Just take off the kid gloves already!

image: Wikimedia Commons (link).


The US equity and bond markets have been anticipating central bank rate hikes for some months now, and this anticipation is almost entirely responsible for the sharp sell-off that has been taking place across the board but especially in the stocks of smaller and more "future-oriented" companies.


We have already written about how we find the conventional wisdom to be nonsensical on this point: see "Conventional Wisdom misses the mark (as usual)."


Today (26 January), after the first Federal Reserve Open Market Committee meeting of 2022, the Fed issued this statement and then Fed Chairman Jerome Powell held a press conference, which you can watch here.


During the press conference, equity markets plunged at remarks that the Fed has "plenty of room to raise interest rates without threatening the labor market" (see statements beginning at the 0:42:00 mark of the video). 


Mr. Powell then went on to say that, in contrast to previous conditions: "the economy's much stronger and inflation's much higher, and I think that leads you to -- and I've said this -- being willing to move sooner than we did the last time, and also perhaps faster" (at 0:45:25 and following).


The markets don't want to hear about "sooner" or "faster" or "plenty of room," but we are already on record as saying that the Fed should just get it over with and raise rates, and get out of what are basically the "emergency low rates" that have been in place, with little variation, since 2020 -- and indeed since 2008 and 2009! 

Fed Funds Rate since July 2000 -- left Y-axis has the rate in percentage points. 

Source: NY Federal Reserve (link).


Our opinion is that the Fed needs to put aside the "kid gloves" and stop babying the markets, and just raise rates -- preferably faster rather than dragging it out. They should just raise rates by 50 basis points (half a percent) at each of the next two meetings (for a total of 1%) and then stop to see how that goes.


We are not worried about the markets dropping in anticipation of Fed rate hikes -- and we don't believe that the Fed should be worried about it either. 


Market corrections are necessary! While they are never pleasant for investors, market corrections represent a "shakeout" of some of the over-speculative behavior that inevitably accompanies any positive market action. These shakeouts need to happen.


The bigger problem in the economy right now is seen in the supply chain issues -- these are real challenges, and they cannot be fixed with overly-accommodative monetary policy. They stem from a variety of factors, including an ongoing shift towards holding smaller inventories and relying on "just-in-time" logistics, with little margin for error. This left supply chains ripe for disruption during the events of 2020 and the policies enacted by governments around the world in response. And they will take some time to get fixed -- but the Fed has no role in fixing them.


In fact, increasing the money supply at a time when the real supply of goods and services is constrained is a recipe for inflation, and as everyone can plainly see (and as the Fed indicated in the published remarks), inflation is impacting everyone right now.


Which is why we believe it is time for the Fed to take off the kid gloves and stop worrying about market hissy fits. 


And for investors, we continue to advise ownership in well-run businesses positioned in front of fertile fields for future growth -- and continuing to own those companies through the many cycles and shakeouts that inevitably arise, including the one we are going through at the moment.

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Continue Reading

Investment Climate January 2022




Image from https://www.hp.com/us-en/shop/tech-takes/top-7-augmented-reality-experiences

The equity markets, and particularly the stocks of growth companies, have been caught up in a major sell-off that started in November and which accelerated into the close of the year. It has continued in the early weeks of January as well. A recent article published in Bloomberg News notes that fully 40% of stocks on the NASDAQ composite are down 50% or more since their all-time highs -- a situation reminiscent of the dot-com crash in 2000. (https://www.bloomberg.com/news/articles/2022-01-06/number-of-nasdaq-stocks-down-50-or-more-is-almost-at-a-record) 


The sell-off appears to be related to Fed rate-hike fears and interest-rate inflation noise. The Bloomberg article, for instance, declares: "Traders were quick to unload tech shares, whose high valuations become harder to justify in a rising-rate environment." We find that argument to be short-sighted, and to have little to do with the actual investment merits of innovative businesses that are creating real value in their industries. Therefore, we believe at times like this, when so much of Wall Street and the financial media are reacting in short-sighted ways, it is valuable to share some of our longer-term views on the investment narratives which we see as important drivers of future growth that will play out over the next several years. 


One very important development which is sure to bring about many changes is the proliferation of digital currencies utilizing the blockchain, which are poised to disrupt many existing financial structures in payments, and which will enable a proliferation of new business models that will go well beyond finance. Just as the advent of smartphones and of new smartphone apps such as Uber enabled people to use their otherwise-idle cars to earn side income, the advent of blockchains and crypto currencies and tokens can enable people to “rent out” the processing power in their otherwise-idle home computers and game consoles -- and be compensated for their use! 


This example is related to the development of the next iteration of internet evolution, sometimes dubbed "Internet 3.0." As this example indicates, Internet 3.0 will likely feature more decentralization, in contrast to the centralization we see today in which giant companies such as Google, Amazon, Twitter and Facebook have disproportionate power and control over monetization and distribution of data and information. 


Internet 3.0 will also almost certainly be more "three-dimensional" than the current "two-dimensional" web, which today is still dominated by "flat" web-pages and social media feeds, but which in the future will probably incorporate immersive, three-dimensional virtual spaces ("virtual reality") and "augmented reality" (the addition of visual, digital images and information onto the three-dimensional "real world" with which we are already familiar). 


These benefits go far beyond the kind of entertainment and gaming applications that most people think of when they hear "AR" and "VR" mentioned (augmented reality and virtual reality). For example, imagine if an engineer could simply look at the gauge on a high-pressure pipe -- even from a distance -- and immediately get a reading of the pressure and volume and flow of the fluid in that pipeline, presented in a digital visual display floating in his or her field of vision, perhaps while wearing a pair of smart glasses. We believe that industrial and business applications for such technology will be tremendous, and that their potential is only barely appreciated today. 


Similarly, we also see an ongoing trend that involves the continued incorporation of the many benefits of digitization and modern technology by industries outside of the traditional "tech sector" which in many cases have yet to take advantage of all the transformative power that technology has to offer. There remain an enormous number of "analog" processes and procedures in industries from education to restaurants to construction which can become digital, with potentially transformative impacts for the companies involved.  


We also predict a tremendous increase in the automation of manufacturing, with robotic machinery that will be connected via digital networks. In fact, we think that it is very likely that the much-discussed advent of 5G cellular networks will be most useful for controlling machinery and equipment in major industrial settings, even though most investors think of consumer uses when they hear the word "5G." 


And, we see tremendous innovation taking place in the field of medical device technology, including the continued development of minimally-invasive procedures to replace treatments that in the past required much more invasive treatments and much longer recovery times. We are also convinced that the early advances in robot-assisted surgeries and other procedures will only accelerate, as innovative companies find new ways to apply the advantages of new developments in robotic automation to medical applications. 


In short, we do not deny that the current investment climate is quite ugly. However, we believe that right now is a very good time to look forward and to realize that the best investment strategy has always involved the identification of what we call "fertile fields for future growth." We are working to include exposure to all of the above growth narratives for our investors -- and to many other themes as well. Thank you for your continued confidence in our firm, and Happy New Year! 






Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Continue Reading

Conventional wisdom misses the mark (as usual)









image: Wikimedia commons (link).

The markets are presently selling off sharply, with smaller companies and tech-related companies being sold even more vigorously than the overall market.

The chatter that we are hearing involves three widespread (but, in our opinion, misguided) pieces of "conventional wisdom" on the Street: 

  • First, that inflation makes smaller companies whose earnings are more "in the future" than "already in hand" significantly less attractive and less valuable,
  • Second, that inflation concerns will cause the Fed to raise rates more aggressively which will also negatively impact smaller and more future-oriented companies,
  • And Third, that the Omicron variant appears to be much more contagious but much less severe than previous variants, and that if this variant sweeps across the country without causing too much damage, it could create widespread "natural immunity" and thus bring an end to the attractiveness of "Covid-related" stocks, including many technology stocks and the stocks of companies which benefit from the "work from home" and "stay at home" theme.
A look at the performance of various stocks and of various indices over the past several days shows plenty of evidence that the above three pieces of misguided conventional wisdom are behind much of the market action. The Russell 2000 index (a small-cap stock index) has broken blow its 200-day moving average as this post is being published, and other examples could also be offered.

But while there is no denying the spread of either inflation or of a highly-contagious variant in recent weeks, we would argue that the above interpretations miss the mark completely regarding what all this means for smaller, more innovative, and more technology-oriented companies. 

First, we of course agree that inflation is an extremely negative development, and one that doesn't help most businesses and certainly doesn't help the general standard of living. However, we completely disagree with the conventional wisdom that argues that in an inflationary environment, it is better to invest in the stocks of "cyclical" and "defensive" companies, and to sell the shares of smaller companies (and especially smaller companies whose growth and earnings is more skewed towards the future).

We understand where this thinking comes from -- but we simply disagree with it. 

Based on our experience as professional portfolio managers for going on four decades, in an inflationary environment, we would much rather own the shares of innovative and well-run businesses which are positioned in front of the narratives that are most likely to succeed over the next five to ten years, versus  just about any other asset anyone else can suggest (including cash)!

And, as for the convoluted "Omicron" argument which some of the "hot money" on Wall Street are using to guide their so-called "investment decisions" (more accurately, their computer-trading algorithms), we would of course welcome anything that helps bring an end to the lockdown mania that has taken control of the thinking of so many technocrats around the world (and here in the United States). 

But while we can't stop algorithmic traders from selling stocks based on their attempts to predict the end of the "Covid story," we think it is a particularly egregious example of the kind of non-fundamental speculation that drives so much of the market action today -- speculation that is extremely unproductive and which real investors should shun.

As we have explained many times in this blog over the years (now going strong since 2007: fifteen years!), our strategy is based on owning well-run businesses in front of future fields for future growth

It just so happens that the narratives we identified regarding the future were, in almost every case, accelerated by the events of the past two years, but that only goes to show that those narratives we identified were correct descriptions about the way that technology would play a bigger role in more areas of our life in the future (the lockdowns only made that happen faster than it would have otherwise).

We find it to be ridiculous to think that, just because the damaging and (we would argue) nonsensical lockdowns might finally be coming to an end, investors should get rid of any stocks that are involved in the very narratives which are most likely going to continue for many years to come. 

As an important aside, we do also recognize that the valuations of some of the companies we own did indeed get carried higher than they should have during the Covid-story-based buying during 2020 and early 2021. Now many of those valuations are being taken down severely. But this kind of over-reaction (in both directions) just underscores the necessity of our standard practice of owning good companies through the various market cycles, for as long as they remain well-managed businesses in front of fertile fields for growth.

And so, during the current market correction, we would advise real investors to avoid getting caught up in mistaken conventional talking points which miss the mark when it comes to the kinds of companies that are best to own for the future.  We would be using this "growth correction" to deploy idle cash.


Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.
Continue Reading

"Hissy Fits in Both Directions"

image: Wikimedia commons (link).

The algorithmic market in which we live:
We have been seeing bouts of wild volatility -- in both directions -- separated by periods where markets go basically nowhere. It is clear that there is no fundamental reason behind this behavior but rather the fact that the humans have basically handed over control to algorithms, like a Tesla-owner letting go of the steering wheel, but the auto-pilot doesn't drive very effectively.
Fed rules the world?
In our many decades of professional investment management, it never ceases to amaze us how the markets hang on every word from the Fed. Last we checked, the Fed wasn't in charge of any of the businesses we own for our clients.
Hissy fits in both directions:
The conventional wisdom and various media market commentators are spewing out memes which are shallow and not well-informed, from "small-caps will get hurt in this environment" to "value is outperforming growth today" to the general "risk on: risk off." If you are trying to manage capital based on chasing those kinds of ignorance, heaven help you. We follow the mantra: "Be centered, be still." On days of non-fundamental volatility, we typically wouldn't make any changes.
Everyone is pushing portfolio management "into a box"
They want to categorize companies -- and managers -- into little boxes and try to guess which category is going to go up today. Why would anyone want to be so reductive and shallow? Because no one wants to make investment decisions based on business fundamentals anymore! This situation provides an opportunity for those who are willing to take the time and effort to do the fundamental work.


Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Continue Reading

Investment Climate October 2021: Interesting Times




Markets spent the last quarter in a general “holding pattern with periods of severe up and down volatility followed by periods of relative quiet, all accompanied by low volume and ending with little progress overall for the quarter, which ended flat to slightly down.  Our portfolios acted similarly.  As we are now in the traditionally weak part of the year – September/October – it would not be at all surprising to see a more severe correction materialize, along the lines of 10-15% down.    


There is very little to be pleased with from a policy standpoint in the current climate.   The printing presses have been in full operation at the U.S. Federal Reserve (the Fed) The U.S. Congress and Executive Branch seem determined to deliver a massive tax and spending plan totaling over $5 Trillion (adding to the $4 Trillion or so they have already spent during the era of COVID) And restrictions on virtually every aspect of life on the planet either continue or are threatened to be resurrected at a moments notice.   


In our view, none of this is necessary  so much so that we hold out hope that much of it will fail to materialize, at least the taxing and spending part.  Nonetheless, massive damage has been done to businesses (particularly small ones) due to misguided policies from governments all over the world. Of course, these policies were enacted in the interesof fighting what was considered a serious virus.  However, the impact of these actions is now far more serious than the virus itself.  We did warn of this potential back in March of 2020 in our blog post, “Time For A Pushback.   We urge readers to review that post.  


Regardless, this scenario is what we must deal with at present.  Supply chains are in shambles as the powers-that-be are learning that you cannot turn the economy off and on like a light switch.  Whatever the masters at the Fed say, this situation is not just transitory.  These massive actions have served to disrupt supply chains for years.  And the inflation that everyone is experiencing is likely here to stay, at least for a while.  As for the  damage this has done on a societal level, and how that affects economic behavior going forward, we can only guess.  We expect it will be long-lasting if not permanent. 


Nonetheless, it will be the entrepreneurial drive of the people who run businesses that will lead us out of the morass that has been created.  And good news on that front is at hand.  The long, dark slog of the “8000 to 4000” problem (the drop in the number of public companies on U.S. exchanges), of which we have written about endlessly in recent years, has reversed.  Thanks to the little understood special purpose acquisition company (SPAC), we are now back up to over 5800 companies on U.S. exchanges.  This is amazing news.  These are the generally smaller companies that in the previous 15-20 years were unable to gain access to the capital in public markets, allowing the oligarchic rise of the “FANGS” to dominate the past decade and, in our view, stultify innovation and competition in ways that have become detrimental to economic progress.   


It is from these ranks, and from other companies yet to become public, that we will see the unleashing of the innovation necessary to drive the economy of the 21st century. While some pundits have argued that the technology boom of the past few decades has run its course and is running out of steam, they could not be more mistaken. We are actually on the verge of revolutionary new developments in many areas, among them two important related developments: blockchain technology and distributed computing. This economy will be transformed by the rise of distributed computing tied to blockchain technology and, as our friend George Gilder wrote about in Life After Google, those transformations will power the next generation of computing and technology, not to mention almost every other sector in the economy.  The “central control” of everything from computing to finance will be upended.   


We are reminded of the experience of the 1970s, during which we saw tremendous economic and political mistakes, leading to all kinds of negative consequences (including the rise of enormous conglomerated business behemoths and all kinds of obstacles for smaller companies), but during which we also saw the rise of new and innovative companies (including Apple, Microsoft, Intel, and many others) who would go on to change the world in completely unforeseen ways. We are convinced that the lesson for investors is that we must always be searching for innovative, growing companies and new transformative paradigms (which are at the heart of our narrative-based investment philosophy), no matter how negative the general climate seems to be at any given moment.  Yes, indeed, we are living in interesting times!  Stay tuned. 








Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Continue Reading