As we move onto the full on trade war chapter of our current novel, it's important to realize where the risk is in the current market environment. The ubiquitous dance of optimism very often hides the underlying risk investors are facing. This circumstance is no different.
It can be said with a better than coin flip degree of certainty that the current economic environment is healthy in more ways than one. It can also be said that a market pullback can occur without any tangible interference in the economic machine that is currently spinning. A market pullback of severe consequence will likely be systemic in nature, relying on easily exploitable inefficiencies that are currently taking place in what has become a largely trend following approach to asset allocation masked as something more sophisticated.
A majority of technology names are fraught with risk having coaxed nearly every asset manager to believe they have to keep exposure if they want to retain employment.
Large cap financials also seem susceptible as they have become the "I have exposure to the markets but I don't have the guts to invest in tech" trade.
Actual opportunity does exist, however, regardless of your stance with respect to the current condition of the market or economy. In no particular order:
- Property casualty insurance names have caught a tailwind as they face a number of positive fundamental factors that buoy their income statements.
- Private equity names are taking on a completely transformed business model to a great degree, taking the place of investment banks like Goldman that have mutated into god knows what over the past several years. KKR continues to be my favorite name in the space, acting like it is closer to a beginning of a powerful uptrend rather than any conceivable end.
- Specialty finance companies, whether select fintech names or mortgage servicing companies are transforming finance in a very deliberate manner. In the case of mortgage servicing, during the first half of the decade investors realized the profit potential of the business model of essentially becoming a government sponsored debt collector, until the very same government decided to step in because the companies were growing too fast. The government has stepped back greatly with a virtual dismantling of the CFPB. The power of their earnings model will be realized in the years to come.
- Single family residential REITs are attractive. There is not another sector of the market that is positively correlated to interest rates (as interest rates rise less individuals can afford homes, forcing them to rent); positively correlated to most any economic condition that doesn't involve a skyrocketing unemployment rate; has vasts amounts of capital thrown into the sector as private equity investors buy up large swaths of residential properties and has potential for general price appreciation as home prices aren't going anywhere but up, except for single family residential REITs. They provide yield and potential for price appreciation if chosen carefully.
These are all sectors that take risk into account as well as reward.
In other words, units of downside exchanged for units of upside certainly count. A fact that has been forgotten in the current market environment.
_______________________________________________________________________________
From time to time, I email individual company research, commentary and excerpts from my monthly investor letter to those who are interested. If you would like to receive future emails, please write me at mail@T11Capital.com
Disclaimer
This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained on this website constitutes investment advice.
This website should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Viewers of this website will not be considered clients of T11 Capital Management LLC just by virtue of access to this website.
T11 Capital Management LLC only conducts business in jurisdictions where licensed, registered, or where an applicable registration exemption or exclusion exists. Information contained herein is not intended for persons in any jurisdiction where such distribution or use would be contrary to the laws or regulations of that jurisdiction, or which would subject T11 Capital Management LLC to any unintended registration requirements. Visitors to this site should not construe any discussion or information contained herein as personalized advice from T11 Capital Management LLC. Visitors should discuss the personal applicability of the specific products, services, strategies, or issues posted herein with a professional advisor of his or her choosing.
Information throughout this site, whether stock quotes, charts, articles, or any other statement or statements regarding capital markets or other financial information, is obtained from sources which we, and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in, the transmission thereof to the user. With respect to information regarding financial performance, nothing on this website should be interpreted as a statement or implication that past results are an indication of future performance.
