Hyacinth Wealth Management

09/22/2024

What Just Happened?

Much has been made of the fact that the Dow Industrials and the S&P 500 have made all-time highs on less breadth.

What does that mean?

It means that not all stocks have participated in this rally. A few stocks continue to make new highs, while a large number of stocks in the index have done nothing or declined.

This is known as market breadth. Market breadth is one measure of the health of the stock market. It compares the number of stocks increasing in price to those decreasing in price.

We all know that just a few names have led this rally, and there has been much hand-wringing by the media, such as:

• Can this continue?
• Is the economy slowing?
• Are we going into a recession?
• Is the AI story over?
• Are all these big names (Nvidia, Amazon, Google, Apple, etc.) overvalued and due for a pullback?

And on and on.

The first thing to point out is that none of these people know that answer, or they wouldn’t be working a day job on TV. And their comments often defy common sense.

Chances are, you are reading this on an iPhone, an iPad, MacBook, or even an Apple Watch. If not, you’ll probably end up seeing or interacting with at least one Apple product before heading home this evening to turn on some Apple TV and binge your favorite show. Apple has its hand in nearly everyone’s pockets in one shape or another, whether that be the newest iPhone or that pesky recurring charge for 200 GB of storage you forgot to cancel years ago.

Do these large tech companies become overvalued? Yes. Do they pull back from time to time? Yes. But they will continue to make loads of cash for years to come. And as all my clients know, whether at the personal or corporate level, it’s all about cash flow.

But what is also true is that, since 2020, some of the greatest blue chip stocks on earth have gone through a brutal correction. We have a situation in which the stock market looks expensive while there is an abundance of opportunity for the types of companies you want to own 10 or 20 years from now.


Many of my private clients have heard me discuss Hershey – one of the most well-run, dividend-paying, cash flow generating operations in history. Only once or twice a decade do we have the opportunity to buy this great company at fire sale prices. Most recently, the opportunity came because of the inflation in cocoa prices. Hershey’s “input cost” – in this case, cocoa – could not be overcome by raising prices. Their profitability dropped, and with it, the stock price. As long-term, strategic equity investors, we know a bargain when we see it.

This is just one example of many.

So, while the pundits would have us sweating out every new high in the market because breadth has been absent, my approach has been, why not pick up the wonderful bargains in front of us? We want to be owners of profitable companies that produce actual cash flows. And we want to acquire these cash flows at a fair price. That’s it.

So, yeah … it has been a little odd. But every market is different. That’s why it’s so fascinating. I never wake up to the same thing twice.

It seems like stocks are getting more expensive when in reality, many wonderful companies are getting cheaper. This goes back to the media’s focus on “the indexes.” We know better.

This is the reason it is so important to always think about your claim on individual cash flows of specific assets. That is, you can’t think of yourself as a stock market investor. Rather, you are an owner of individual productive assets that generate actual cash flows. Beyond that, the price and terms on which you acquire those cash flows determine much of the outcome. That’s the work. The rest is just noise.

Janelle O’Brien
FOUNDER, MANAGING DIRECTOR




Hyacinth Wealth Management
2600 W Olive Avenue, Suite 519
Burbank, CA 91505

[email protected]

www.hyacinthwealth.com

Office: 310.754.5209



CA Insurance Lic #: 0I4857
Securities offered through LPL Financial Member FINRA /SIPC.

Janelle O’Brien is a Registered Representative with and Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. Hyacinth Wealth Services is a separate entity from LPL Financial. The information contained in this email message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.

06/29/2024

Thoughts on Returning to a Reasonable Interest Rate Environment

The S&P futures market closed above 5,400 for the first time ever on Wednesday, June 11, 2024. In short order, it closed above 5,500 on June 17, 2024. At today’s writing, the market is up 14.66% year to date (excluding dividends) and any time the market has a strong run, the question “how much further can it go” inevitably arises.

The short answer is that, since 1928, there have been 28 times when the S&P has gained 10% or more during the first half of the year. Of those 28 years, there have been only 7 occasions, or 25% of the time, when the S&P followed a gain of over 10% with a negative return in the second half.

Further, only once has the S&P gained more than 10% during the first half of the year and then had a second half that was bad enough to push it into negative territory for the year. Most would guess the year: 1929. The S&P was up 12.57% in the first six months, and then lost 21.74% in the second half of the year. That year included Black Tuesday and the Great Depression.

The gains in 2024 come after a strong 2023, when the market gained 16% in the first six months and then 7% in the second half. However - the difference between the two years is that in 2023, the market was coming off a 19% loss in 2022.

This is extraordinary volatility by any measure. And it was, at least in part, caused by a Federal Reserve that kept interest rates too low for too long, in my opinion. The Fed created a warped environment where money was essentially free, and it also didn’t pay you to hold cash. Remember TINA? That means There Is No Alternative, meaning no alternative to stocks, since cash or bonds paid you nothing. Money goes where it’s treated best, right?

The Fed waited too long to raise rates, for reasons that have been well-publicized. Once they started, they were forced to aggressively hike rates at a pace never before seen in this country. The speed and magnitude of the hikes were breathtaking.

The result? 2022 was the worst year for bond returns in history, not to mention the 7th worst equity market year.

We were coming from an environment when the Fed had held rates close to zero for 12 years. Some government banking regulators even stopped stress-testing for rapid changes to interest rates, they were so convinced that we would never have another rising rate environment!

So where are we now? We are still in an environment where rates are becoming more typical. People are still adjusting to “high” mortgage rates, which in reality are normal, or even low. In 1981, the average 30-year fixed mortgage rate hit 16.63%, and at one point that year hit 18.63%, the highest weekly rate on record. By that standard, a 5% or 6% mortgage is “cheap.”

Further, the difference between and 2-year and 10-year yield stands at -0.46% as of June 24, 2024. This is not normal. You should get paid more for your money the longer it’s invested, not less. Does this indicate a slowdown in the growth of the economy, as usual? It’s hard to tell because the reasons for this inversion are unprecedented.

This is why most of the data points that captured people’s attention all year have been around interest rates and inflation, and how the Fed will respond to that information. Since 2022, the market has been hanging on their every word. And from last year’s low in October, the market has believed that the Fed would start to cut rates. Rate cuts have been “priced in,” creating a strong rally that continues to this moment.

We do not fully understand the consequences, nor have we come to terms with, the ramifications of these changes. One can only hope that the Fed has learned from its mistakes and can apply a healthy dose of restraint and humility to future pronouncements.

https://www.bankrate.com/banking/federal-reserve/history-of-federal-funds-rate/
Historical Mortgage Rates
2- and 10-year yield spreads

Tracking #597479-1

The federal funds rate, a key borrowing benchmark set by the Federal Reserve, is back to levels not seen since early 2001.

05/17/2024

Rotation and Opportunities

Life is all about relationships.

I have put my 10,000 (or 20,000) hours into the study of the market. And if I had to sum up what I’ve learned in a single sentence, I would echo the old market adage, “Money goes where it’s treated best.”

In the finance world, we call this “sector rotation.” A sector is understood to mean a group of stocks representing companies in similar lines of business. All things being equal, most companies in a sector should move together.

“Rotation” means that certain areas of the economy will do better than others in different stages of the business cycle.

As in life, it’s all about the relationships.

Let’s start an easy relationship to understand (and one of the most important). 2 sectors that function like opposite ends of a see-saw:
• Consumer discretionary (things you want)
• Consumer staples (things you need)

Most of the time, you buy both. But in a weak economy, or a recession, the consumer pulls back. No more fancy purses. Time to save.

Generally, the consumer discretionary sector does better than staples. Which makes sense because most of the time the U.S. economy is expanding. And if you want to see a robust economy, you don’t want to see the staples outperform.

The relationship between these 2 sectors gives a strong clue about where the economy is heading.

Another example is more direct.

Hershey needs no introduction. They’ve been making chocolate bars since 1894. They’ve also been growing and paying out dividends to their shareholders for just as long. The company has been a fantastic cash generating machine.

But Hershey had an historic decline in their share price in 2023, dropping 35%. Why? The skyrocketing cost of cocoa, their main input. They could not raise their prices enough to overcome the effects of paying more for chocolate. The stock price plummeted. Could one assume that when cocoa prices start to moderate, Hershey will resume their winning ways? It’s obvious that this is Hershey’s most important relationship. The price of their main input is not under their control and they can only react to it.

Consider a more complex one. Artificial intelligence. Is it the next industrial revolution? Nobody knows. But there’s no question that most, if not all, major companies have devoted extraordinary resources to its development. And it’s fascinating because there are so many follow-on effects.

Look at Utility companies. They don’t come to mind when you think about artificial intelligence. Utilities usually compete with bonds because both pay dividends. Utilities had a rough year in 2023. Money goes where it’s treated best, right? So if I can hypothetically get a 4% interest payment on a CD, why would I take any risk with a Utility stock also paying 4%? So we would see a massive shift of funds out of Utilities, which we did in 2023.

Generally, Utilities provide guidance as to where bond yields are going to go. And recently, they have started to recover. Does this point to bond yields coming down? We’ve not seen much yet, but this is a clue.

But there may big a bigger theme at play here. AI requires massive amounts of power. To power AI, electrical grids will need to be upgraded. Is the market anticipating that? Utilities provide both income and a public service. It stands to reason that both themes are playing out.

One of the companies at the forefront of AI is, of course, META. They even changed their name from Facebook to META. You can’t be much more committed than that. Recently, they announced a massive capital expenditure in artificial intelligence, increasing its forecast for full-year capital expenditures to a range of $35 billion to $40 billion from $30 billion to $37 billion.

“We continue to accelerate our infrastructure investments to support our artificial intelligence (AI) roadmap,” Chief Financial Officer Susan Li said in the earnings release.

The market didn’t love it. Why? That’s a lot of money going out, maybe more than coming in, for the short term. Simple as that.

One might reasonably ask, where is all of this money going? Who benefits from this infrastructure investment by one of the largest companies on the planet? Among others, look to a premier networking equipment provider, Arista Networks. Arista counts Meta as one of its biggest customers and could be a lynchpin in Meta’s AI strategy. The “picks and shovels” of AI.

I could go on for pages.

There are no investment recommendations here. Just a reiteration of the old Yogi Berra saying, “You observe a lot by watching.” This is how I have learned to think about markets.

03/25/2024

Join me and my wonderful colleague, David Gandelman. It will be fun and informative.

Step into a space where financial know-how meets mindfulness, and discover the deep link between your financial choices and your awareness. In this unique workshop, we'll dive into the key strategies for financial freedom, smart investing, and reaching your goals, all while focusing on how our inner...

04/07/2022

Today is the big day! Please join me for in depth conversation with the amazing Jack Montague of J.P Morgan. To join, simply scan the QR code or click here: https://bit.ly/3uWOdXH

04/06/2022

I am hosting this panel on Thursday with Executive Director of J.P. Morgan Asset Management, Jack Montague. Please click the link below or scan the QR code to join!
https://bit.ly/3uWOdXH

04/01/2022

Please join us for our distinguished speaker Jack Montague, Thursday, April 7th at 5:00PM PST: https://bit.ly/3LELmtr

01/24/2022

The principles below are timeless and always appropriate to share. Read the full story on my website: https://bit.ly/3KEc0Tg

In the last four decades or so, the average annual price decline from a peak to a trough in the S&P 500 exceeded 14%. The S&P 500 came into 1980 at 106, and went out of 2021 at 4,766; over those 42 years, its average annual compound rate of total return of more than 12%.

This data explains my conviction that the essential challenge to long-term successful equity investing is neither intellectual nor financial, but temperamental: it is how one reacts, or chooses not to react, to market declines.

01/22/2022

Janelle O’Brien, an independent LPL Financial advisor at Hyacinth Capital in Burbank, today announced her inclusion in LPL’s Freedom’s Club. With more than 19,000 LPL-affiliated advisors nationwide, LPL awards this distinction to select advisors based on their business success. LPL Financial annually recognizes their top advisors. This distinct achievement represents a commitment to helping clients pursue their financial goals.

We are thrilled and honored to receive this recognition, and will build upon it to continue to provide world class service and cutting edge ideas for our clients.

Read more: http://ow.ly/FOMO50HAtfC

10/18/2021

Starting Tuesday, the first Bitcoin futures exchange-traded fund will be available. What to know before adding it to your portfolio, read more here: https://cnb.cx/3vmacHv