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  • Writer's pictureTim

Messes Create Opportunity

Updated: Mar 12

Looking at the market these days it is easy to become agitated.

In general, the market hates variables and we have a ton in place for the moment. Tragic conflict in Ukraine continues. Supply chains remain congested, and lockdowns in China persist. Energy shortages, rising interest rates, and the developing perception that the economy is slowing weigh on the minds of investors. As of today, we just printed a negative GDP for the first quarter against a positive expectation (Economists thought GDP was growing when it actually contracted).

Strategies for this environment are – oddly enough -- to be patient and look at what we do know.

Over the next few months, the economy will be slowing. Do we enter a recession? Who knows, but the economy will not be running on the pandemic stimulus it received any longer.

If the Fed is able to reduce demand, inflation and underlying supply chains issues should moderate.

Certain components, however, I expect to stay slightly elevated – i.e., energy prices. This is not just due to shortages, but government policy is literally trying to move us to renewables. It may be said that this is a laudable goal, but the fact can not be ignored that fossil fuels still provide the bulk of baseload power and will likely do so into the future. If we try to transition too quickly, shortages will persist, and prices will remain elevated.

As a result, I expect more investment to take place in all sources of energy: fossil fuels, solar, wind, nuclear, etc.

As for the labor markets, we are tight right now, but this will also moderate, and I expect wage inflation to come in, potentially in the next year or so.

Is there good news?

Yes, because messes create opportunities. Supply chain snafus, health care disruption, and energy issues are just some of what has been noticed over the past couple of years. As I listen to conference calls there are numerous companies that see the chance to fix these issues. One of my favorite ideas is the concept of an automated port that could receive, offload and resupply ships. I expect automation like this to make its way into many industries.

So, what are we doing now?

As the market has begun to break for all stocks at different levels we are “upgrading”. In our world this means we focus on the strongest companies that we feel have the greatest resilience to all the uncertainty.

As for sector, materials and energy continue to play a role but technology is getting priced to a point where it is becoming attractive. If growth slows, the companies with scale and speed usually do best and those are typically technology.

Of course, I don’t expect this turn to happen overnight. We are looking 3-5 years down the road.

The goal right now is to study the specific companies to discern how they are managing the environment and what they are seeing in the way of new business opportunities. It may take some time, but these companies will come back, and the goal is to be there when they do.

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