News Archives - Inlet Private Wealth

2024 Election

November 29, 2024/in Articles, News/by Ted E. Furniss, CFA

Donald Trump decisively won the 2024 presidential election after a tumultuous campaign marked by the withdrawal of a sitting president and two assassination attempts on the former president. Republicans took the Senate and will likely retain the House. To paraphrase The Atlantic, voters for Trump tend to take him seriously but not literally while the voters for Harris tend to take him literally but not seriously. Exit polls suggest voters collectively were not overly enthusiastic about either presidential candidate and political rhetoric was much less important their economic issues.

To provide a sense of how much traditional media sources are now valued, Amazon co-founder Jeff Bezos paid $500 million for his yacht Koru, double the amount he paid for the Washington Post. The ratings during October 2024 for Fox News, MSNBC and CNN were down -43%, -49% and -65% respectively from 2020, suggesting voter apathy outweighed chronic attempts to shock viewers by these networks. Unlike when news anchor Walter Cronkite was considered the most trusted man in America, the proliferation of social media can empower almost anyone to expose problems (real or imagined) and amplify public opinion. Most consumers of news media have gravitated toward sources with content that is delivered in a manner consistent with their political views and it has created an economic line most news organizations cannot afford to cross. When the Washington Post decided not to endorse a presidential candidate for 2024, it lost 250,000 subscribers.

The world may or may not be as one wants but with the election behind us, a rational person should seek to make investment decisions based on the world as it is. Over time, successful companies adapt and profit in almost any environment, but elections have consequences that can meaningfully impact companies that are levered to candidates and their policies. The following are likely to be the more notable influences on investments post this election:

The assessment of taxes on unrealized capital gains now seems unlikely to happen any time soon and equity investments will likely benefit from lower corporate and capital gains tax rates under Republicans. The current taxation of carried interest is unlikely to be changed and 1031 like-kind exchanges on real estate transactions are unlikely to become more limited, benefiting private equity. The Federal Trade Commission’s Lina Khan will likely be replaced, and this should foster a more favorable environment for mergers and acquisitions. An increase in M&A or what notable investor Mario Gabelli refers to as “corporate love making,” should benefit investment banking and the share prices of companies considered acquisition candidates. Financial stocks should also benefit from a less burdensome regulatory environment and large technology companies should benefit from less antitrust scrutiny.

Energy exploration companies should benefit from a more favorable environment to obtain permitting for exploration and exporters of LNG (liquid natural gas) will likely find the political environment a lot more supportive. However, an increase in drilling for oil and gas should also increase supply; other things being equal, an increase in supply will cause oil and gas prices to decline and will likely be more beneficial to consumers than to the profitability of large-integrated oil companies. President Trump may or may not pull the plug on the green energy mandates within Biden’s Inflation Reduction Act but at a minimum it is likely these initiatives will be watered down.

There has often been a noticeable difference between what Trump says and what he ultimately does so it’s difficult to know how serious Trump is about tariffs. Regardless, a Trump presidency will likely pose headwinds to international stocks and if he becomes too isolationist and/or tariffs become inflationary, the price of gold will likely increase. Trump views himself as a dealmaker and he will now have an opportunity to renegotiate the North American Free Trade Agreement. As a result, the pace of deglobalization will likely increase as U.S. companies seek to re-shore critical portions of their supply chains currently outsourced abroad.

If the amount the U.S. spends annually on healthcare was the GDP of a country, it would be the 5^th largest economy in the world. Trump has suggested he will put Elon Musk in charge of making the government more efficient and healthcare spending will likely be targeted. While some health care companies may be impacted negatively by government cost cuts, others will likely benefit from a more favorable regulatory environment. The importance of peace through strength was one of the prominent themes during the Republican National Convention, suggesting defense spending will be a beneficiary.

Post election, the future for investors may have more clarity but much remains uncertain. Economic and market conditions are often influenced by a wide range of factors, not just politics. The financial markets have been pricing in a lot of optimism about the future and barometers utilized as proxies for financial risk including volatility and credit spreads remain historically low given the significant geopolitical and global economic risks that remain.

November 2024 – authored by Ted E. Furniss, CFA & Mackenzie Edwards

IMPORTANT DISCLAIMER: Inlet Private Wealth^®, LLC (“Inlet Private Wealth^®” or the “Firm”) is a SEC registered investment adviser with its principal place of business in Jupiter, Florida. Unless otherwise noted, all data has been obtained via Bloomberg^®. Inlet Private Wealth and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which Inlet Private Wealth maintains clients. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. The data contained in this report was gathered from what we believe to be reliable sources, but we cannot guarantee its accuracy. For information about Inlet Private Wealth’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

Mixed Signals October 2024

October 28, 2024/in Articles, News, Quarterly Market Commentary/by Ted E. Furniss, CFA

Political turmoil, economic volatility, and geopolitical unrest are just a few themes to describe what took place during the third quarter of 2024. The theme of the market has been resiliency. The financial markets oscillated between optimism for a soft landing and fears of a recession as inflation data has continued to trend lower while some recent weakness has emerged in employment data. After declining 8.5% from mid-July to August, the S&P 500 received a boost and ended the third quarter at an all-time high, post the Federal Reserve cutting interest rates by 50 basis points to a range of 4.75% – 5.00%, the first interest rate cut since 2020.

During the quarter, equity market performance was led by the Dow Jones Industrial Average’s return of 8.7%, followed by the S&P 500’s 5.9% and the tech-heavy Nasdaq Composites’ gain of 2.8%. Smaller companies outperformed both mid-sized and large-sized companies during the quarter. Utilities and Real Estate led the market with returns of 19.4% and 17.2%, respectively helping the Russell 1000 value index rise 9.4%, outperforming the Russell 1000 growth index’s climb of 3 .2%. Ten out of the eleven sectors in the S&P 500 posted positive returns during the third quarter. Energy was the only sector that experienced a negative return, losing -2.3%.

The performance of bonds significantly improved during the quarter with the U.S. 10-year Treasury yield falling from 4.4% to 3.8%, resulting in a return of 8.0% and U.S. Corporate bonds returned 5.2%. The US dollar declined 4.8% while gold gained 11.5%. West Texas Intermediate (WTI) crude continued to fall, declining -16.4% during the quarter and was down almost -25% for the year until rebounding shortly after the end of the quarter on the news of Iran’s missile attack on Israel.

The head economist of Apollo Investments, Torsten Siok, recently compared current economic conditions to “Goldilocks,” not too hot, and not too cold. Interest rates have been coming down, easing financial conditions. The rate of inflation has declined to nearly 2% annually and Costco recently noted that “as inflation has dissipated, our members have started to spend more on nonfood items, which is really encouraging in our mind.” Recent data for debit card spending suggests consumer spending has been accelerating and weekly data for retail sales remains solid. The Atlanta Fed’s GDP estimate for the third quarter stands at 3.1 %, suggesting growth remains strong. Jobless claims and continuing claims have been in decline for several weeks and the US economy added 254,000 jobs in September versus a consensus expectation of 150,000 jobs. The unemployment rate recently fell from 4.2% to 4.1 % and wage growth was +3.8% in September, well above pre-pandemic trend levels. In addition, default rates and weekly bankruptcy filings have been trending down and the profit margins for S&P 500 companies are near all-time highs.

While the bulk of the economic data and news has been positive, there have been some indications of economic weakness. Consumers have continued to spend but retail sales reports suggest an increase in the prioritization of essentials over discretionary spending. Higher credit card delinquency rates suggest that many lower-income Americans are stretched. The CEO of Ally, an auto finance provider, stated that inflation and softening employment have weakened their customers’ ability to pay back loans as auto delinquencies have been increasing. The annual U.S. budget deficit currently approximates $1.8 trillion, and our national debt recently topped $35 trillion in September. The annual interest expense on this debt has surpassed $1 trillion annually, an amount larger than the nation’s defense budget. Major geopolitical risks loom around the world with wars in the Middle East and Eastern Europe, as well as increased tensions between an economically moribund China & Taiwan. In addition, the closeness of the 2024 U.S. Presidential, Senate and House of Representatives elections pose meaningful political uncertainty.

On balance, the financial markets have been sending a strong signal that the Federal Reserve will successfully pull off a soft landing and the probability of a recession is declining. Some consumers may be stretched, but as long as employment remains strong, spending should remain resilient and the Fed has gone on record saying that it will support the economy if a slowdown occurs, particularly in the labor markets. The current supply of political and economic concerns often feel excessive but as a leading indicator, the financial markets have been pricing in an optimistic future.

Mackenzie Edwards – October 2024

IMPORTANT DISCLAIMER: Inlet Private Wealth®, LLC (“Inlet Private Wealth®” or the “Firm”) is a SEC registered investment adviser with its principal place of business in Jupiter, Florida. Unless otherwise noted, all data has been obtained via Bloomberg®. Inlet Private Wealth and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which Inlet Private Wealth maintains clients. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. The data contained in this report was gathered from what we believe to be reliable sources, but we cannot guarantee its accuracy. For information about Inlet Private Wealth’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the 3EC’s Investment Adviser Public Disclosure website (www.advi:serinfo.:seo.gov).

Recession Postponed

July 11, 2023/in Articles, News, Quarterly Market Commentary/by Mackenzie Edwards

Six months ago markets were falling, inflation was rising, the Federal Reserve was hiking interest rates, and it looked as though a recession was right around the corner. Since then, we’ve had a banking crisis and the threat of a U.S. default. Fast forward to today and the stock market has defied gravity with the S&P 500 gaining 16%. While investors’ worst-case scenarios never materialized and the markets rallied, the first half of the year is a reminder that the stock market is not the economy, but a leading indicator of where investors think the economy will go.

The S&P 500 is up over 20% from its October 2022 lows and we’ve technically entered a new bull market, but before breaking out the champagne, investors may want to consider the concentrated and inequitable nature of this performance. According to S&P Global, seven of the S&P 500’s constituents have provided more than 100% of the gains in the index while the remaining 493 companies are essentially flat for the year. Just five of those seven companies represent nearly a quarter of the market cap of the entire index. The largest constituent, Apple, has surpassed the $3 trillion valuation mark, making it worth more than the combined market capitalization of the entire Russell 2000 index.

The extreme concentration and inequality in performance has been driven by investors going “all-in” on the rise of artificial intelligence and the possibility of it bringing a future boom in productivity. In addition, when the U.S. hit its debt ceiling in January followed by the failure of Silicon Valley Bank in March it led to a meaningful liquidity injection into the financial system. According to Strategas, the size of the Fed’s Balance Sheet jumped by $300 billion in March while the Treasury Department’s General Account fell from roughly $580 billion in January to $23 billion by early June. Since the debt ceiling was increased in June, the Treasury has begun replenishing funds in the General Account which should drain liquidity from the financial system.

Though the annual rate has decreased from 5.4% to 4.6%, inflation remains higher than normal. According to a report on the Economic Well-Being of U.S. Households, over 23% of adults reported that their spending had increased but their income had not. Packaged goods company General Mills recently issued a profit warning due to consumers substituting from their branded products into generic alternatives because they are no longer able to stomach (pun intended) the company’s price increases. The U.S. economy is dependent on consumer spending which makes up 70% of its GDP but consumers now need 18% more today to buy the same set of goods as they did in January 2020. Households will keep spending as long as they have jobs and access to credit, but inflation continues to erode their purchasing power.

Cracks in the economy are beginning to show. From the start of the year through May, 286 U.S. companies filed for bankruptcy protection, including Bed Bath & Beyond and Vice Media. According to the Wall Street Journal, that is the highest number during the first five months of a year since 2010. Banks have become more strict with their underwriting and data on the manufacturing sector has been deteriorating for months. Commercial real estate continues to be a major area of concern, especially offices. In the U.S. alone, about $1.4 trillion of commercial real estate loans are due this year and next, according to the Mortgage Bankers Association. Americans continue to say they are concerned with the economy and believe it’s in bad shape; in one poll 83% of Americans think the economy is fair to poor and 72% expect it to get worse.

In spite of this negativity, not all things are bad and the American consumer has remained resilient. Compared to all other G7 countries, the U.S. is growing the fastest and has the lowest rate of inflation. The labor market is still strong, unemployment remains at record lows, and jobless claims decreased in May. People are back to traveling; the number of people flying in the U.S. recently rose above pre-Covid levels according to the Transportation Security Administration. Mortgage rates are undoubtedly high at 7%, but housing starts unexpectedly surged 21.7% in May and new building applications increased, suggesting residential construction is on track to help fuel economic growth.

As amazing as this market rally has been, it can be humbling to take a step back and view it with a wider lens. Most of 2023’s year-to-date gains represent only a partial recovery from 2022’s declines. We may now technically be in a bull market, but last year’s bear market has not yet gone completely into hibernation.

Mackenzie Edwards – July 2023

IMPORTANT DISCLAIMER: Inlet Private Wealth^®, LLC (“Inlet Private Wealth^®” or the “Firm”) is a SEC registered investment adviser with its principal place of business in Jupiter, Florida. Unless otherwise noted, all data has been obtained via Bloomberg^®. Inlet Private Wealth and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which Inlet Private Wealth maintains clients. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. The data contained in this report was gathered from what we believe to be reliable sources, but we cannot guarantee its accuracy. For information about Inlet Private Wealth’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

The “X” Date

May 18, 2023/in Articles, News/by Ted E. Furniss, CFA

After a disappointing 2022 tax season (from the government’s perspective), the U.S. debt ceiling’s “X” date is now fast approaching. Estimates for when the U.S. Treasury will run out of cash have ranged from as soon as early June to as late as September and the U.S. Treasury Department is already utilizing extraordinary measures to avoid going over the current debt limit. If a compromise cannot be reached, the U.S. Treasury will eventually have to resort to even more extreme measures such as shutting down the government to avoid payrolls, Social Security payments, etc. before the U.S. is forced to default on its debt.

The U.S. currently has approximately $31.4 trillion of debt. This amount represents $93,393 for each of the 336 million U.S. citizens. The Bureau of Labor Statistics estimates that the median annual pre-tax earnings of wage and salary workers in the U.S. is currently $57,200 while the debt represents $263,423 for every full-time wage and salary worker in the U.S. The weighted average annual cost of this debt is currently 1.8% and nearly half matures within the next three years. With the cost of three-month T-Bills currently more than 5%, the Congressional Budget Office (a non-partisan organization) projects the federal government’s interest costs will surge, contributing to its projected $20.2 trillion in cumulative annual federal budget deficits over the coming decade. If accurate, this would increase the amount of U.S. debt nearly 65% to $50.7 trillion by 2033.

Approximately 65% of U.S. government spending (Social Security, Medicare and Medicaid) is mandatory and indexed to inflation. After making the current interest payments on the $31.4 trillion of U.S. debt, the remaining discretionary portion of the federal budget is just 28%. Since the tax brackets in the U.S. are also indexed to inflation, a rapid rise in interest costs could squeeze out discretionary portions of the budget. President Biden has been firm that he wants no fiscal reforms and wants a clean debt ceiling increase. Speaker of the House McCarthy’s Limit, Save, Grow Act of 2023 would raise the borrowing limit by $1.5 trillion in exchange for limiting future spending growth, put work requirements on Medicaid and remove the funds allotted to the IRS and the clean energy tax credits that were part of the Inflation Reduction Act. There is virtually no chance McCarthy’s plan will be passed by the Senate but the passage of McCarthy’s bill now transfers some responsibility to the Senate, which needs 60 votes to pass any bill.

The debt ceiling will almost certainly be raised in 2023 but the process is certainly not an example of representative democracy inspiring confidence. Collectively, Washington D.C. appears complacent that rising debt is merely a political issue and not a cause for economic or financial concern as most current policymakers have only served in office during an era with low inflation, low interest rates and declining debt service costs. Uber political polarization makes it very unlikely any agreement on the debt ceiling will mitigate the CBO’s estimated growth of U.S. Government debt. While there is not an ironclad threshold beyond which deficits or debt become a problem, at some point, either bond vigilantes and/or the rating agencies will raise an alarm over the US debt and rising interest costs. Financial brinksmanship by politicians has not historically been good for the financial markets but it may result in some excellent long-term investment opportunities.

Ted E. Furniss, CFA May 2023

IMPORTANT DISCLAIMER: Inlet Private Wealth^®, LLC (“Inlet Private Wealth^®” or the “Firm”) is a SEC registered investment adviser with its principal place of business in Jupiter, Florida. Unless otherwise noted, all data has been obtained via Bloomberg^®. Inlet Private Wealth and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which Inlet Private Wealth maintains clients. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. The data contained in this report was gathered from what we believe to be reliable sources, but we cannot guarantee its accuracy. For information about Inlet Private Wealth’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

The Tide Goes Out

April 18, 2023/in Articles, News, Quarterly Market Commentary/by Ted E. Furniss, CFA

The financial crisis in 2008 was essentially caused by trillions worth of debt going bad. In its aftermath, Dodd Frank legislation and the Federal Reserve placed an emphasis on the creditworthiness of the assets banks held and incentivized them to own what regulators considered “very safe,” liquid government securities. Because regulators considered these securities essentially riskless, they required banks to have relatively nominal levels of regulatory capital when owning them. However, the legislative emphasis on credit risk and the Fed’s use of risk-weighted capital to judge a bank’s health do not take into consideration the risk of potential investment losses that can result from increases in interest rates. Treasury securities are only free from credit risk when held to maturity. As rates rise, even assets that are safe in credit quality will fall in price, resulting in a loss if sold.

After interest rates fell to zero during the early stages of the Covid pandemic, many banks became accustomed to having a base of deposits that did not pay depositors any interest. Concurrently, many of these banks invested sizable amounts of the capital provided by these “free” deposits in long-term, “safe” government securities that were yielding around 2%. To some banks the 2% spread being made from these deposits was viewed as a form of riskless financial alchemy and according to the Fed, U.S. banks bought trillions worth of treasury and agency securities during the past few years.

When inflation reached levels not experienced in over 40 years, the Fed was forced to start aggressively raising interest rates during 2022. This rapid increase in interest rates caused bond prices to plunge and while this risk is implicit in every bond purchase, accounting and regulatory frameworks can obscure this risk and distort economic reality. While the intelligence of many bank CEOs is debatable, most were smart enough to counter the potentially negative impact falling bond prices would have on their balance sheets by employing a relatively basic accounting change that also provided the added benefit of keeping billions of unrealized losses on their bond holdings from impacting reported earnings. This “acceptable” accounting maneuver involves simply declaring an intent to hold bond investments until they mature rather than classifying them as being available for sale. After making this reclassification, the prices of these bonds become “frozen” regardless of how far in market value they may fall. The ability to make this accounting change falls well within approved accounting guidelines but has helped enable many banks to report robust levels of capital when the current economic reality of the assets they hold are worth significantly less.

This is the playbook that Silicon Valley Bank (SVB) followed. SVB bought long-dated Treasury bonds and declared an intention to hold them until maturity. The unrealized losses of these bonds were initially ignored because they will pay the bank their par value at maturity but the income generated by these bonds went straight to the bank’s income statement, adding to SVB’s reported profitability. SVB held about $90 billion of its $120 billion bond portfolio as held to maturity investments and did next to nothing to hedge against its exposure to an increase in interest rates. Almost all of these bonds were rated “risk-free” or “low-risk” from a credit perspective but they were ladened with interest rate risk. Today’s digital technology makes everything move faster and when withdrawals happen fast, liquidity and solvency (or the lack-there-of) can become synonymous. After a few tweets by Peter Thiel raising the issue of SVB’s potential lack of liquidity, withdrawals snowballed as depositors instantly moved their funds in mass from SVB to other financial institutions simply via the touch of an app or the click of a mouse. When SVB’s depositors in mass demanded their funds, the bank had far less in assets based on the current market value of the bonds they owned versus their par value if held to maturity and could not make their depositors whole. Silicon Valley Bank quickly ran out of capital and was seized by federal regulators and arguably became the first victim of a digital bank run (albeit largely self-imposed).

After reading numerous annual reports of small and regional banks, it’s nearly impossible to predict how broad this problem could become but what’s certain is that many of these banks locked up their capital in bonds and mortgages at what could prove to be well below market rates for a long time. According to the Fed, these holdings had collective unrealized losses of more than $600 billion at the end of 2022. To paraphrase Warren Buffett, the tide of low interest rates has gone out and we are starting to learn who has been swimming naked. As savers continue to seek higher rates of return on their deposits and become more mindful of the FDIC’s $250,000 insurance limit on their deposits, capital has been moving from smaller and regional banks to larger banks that are more heavily regulated, have stronger capital ratios and are too important systemically to be permitted to fail. Post SVB’s collapse, JP Morgan, Bank of America, Citigroup and Wells Fargo have not been able to open new accounts fast enough.

Throughout history, the United States has seemed to careen from crisis to crisis. Investors will never run out of things to worry about but over time, the world gets wealthier, new scientific advances improve health and the quality of life while creative people and businesses bring innovations to market that delight us and improve our lives. In time, this too shall pass.

Ted E. Furniss, CFA – April 2023

IMPORTANT DISCLAIMER: Inlet Private Wealth^®, LLC (“Inlet Private Wealth^®” or the “Firm”) is a SEC registered investment adviser with its principal place of business in Jupiter, Florida. Unless otherwise noted, all data has been obtained via Bloomberg^®. Inlet Private Wealth and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which Inlet Private Wealth maintains clients. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. The data contained in this report was gathered from what we believe to be reliable sources, but we cannot guarantee its accuracy. For information about Inlet Private Wealth’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

What’s in a Meme?

February 8, 2022/in Articles, News, Quarterly Market Commentary/by Ted E. Furniss, CFA

“Meme” conceptually originated with Richard Dawkins in his 1976 book “The Selfish Gene.” Its initial genetic connotation has since evolved into a form of symbolism that spreads by imitation from person to person. During 2021, “meme stocks” became synonymous with companies having arguably dubious long-term business prospects and a cult-like following of stock traders that created buying frenzies through social media resulting in sky-high share price increases. It was not uncommon for video game retailers with physical locations (GameStop) or movie theaters (AMC Entertainment Holdings) to quickly double or triple in price. The intrinsic value of an investment is irrelevant, all that matters to a meme trader is if there will be someone willing to pay more than them (minutes) later. However, just as “a rose with any other name would smell as sweet,” a meme stock is effectively just another name for an illegal “pump and dump” scheme.

The advent of commission free trades may have helped to “democratize investing” but it has also aided and abetted meme schemes. Coupled with Robinhood’s gamification of investing, commission free trading has also significantly shortened investment time horizons and effectively turned some financial markets into giant casinos. According to the CBOE (Chicago Board Options Exchange), options trading, which can be riskier than stock trading, surpassed stock trading activity during 2021 for the first time in history (based on notional value). There are now over 8,000 cryptocurrencies to choose from, more than all the stocks listed on the New York Stock Exchange and NASDAQ, combined. However, unlike sports gambling and casino games, there is a time value associated with most investments and its outcomes are rarely instant and/or binary. Alcohol has also played a role with 59% of Generation Z traders claiming in a recent survey by MagnifyMoney to have bought or sold an investment while inebriated. This “greater fool” approach to investing can work extremely well, until like water, a highly overvalued stock seeks the level of its intrinsic value. Or, to paraphrase the philosopher Homer Simpson, alcohol can be both the cause of and the solution to all of life’s problems.

2021 was the third straight year of double-digit gains for the S&P 500. During the year, this index made 70 new all-time highs. However, in addition to the extraordinary returns from “meme trading,” most of 2021’s stock market performance was concentrated among relatively few large cap stocks with the ten largest experiencing an average total return of 49.6%. These ten companies are selling with an average price to earnings multiple of 70 while the index as a whole is selling for 21 times earnings. As a result, the valuation of the S&P 500 Index has become “top heavy.” On average, US stocks finished the year down 28% from their peaks and 38% of NASDAQ stocks have fallen 50% or more from their highs during the year. Tech stocks equally weighted were up only about 14% for the year and two thirds of the companies that went public via initial public offerings during 2021 are now trading below their IPO prices. Diversification is often referred to as the only “free lunch” in investing but the returns from international markets were unpalatable with the Vanguard FTSE All-World ex-US index finishing up just 6.3% and the MSCI Emerging Markets Index down -4.8%. China was down -22% and bonds were certainly not a safe haven with the US Aggregate Bond Index finishing the year down -1.6%.

Inflation as measured by the consumer price index is currently running at 7.0%, well above the Fed’s target rate of 2.0%. Gas prices are over $3 per gallon for the first time in over six years, prices for used cars have increased 42% year-over-year and standard Medicare Part B premiums will be increased by 15%, one of the largest annual hikes in the history of the program. The unemployment rate is currently just 3.9% but 2021 will be remembered as the year of “The Great Resignation” with over 38 million quitting their jobs. While many switched jobs, employers are still trying to fill 11 million openings with just 6.9 million unemployed actively searching for work. According to the Labor Department, 3 million workers retired early because Covid changed attitudes toward work at a time when stock and housing market gains made doing so feasible. 2022 is a mid-term election year which historically have been referendums on the party in power. Inflation currently polls as the key issue for consumers and by extension voters as their after-tax, after-inflation income is underwater. According to Strategas, midterm election years have been the most volatile for the S&P 500 during the four-year presidential cycle with the market correcting an average of 19.0%. With Washington D.C. more divided than ever, the era of the open check book seems over. Monetary and fiscal policy will likely be noticeably tighter in 2022 and the returns of the equity market indexes will likely be modest. Dividends are likely to be a more important component of total returns during the new year and with 45% of the companies in the S&P 500 yielding more than the US 10-Year Note, there are seemingly a lot more stocks to like under the market’s surface for 2022 than toward the top of the S&P 500 Index. As such, the current environment for financial markets seemingly favors active managers like Inlet Private Wealth.

Ted E. Furniss, CFA – February 2022

IMPORTANT DISCLAIMER: Inlet Private Wealth^®, LLC (“Inlet Private Wealth^®” or the “Firm”) is a SEC registered investment adviser with its principal place of business in Jupiter, Florida. Unless otherwise noted, all data has been obtained via Bloomberg^®. Inlet Private Wealth and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which Inlet Private Wealth maintains clients. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. The data contained in this report was gathered from what we believe to be reliable sources, but we cannot guarantee its accuracy. For information about Inlet Private Wealth’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

Third Quarter 2021 – Not So Grande

October 7, 2021/in Articles, News, Quarterly Market Commentary/by Mackenzie Edwards

The surge of a new COVID variant, a global supply chain struggling to keep up with demand, inflation on the rise, a major debt crisis in China, and the looming threat of another government shutdown here in the US made the third quarter anything but ordinary. Despite all this uncertainty, the US equity markets did their best to hang in there. For the quarter, the S&P500 was essentially flat with a -0.29% return and the Dow Jones was down -2.28%.

Global supply chain update: Still broken. The queue of container ships waiting to enter neighboring ports of Los Angeles and Long Beach hit an all-time high of 65 vessels in the past couple weeks, and they’ll wait an average of 8.7 days to deliver their cargo. The average transit time from China to the US is now 71 days, compared to 40 days in 2019. This matters because these California ports are the busiest in the US, and they accept more than a quarter of all American imports. Nike and Costco are two victims of these supply chain issues who have recently cut their revenue forecasts for the year. Nike also said that 80% of its shoe factories in Vietnam are currently closed. Be prepared to hear this more and more during the upcoming earnings season. Of all the goods caught up in these bottlenecks, semiconductors and other chips used in electronics may be the most in demand. The global chip shortage will cost the auto industry $210 billion in revenue, according to consulting firm AlixPartners. Automakers are estimated to lose 7.7 million units of production this year because of the chip shortage.

As a result of these bottlenecks and the Federal Reserve’s purchase program of $120 billion of bonds every month, inflation has kicked in and is on the rise. In fact, Dollar Tree (a store that sells a majority of their items for only one dollar) announced that they will be boosting their prices above $1 as their costs continue to rise. To avoid being accused of false advertising, they may soon have to change their name to the “Dollar Tree Plus.” As of August, the U.S. Consumer Price Index, the most widely used measure of inflation, read a 5.3% increase in prices compared to August of 2020. While the Federal Reserve has signaled that they believe this inflation is only “transitory,” these lingering bottlenecks threaten to limit supply and keep inflation elevated. The economic experts at Strategas suggest inflation will likely not be sticky at 5%, but it remains an open question as to whether price changes will remain closer to 3% in years to come. The Federal Reserve has given us more transparency about when they will begin slowing down their bond purchases and, in response, treasury yields are back on the rise. Rising yields don’t necessarily spell doom for stocks. They actually appear to be signaling that a more “normal” economy, one that doesn’t require unprecedented government stimulus, is arriving.

In China, a company called Evergrande promised to deliver apartments to some 1.5 million buyers, who are still waiting for their keys. Some of them have started protesting. They want Evergrande (oxymoron?), the world’s most indebted property developer, to resume construction of the apartments they were promised, or give back their money. On September 23rd, Evergrande seemed to have missed their deadline on interest payments of $83.5 million to offshore bondholders, according to sources quoted in several media reports. The group is now entering a 30-day grace period during which it can still make good with its creditors, but fears have increased about the company’s capacity to manage its $305 billion total debt load. It remains to be seen if and how Chinese authorities will react- whether they will allow Evergrande to collapse, facilitate a restructuring, or bail out the battered group. If that wasn’t already enough Chinese drama for you, President Xi has also been cracking down on industries as he tries to center the country around the ideal of “common prosperity.” During the last three months he has 1) stopped Didi, the Uber of China, from signing up new customers 2) announced plans to break up Alipay, China’s largest digital payments platform 3) expanded a ban on crypto-related transactions 4) limited the amount of time young children can play videogames 5) banned “effeminate” men from appearing on TV and 6) blocked tutoring companies from taking profits.

Although, the media loves to bombard us with negative news, it’s important to remember that there are still positive events happening in the world. The oldest living World War II veteran, Lawrence Brooks, just celebrated his 112th birthday in September. Commercial space flight is officially a reality. In July, Richard Branson and Jeff Bezos separately blasted off into space in their own respective rockets before safely landing back down to Earth. The percent of people in the U.S. who have received at least one dose of a Covid-19 vaccine is now over 65%. Drugmaker Merck just released a study that its antiviral pill, molnupiravir, slashed the risk of hospitalization or death in subjects with mild to moderate Covid-19 by 50%. If approved by the FDA, this treatment could be a huge help to keep hospitals from being overwhelmed. After growing at an annual rate of +6.7% in the second quarter of 2021, forecasters from the Federal Reserve of Philadelphia expect U.S. GDP to grow 6.1% in 2021 and 4.4% in 2022. The net worth of U.S. households rose to a record $141.7 trillion as of June 30th, up 19.6% from a year ago. Of the $5.85 trillion increase in net worth, stocks accounted for $3.5 trillion, and real estate appreciation was responsible for $1.2 trillion. Personal savings in the US is also up more than $700 billion compared to the 10-year average before the pandemic, per Strategas.

With all that’s going on in the world, the fourth quarter promises to be another volatile one. Though volatility may create short term worries, it also typically creates long-term buying opportunities. We will stay tuned.

Mackenzie C. Edwards September 30, 2021

IMPORTANT DISCLAIMER: Inlet Private Wealth, LLC (“Inlet Private Wealth” or the “Firm”) is a SEC registered investment adviser with its principal place of business in Jupiter, Florida. Inlet Private Wealth and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which Inlet Private Wealth maintains clients. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. The data contained in this report was gathered from what we believe to be reliable sources, but we cannot guarantee its accuracy. For information about Inlet Private Wealth’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

Halftime 2021

July 6, 2021/in Articles, News, Quarterly Market Commentary/by Ted E. Furniss, CFA

On May 25^th, the number of restaurant reservations made on OpenTable returned to pre-pandemic levels and during June, the average number of video streaming services utilized per U.S. user declined for the first time. “Cord-cutting” is rising again and the number of Costco memberships is now higher than the number of U.S. households that pay for cable TV (Bloomberg). TSA check-ins are now at 2.2 million per day, more than tripling from 600,000 a year ago and nearing their pre-pandemic level of 2.5 million. GasBuddy, an app to find the cheapest gas stations nearby, reports that gasoline demand is 40% higher than a year ago and Hilton Hotels’ CEO highlighted that 93% of its rooms were occupied over the Memorial Day weekend. Despite a pandemic, the Financial Times reported that more than 5 million people worldwide became U.S. Dollar millionaires last year.

Many countries continue to struggle with Covid and the risk from new variants remains. However, the above metrics reflect a collective vibe in the U.S. that the end of the Covid-19 crisis is in sight and the financial markets have responded accordingly. The S&P 500 Index has returned 15.2% year-to-date and there are now five companies with equity market capitalizations exceeding $1 trillion. This highly exclusive club includes Apple, Microsoft, Amazon, Alphabet (Google) and Facebook but this year’s returns have been driven mostly by a rotation from “growth” and “stay at home” stocks into “value” and “economic reopening” stocks. Financial and energy stocks have been leading the way while Tesla’s shares have fallen by a third and a 33% decline in toilet paper sales and softening demand for bleach have turned Kimberly Clark and Clorox from outperformers into regulars on the Wall Street Journal’s 52-week low list.

Disruptions to supply chains, extraordinary monetary and fiscal stimulus and pent-up demand have contributed to an inflation rate of 5.9% for the 12 months ending in May. U.S. gasoline prices now average above $3 per gallon for the first time in more than six years. Lumber prices have nearly tripled since the start of the pandemic. The median home price has advanced 23.6% from a year earlier to just over $350,000 while the number of licensed realtors (1.45 million) noticeably exceeds the supply of homes for sale (1.04 million). The average used-vehicle price was up more than 30% in May from a year earlier even though the average vehicle age on U.S. roadways has increased to 12.1 years – the oldest level recorded. The Fed suggests these consumer price increases are transitory but also recently stated that they will likely raise rates twice during 2023. The need to raise rates seems inconsistent with their use of the word “transitory” but to date, the financial markets have shrugged this off.

Recently released U.S. census data suggests that about half of its population was born after 1981 which was the last time consumer prices moved upwards meaningfully. As such, 50% of consumers are experiencing material price increases for the first time. It will be interesting to observe how consumers respond but with Levi’s CEO suggesting that 25% of shoppers have a different size today than before the pandemic, suggesting that many consumers are spending because of genuine demand. The census data also highlighted how the U.S. population is starting to collectively age with the number of people over 65 now outnumbering children under the age of 5 for the first time in its history. While it seems that sheltering in place during Covid-19 should have helped foster procreation, just over 9 months after Covid-19 related lockdowns in the U.S., the birth rate plummeted by 8% and 25 states have been reporting a greater number of deaths than births. Many other countries are aging more rapidly – in Japan, the number of adult diapers sold is now greater than for babies. However, there have been some areas experiencing noticeable growth with Utah (18.4%), Idaho (17.3%) and Texas (15.9%) leading the way. Florida, often cynically referred to as the “sixth borough,” now has a population that is larger than all of New York State’s and the number of West Palm Beach area luxury home sales increased 116% year-over-year (Redfin), the largest gain of any major U.S. metro area. U-Haul’s pricing has responded accordingly with the cost to move from New York City to West Palm Beach costing 60% more than moving in the opposite direction. Demographics may or may not be destiny, but the most recent census data highlights many trends that may provide attractive long-term investment opportunities.

Inlet Private Wealth just celebrated its third anniversary! The past three years have passed much faster than seems possible and while much has changed in the world during this time, our clients and the financial, investment and legal professionals we work with have remained extremely loyal and tremendously supportive. We are grateful for the opportunity to work with such wonderful people and for the confidence and trust they have placed in us.

Ted E. Furniss, CFA – July 2021

IMPORTANT DISCLAIMER: Inlet Private Wealth^®, LLC (“Inlet Private Wealth^®” or the “Firm”) is a SEC registered investment adviser with its principal place of business in Jupiter, Florida. Unless otherwise noted, all data has been obtained via Bloomberg^®. Inlet Private Wealth and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which Inlet Private Wealth maintains clients. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. The data contained in this report was gathered from what we believe to be reliable sources, but we cannot guarantee its accuracy. For information about Inlet Private Wealth’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

Unprecedented – January 2021

January 12, 2021/in News, Quarterly Market Commentary/by Ted E. Furniss, CFA

One of our wittier clients recently commented that on midnight January 1^st, it was the first time in history we all had hindsight that was 2020. Even Nostradamus could not have had the foresight to predict the magnitude of the Covid-19 pandemic, that oil prices would fall below zero, that shares of Hertz would significantly appreciate after declaring bankruptcy, or that pharmaceutical companies could develop multiple vaccines in less than one tenth of the time it has historically taken them to create just one. There were so many “unprecedented” events during 2020 that the use of this word now feels trite.

Financial markets behaved capriciously during the year with the S&P 500 surprisingly finishing up nearly 18% while concurrently the global economy noticeably declined. With the benefit of 2020’s hindsight, the large outperformance of the S&P 500 versus the economy last year was primarily due to the difference in the composition of the S&P 500 compared to the US economy. Apple, Microsoft, Amazon, Alphabet and Facebook combined comprise 21% of the S&P 500 but collectively generated 66% of its returns. However, compared to the US economy as measured by gross domestic product (GDP), the collective net income of these five stocks during the year represented only 1% of GDP. The S&P 500 is arguably now “top heavy” from the appreciation of its largest constituents. For example, Apple, the world’s largest publicly traded company based on its market capitalization, is valued at $2+ trillion making it worth more than all the constituents of the Russell 2000 Index, combined.

As we enter 2021, many remain cautious or understandably, afraid. There is currently $500 billion more in money market funds compared to pre-pandemic levels. 79% of the more than 500 institutional investors recently surveyed by Natixis SA do not expect GDP to recover to pre-Covid levels before 2022. Handgun sales increased year-over-year by 81% and personal savings rates are at decade highs. However, there have also been increasing signs of what John Maynard Keynes referred to as “animal spirits.” Margin loans or the use of debt to buy publicly traded securities is at all-time highs. Individual investors opened more than 10 million new brokerage accounts during 2020, a record. The volume of traded option contracts, risky securities that are levered to the change in price of an underlying security, were 48% higher than during 2019. Initial Public Offerings (IPOs) have started to party unlike any time since 1999 with more than half of these new issues being speculative, special purpose acquisition companies or SPACs. At the start of last year, Berkshire Hathaway held enough cash to buy Tesla, twice. Enthusiasm from Robinhood’s investment community and Elon’s Musketeers helped to drive Tesla’s share price up so much that at the end of the year it was the 5^th largest publicly traded company in the US, making it larger than all of Berkshire Hathaway. Bitcoin, once referred to as “a charlatan attracting delusion that is likely rat poison squared” by Warren Buffett, arguably one of the greatest investors of all time, recently sold for more than $40,000, up from $7,000 at the time of his statement.

It is challenging to describe the current prices of most investable assets as inexpensive. The S&P 500’s price to earnings ratio is currently 31x. In 1990, a $5 million portfolio of investment grade municipal bonds could generate $362,500 of tax-exempt income annually; today, it takes $36 million to generate this much income. As a result, many investors that would like to buy bonds are no longer able to “afford” them. Technology now represents 38% of the S&P 500’s market capitalization but accounts for just 6% of US GDP and 2% of employment. However, the collective optimism of investors that is being reflected in asset prices has some merit. The Fed is expected to keep interest rates near zero until 2023 and to continue purchasing $120 billion worth of bonds each month until the economy is near full employment. The money supply has been growing at an annualized rate of 25% and while this would typically stoke broad inflationary pressures, to date, an historically high savings rate has resulted in the inflation of asset prices, not the real economy. During a time of extreme political polarization, Republicans and Democrats have worked together to pass multiple fiscal relief bills. With a so called “unified government” in 2021 and interest rates hovering near zero, these levels of fiscal and monetary stimulus are likely to continue unabated.

John Kenneth Galbraith once said, “the only function of economic forecasting is to make astrology look respectable.” Having provided this disclaimer, the 2021 consensus forecasts are for GDP growth of 4% and for the S&P 500 to gain 7.4% and there do seemly remain some areas of potential opportunity for investors. As the pace of vaccinations improve and fiscal & monetary stimuli increasingly flow into the economy, small and medium sized companies should start to noticeably recover and with interest rates close to zero and likely to stay there for some time, quality dividend paying stocks seem relatively attractive. It is likely the New Year will present more than its fair share of challenges but the mere changing of the calendar to 2021 does makes it seem likely that it will be an improvement over an unprecedented 2020.

Ted E. Furniss, CFA – January 2021

IMPORTANT DISCLAIMER: Inlet Private Wealth^®, LLC (“Inlet Private Wealth^®” or the “Firm”) is a SEC registered investment adviser with its principal place of business in Jupiter, Florida. Unless otherwise noted, all data has been obtained via Bloomberg^®. Inlet Private Wealth and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which Inlet Private Wealth maintains clients. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. The data contained in this report was gathered from what we believe to be reliable sources, but we cannot guarantee its accuracy. For information about Inlet Private Wealth’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

Ted Furniss – Leader of Inlet Private Wealth^®

August 28, 2019/in News/by Inlet Private Wealth Team Inlet

As recently published by Gulfstream Media,

Chief Investment Officer Ted Furniss is an independent thinker who enjoys the intellectual stimulation of analyzing investments. His firm, Inlet Private Wealth^®, differentiates itself from the rest by customizing the investments it manages for clients to meet specific financial objectives. The company caters primarily to those with $5 million or more to invest whose objectives are too complex to properly be addressed by a generic asset allocation strategy.