Greetings from Colorado Springs!
After some serious winter storms in February, we are enjoying some unusually warm weather this week. For the time-being, Spring is in the air!
Current Market Conditions
The macroeconomic outlook for the coming weeks and months continues to be definitively bearish, in my humble opinion. While our assessment of peak US economic growth in 4Q 2021 was right on, it appears that inflation actually peaked a bit later… in January or February of 2022.
Risk-on assets correctly sniffed-out this subtle change and staged a rally (albeit tepid) from late-January through mid-February.
Since then, however, we have seen a series of lower highs throughout nearly every sector in the S&P 500. This is a bearish sign from a technical standpoint, and it portends to tougher days ahead for market participants.
Similar to my view in last month’s client update, I believe that both the economy and inflation will continue to decelerate from here. Such a combination of factors often coerces stocks and most other “risk-on” assets to perform poorly.
On top of this–and despite the escalating war between Russian and the Ukraine–the Federal Reserve still seems intent on their hawkish stance. At the time of this writing, the market anticipates a 25 bps hike in the Federal Funds rate and no additional asset purchases. As I’ve previously written, I believe the Fed is getting hawkish to fight inflation at exactly the wrong time… and the markets will let them know the error of their ways.
At the time of this writing, the price of bitcoin has surged to approximately $44,000, up from recent lows near $34,000. The general narrative is that citizens of both Russia and Ukraine are rapidly converting their government fiat currency to the world’s most secure, freely available, and decentralized money: bitcoin. On-chain analytics reveal that multiple large buyers (aka, “whales”) are buying bitcoin at current prices, which is a positive long-term sign.
However, given the above-mentioned macroeconomic and inflationary concerns, I remain somewhat skeptical that these upwards price movements can be sustained in the short-term. But only time will tell.
Strategies for Vailshire’s Separately Managed Accounts
While my macroeconomic outlook remains decidedly bearish, we have made some important moves within our Vailshire portfolios over the last few weeks.
In terms of our investments, we took advantage of lower stock market prices to establish starter positions in our top ten stagflation-resistant, capital-efficient companies. These companies should continue to attract customers, grow revenues and earnings, and reward shareholders (including us!) over the coming tumultuous decade.
I am sincerely hoping that the stock market continues to decline over the coming weeks, so that we can establish full positions of these stocks at bargain bin prices! It would be a fantastic long-term wealth-building opportunity to purchase one or more additional tranches across the board at a 10-30% discount from today’s levels.
For what it’s worth, I hold the same ten stocks within the more aggressive Vailshire Partners LP hedge fund portfolio. Once fully established, I am anticipating annualized returns of 20-30%, on average, from these stalwart companies.
Regarding our portfolio savings, we hold a combination of cash (US dollars) and bitcoin, depending upon Vailshire’s proprietary quantitative model. I have spent several months creating and tweaking this system, which just went live in early February.
How does it work? Good question!
The bitcoin model offers appropriate position-sizing, and enters “Buy” mode when momentum is positive and certain price thresholds have been surpassed. Likewise, it enters “Sell” mode once momentum is negative and trailing stops have been crossed.
In short, the goal of the model is to allow Vailshire clients to enjoy the largest-possible upside gains of bitcoin while limiting the downside losses of this notoriously volatile asset. Time will tell how efficient it is, but I am extremely optimistic about our odds of profitability over the ensuing quarters and years.
We will continue to add and remove all investments based on the same full-cycle systematic investment approach that we have been using for the past few years. As underlying market conditions become more or less favorable, so too will change the aggressive or conservative tilt of our portfolios. At the moment, we are decidedly bearish about “risk-on” assets and are anticipating the ability to buy larger equity and bitcoin-related positions in the coming months, at significantly lower prices!
Depending on your financial objectives and individual account investment privileges, Vailshire’s separately managed accounts are currently allocated in the following manner:
- 30-40% select capital efficient equities
- 35-50% cash
- 1-3% bitcoin, Bitcoin infrastructure, and related digital assets
- 10% gold-related equities
- 0-5% short S&P 500 ETF
- 0-5% double short NASDAQ ETF
- 0-5% short US small cap stocks
- 0-5% long volatility ETN
If you are a Vailshire Client, feel free to log into your Vailshire-managed account(s) at Interactive Brokers and see how your own portfolios are positioned. (It’s a good idea to log into your accounts at least quarterly, just to make sure your settings and demographics are up to date.)
Important note: For those clients who wish to actively hedge against anticipated declines in the equities markets but do not see them within your account(s), you will need to log into your Vailshire account(s) at Interactive Brokers and apply for trading privileges in “leveraged or complex exchange traded products.” If you need help with this, please let me know and I will re-send instructions from Interactive Brokers to your email. Also, if you decide to move forward with this account change, please let me know so I can begin hedging your account on your behalf.
Vailshire in the News!
My February 2nd interview with Preston Pysh on The Investors Podcast network was not available in video format at the time of writing last month’s Vailshire client update. For those who wish to watch the full interview (approximately one hour in length), here is the YouTube link.
While it can be hard to profit during inevitable stock market downturns, we can do our best to maximize longer-term investment gains by buying ownership stakes in great companies when they trade at discounted prices. As stated above, I believe that ample buying opportunities are headed our way in the coming weeks and months.
Currently flush with cash and defensive posturing, we will be ready to scoop up additional shares in size when the deals appear.
On the savings side of our portfolios, I am also incredibly excited about Vailshire’s new quantitative bitcoin trading model! Factoring in position-sizing, momentum indicators, and trailing stop losses, Vailshire clients will rest well knowing that their portfolios can experience significant future price appreciation of bitcoin, while limiting our downside with trailing stop losses.
It’s an exciting time to be a part of the rapidly growing Vailshire family! I am honored that you have entrusted me and Vailshire’s ever-improving investment processes to manage your hard-earned savings and investment portfolios.