14-Years Grateful – FC & SGR

14-Years Grateful – FC & SGR

By Julien B. Booth

March 22, 2018

The upcoming conclusion of the 1st quarter of 2018 marks the 14th Anniversary of Forest Capital.

With each passing year, I become more grateful for the family, friends, clients, and colleagues who have added so much value to my life.  I appreciate each of you, including those who are no longer with us.

Nora Booth’s (age 14) birth coincided with our launch.  Net, net I am the most grateful for the amazing young lady she has become.  Picture attached (photo credit Anna Booth – age 11).

My most sincere Thank You to everyone who has been on this path with us.

First Quarter 2018 Redux

This note is a total repack of the note of February 11th.  I have updated the data, but the song remains the same.  Markets front-run big news (Tax Cuts) – and the 19th Interest Rate (media-driven hysteria) scare (yet still below 2013 range).

We are now in the hard part – proving how it affects Growth and Inflation, and if it is sufficient to keep the economic expansion growing after 9 years.

After a difficult quarter in the financial markets we find it insightful to judge our underlying performance vs. our stated objective:  Risk-Adjusted Total Return.

The 2018 stock market started with a surge – and it has given it all back+.  No one likes draw downs, but they are a part of the investing process if you prefer the riskiest asset (stock).

For some time now (trailing 3-4 months) we have favored floating rate, hybrid securities, and selected high yield bonds, all securities that are senior in the capital structure.

Senior loans and other floating-rate securities generally reset to prevailing interest rates (3-month Libor).  In the past few months Libor has been trending strongly upward.  See chart at bottom.  We found 6-7% yields downright attractive vs. the alternatives.

We often look stupid as we fade these euphoric stock markets.  This time was no different…equity asset prices (stocks) continued unabated, screaming into 2018.  Fortunately, we were not fired as we under performed stocks.

As is often the case, Expectation is the root of all Heartache.

Interest rates are the gravity in the financial markets.  Every asset is sensitive to the time value of money (discount rate).  Fixed income securities are especially sensitive to rates – subject to credit quality and the duration/maturity of the asset.

Additionally, in an age of massive leverage (borrowed money), interest rates become extraordinarily important for the level of all asset prices.  Do we dare reflect on all the borrowed money during the 2007 housing bubble.

Stocks are long duration assets; they trade on a multiple of annual earnings (http://www.multpl.com/shiller-pe/)

Q1 2018 was no different, but in addition, we have many other elements of excess, crypto-currency-BitCoin speculation (ouch), massive bets on volatility, extreme bullishness, etc.

After fully reviewing this quarter’s affect we are pleasantly surprised.  Generally, NAV performance in our closed-end fund positions included modest declines (-1%), high yield bonds (-1.5%) and mortgage bonds (-2%).  Our preference for income does not prevent portfolio declines, but it sure looks better than Dow -724 pts./ -2.93% (3.22.2018)

Downside stock volatility is often forgotten – until it happens.

As always, understand what you own, the cash flow associated, and what the intrinsic value should be over time.  Research is not an exciting story to tell…until it is.

As usual, thank you for investing with Forest Capital! For additional information on portfolio positioning, please contact Forest Capital directly at jbooth@forestcapital.net.