations with fewer stocks participating in the upward surges, the overlay of massive increases in global debt, and the fact that 16 nations have a combined total of almost $8 trillion in sovereign debt trading at negative interest rates, we have determined to tread cautiously in the weeks and months ahead.
Fourth Quarter 2015 – Given the market volatility at year end and the shaky start to 2016, we explore a number of the reasons for the gut wrenching swings and offer ideas on how to manage risk as the new year progresses. In this letter, we lift the veil on certain market indices to reveal what is happening below the surface. Forecasts for paltry returns over the next ten years, a package of valuation measures tracking high above historical norms, and signals indicating investors are becoming increasingly risk averse, cause us to focus on risk management. Yet despite our concerns about the overall investment climate, we briefly highlight five opportunities that currently look attractive to us.
Third Quarter 2015 – In the 12 months ending September 30, 2015 credit spreads widened by 78% indicating that investors are increasingly becoming risk adverse. Given the history of low stock market returns during periods of widening credit spreads, we examine risk management strategies that can generate equity-like returns but with smaller drawdowns and less volatility than equity market indices. Herein we discuss the importance of asset allocation during periods of investor risk aversion by increasing “haven” assets and reducing risky assets. We showcase how we use scenario analysis to assess exposure to downside risk. With Valeant Pharmaceuticals (VRX) as the overlay, we review the importance of managing the size of investment positions to protect gains and to lessen the impact of negative events.
Second Quarter 2015 – In this letter, we challenge the consensus view that bonds are in a bubble and stocks are fairly valued. We also discuss the role government bonds play in creating an “all-season” portfolio – a tactic often ignored by the bond bears. Additionally we highlight Priceline Group (PCLN), one of our largest portfolio holdings. Even though asset class prices in general appear expensive, we believe there are pockets of opportunity and PCLN is one of them.
First Quarter 2015 – Quantitative easing and the Fed’s zero interest rate policy befuddle sage investors suggesting inflationary pressure on one hand and deflation on the other. Additionally, a March Federal Reserve release unleashed manic activity and investor hysteria causing wild gyrations in the S&P 500. Herein we posit the importance of maintaining an “all-season” approach to investing given the uncertainty created by the Fed’s machinations and the concomitant drag on corporate revenue and earnings growth. In our estimation, an “all-season” approach is just as crucial now than at any time since the late 1990s.
Fourth Quarter 2014 – While opening with a brief commentary on asset class returns and underlying market trends, we devote most of this letter to discussing portfolio activity over the last six months of 2014. From core positions to “all-season” investment initiatives, we offer trade-by-trade analysis of our decision making rationale. Among others, we highlight trades in readily recognizable names such as Baxter International, Apple and Berkshire Hathaway and some which may not be quite as familiar like Conversant, Bluerock Residential Growth REIT and Vanguard Emerging Market ETF.
Third Quarter 2014 – In this letter we delve into three hallmarks of our investment approach: protecting capital from permanent loss; retaining purchasing power; and smoothly growing capital over time. Through asset allocation and security selection, we aim to mitigate the risk of a steep and /or prolonged market drawdown. We cede some upside potential for significantly better-than-the-market downside protection.
Second Quarter 2014 – We continue to believe that a portfolio designed to perform well in any environment at the expense of performing exceptionally well in a specific environment is the correct choice. Herein we discuss various aspects of our “all-season” portfolio in light of the weak recovery, debt overhang, stock market gyrations, and monetary and fiscal government intervention. We also discuss our EBAY holding in greater depth.
First Quarter 2014 – Despite the stock market continuing to hit all-time highs, we found a couple of interesting buys in recent months. In this letter we review our two new portfolio additions and bid farewell to a portfolio old-timer.
Fourth Quarter 2013 – How sustainable are stock market total returns that greatly exceed the rate of increase in intrinsic value? We compare recent returns of the S&P 500 versus the returns of our largest portfolio position. We also explain our thesis behind the newest addition to our portfolio as it diverges a bit from our usual selection criteria. Finally we discuss the perils of investing with margin debt levels teetering at historic highs.
Third Quarter 2013 – Opportunities exist despite the risky investment environment and government intervention in the economy. In this letter we examine our five largest equity holdings, Berkshire Hathaway, Valeant, Express Scripts, Markel and Ebay, highlighting the factors that make them attractive investments.
Second Quarter 2013 – There are only two possible outcomes to the Federal Reserve’s continuing intervention and neither of them is desirable. Read on for our discussion of financial repression and perfect asset price correlation and how we have positioned our portfolio accordingly.
First Quarter 2013 – Have we entered an epoch of a stagflationary, muddling, sideways economy and market, with frequent spurts of volatility? Herein we explain why we think this is the most likely of four possible scenarios and how our analysis has influenced our investment decisions.
Fourth Quarter 2012 – Central banks continue to rev up their massive and coordinated monetary intervention. The US Federal Reserve is no longer just a referee, but the biggest player in the financial market. In this letter we discuss distortions created by the Fed’s massive balance sheet and how we will navigate through them.
Third Quarter 2012 – Massive central bank intervention across the developed world seems to have stabilized the world economy (for the time being). Either way, we think our two latest investments, Weight Watchers and LabCorp, should fare quite well in most economic environments.
Second Quarter 2012 – The world economy appears to be decelerating. There is evidence that US fiscal and monetary policy is becoming less effective. We are positioned conservatively.
First Quarter 2012 – During the quarter, we continued to “high-grade” our portfolio and increase its defensive posture. The letter provides our investment case for three short-term high-yield debt securities from CSC, MGM, and WAL.
Fourth Quarter 2011 – 2011 was a year of extreme volatility. “High-quality” companies significantly outperformed the market. We review our 2011 results and describe our road map for 2012 which, unfortunately, we expect to look a lot like 2011.
Third Quarter 2011 – It is unlikely market volatility will subside in the short-term. In such circumstances, the best thing to do is to focus on business fundamentals rather than market prices. We review key metrics for our four largest positions: Microsoft, Berkshire Hathaway, Lexmark, and Markel.
Second Quarter 2011 – We share our thoughts on the debt ceiling drama and why we think the media’s focus misses the point. We also discuss four new investments: Lexmark, Las Vegas Sands, The Howard Hughes Corporation, and Diana Containerships.
First Quarter 2011 – We examine the market’s performance and explore economic underpinnings and valuations. We utilize charts and graphs to try and get a clear picture that keeps things in context.
Fourth Quarter 2010 – We discuss the 2010 market environment where low quality outperformed. We also provide an update on our proprietary education thesis and use this as a case study to explain a portion of our portfolio management process.
Third Quarter 2010 – We discuss the recent, elevated correlation of stock price movements and the macro-driven nature of today’s investment markets. In this context, we detail the rationale for our investment in Microsoft.
Second Quarter 2010 – We deviate slightly from our typical style of quarterly letter and focus on two specific holdings in our portfolio: Transocean and Apollo Group.
First Quarter 2010 – We discuss multiple sources of sovereign risk that could present near-term problems for US equity markets. On a positive note, we describe the resilience of companies which, by extension, provides equity investors more ways to survive and thrive in difficult environments.
Fourth Quarter 2009 – We discuss the market’s current valuation, whether to buy 80-cent dollars or wait for 50-cent dollars, and the history of range-bound markets.
Third Quarter 2009 – We question the veracity of the V-shaped recovery thesis, the sustainability of the growing national debt, the implications of doubling the monetary base, and the impact of all three items on stock market valuation. Plus we discuss “margin of safety” and “career risk.”
Second Quarter 2009 – We examine the government’s “stimulus” programs, dissect the recent stock market rally, and provide our thoughts on investing after the crash.
Press Releases
June 2, 2010 – Grey Owl Capital Management Marks One-Year Anniversary Grey Owl Capital Management will host an open house to celebrate a very successful first year amidst one of the most volatile economic and stock market environments in history. The firm simultaneously announced the hiring of their newest associate, Valori Infanger, who will be responsible for client service and marketing.
April 20, 2010 – Goldmans Alledged Fraud: Is Anyone Really Surprised? Grey Owl Capital Management Advises Retail Clients of Goldman Sachs and Other Large Brokerage Firms to Seek Independent Advice to Identify Conflicts of Interest
August 24, 2009 – Grey Owl Capital Management, LLC Launches New Investment Management Business: Industry Veterans See Opportunity to Create Differentiated Investment Firm Following the Exposure of Wall Street’s Flawed Approach
Articles
September 17, 2020 – Grey Owl Capital Management – Of Forest Fires and Markets
December 31, 2015 – Value Investor Insight – Disconnect? New Senior Investment Group (NYSE: SNR)
October 29, 2009 – Non Profit News – Trend: When Tactical Opportunities Knock For Investors
September 1, 2009 – Markets Media LLC – Mortgage REITS Still Offer Good Returns
August 25, 2009 – Washington Business Journal – Partners start Grey Owl Capital Management
August 25, 2009 – Investment News – Ex-Merrill wealth advisers form Grey Owl Capital Management
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