Worries + Sectors
Let’s take a moment to do a little top down thinking. Two years ago my economic forecast was well below consensus, and that was reflected in a very “defensive” portfolio. While there continues to be substantial risks in the US and global economy, there is a new risk added to my list. That is the risk of the economy growing substantially faster than the consensus forecast. That new risk was the reason for adding Thor Industries and Teck Resources.
WORRIES
China - China and its banking system is an old worry. Jim Chanos and Kyle Bass have been very articulate in their criticisms for 10+ years. I am reminded that that I was part of the team that warned about a “credit bubble” in 1999, only to see it explode 9 years later in 2008. Chanos and Bass might just be early.
Real Estate/Banking - It is completely unbelievable that we have not seen any significant banking problems from the commercial real estate crisis. The partners of large accounting firms should be hung by their thumbs until they force their clients to admit these problems. I will completely ignore financial stocks while the real estate problems are hidden.
Consumer Debt - By any measure the lower end consumer is over-leveraged. Maybe wage growth can dig us out of this problem. I own Brunswick and Thor because the higher end consumer might be OK, if not, we will all be eating at Jack in the Box
Dollar/Fed - I once called Alan Greenspan a “mailman in a nice suit” and I stick with that opinion for Mr. Powell and other Fed bureaucrats. Who knows what disasters they can create. The “flight to safety” pushing the dollar higher is concerning. As my hero Dr. Ron Paul wrote - End the Fed.
Recession - I was wrong about the end of “pent up demand” and recession in 2023 or 2024. There are still some bad signs in labor market demand that are flashing recessions signals, but the election might have changed this.
Boom - This is my new worry. Anecdotes are a terrible method of economic forecasting, but sometimes they make an important point. The biggest miss of conventional economists in the “Reagan Revolution” was not understanding the boom in small business. Two weeks after the election I heard the CEO of Miller Industries - MLR - $71 (the largest maker of tow trucks) say that post-election demand for new trucks was “robust”. A few days later at the racetrack a guy sat down next to me. He operated a fleet of 5 tow trucks, and yes, he had just ordered a new truck.
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SECTORS
The new Top 25 Model Portfolio is moderately well diversified.
The emphasis is on special situations. We are ignoring Financials and Technology and are slightly over-weighted in the other 9 sectors. When you have a 0% weight in two major sectors, it is hard not to be sightly over-weighted in the other sectors.
The weights shown are the from the average small/mid-cap value index as calculated by Morningstar.
Special Situations - Royal Gold (gold royalties), Iridium (satellites), HF Sinclair (refining), Darling (rendering), FirstCash Financial (pawn shops), these companies do not fit well into the conventional sector definitions
Technology - 11% - none - under-weight
Financials - 23% - none - under-weight
Industrials - 18% - Middleby, Titan Int., Chart, RXO (still maybe under-weighted)
Consumer Cyclical - 14% - Brunswick, Thor, Jack in the Box, Red Rock Resorts
Real Estate - 6% - Rayonier, Alexandria Real Estate
Healthcare - 6% - Royalty Pharma, Revvity
Materials - 7% - Nutrien, Teck Resources
Energy - 7% - Halliburton, Kinder Morgan
Consumer Defensive - 4% - Tyson, Corteva (seeds are almost food)
Communications - 3% - Nexstar Media
Utilities - 3% - AES Corp.