April 2023

To Our Business Partners


To the extent we follow economic trends, we have often been critical of the Federal Reserve Board’s (“The Fed”) monetary policy over the last several years, due to the distortions it has caused in the financial markets, primarily the abandonment of any risk considerations to investors.  This has been manifested over the years by various phenomena, ranging from the “dot-com” bust in 2000-02, to the real estate bubble in 2007-09, to the tech bubble in 2021.

Today, the worldwide banking system seems to be weakening.  Banks have always had a mismatch between mostly LONG-term assets (loans and securities) and mostly SHORT-term liabilities (deposits and checking accounts).  Usually, banks neutralize the mismatch by keeping short-term securities on hand to meet any deposit withdrawals, or other methods to hedge against such risks.

The Fed’s “easy money” policies (maintaining ultra-low interest rates on borrowings) encouraged highly speculative practices in the banking community.  Banks got sloppy by buying longer-term securities to bulk up the yields on their assets, with the belief that interest rates would stay low for a long time.  Shockingly, apparently no one, including the regulators, U.S. Congress, bank managers, and bank investors, anticipated what would happen to bank assets if interest rates actually ROSE.  When The Fed finally upped its benchmark interest rate to cool price inflation, the banks’ asset/liability mismatch blew up, already causing three bank failures in 2023 and the possibility that there are many other banks facing the same fate in the coming months.

With interest rates currently much higher than a year or so ago, there may be other areas of the economy that will be affected.  Notably, commercial real estate is easing in spots.  Additionally, many companies have borrowed virtually free money to buy back their own, in most cases, overvalued stocks, severely straining their own balance sheets.  We may be old fashioned, but we just don’t see a positive outcome from all that borrowing when the debt has to be refinanced at much higher interest rates.  The bill for the extensive financial leverage that has taken place is coming due.


Meanwhile, MARGIN OF SAFETY is our operative phrase.  We continue to look for profitable, growing companies, conservatively capitalized with strong balance sheets, selling at attractive valuations.  Our group* of widely owned stocks stands at 83% of estimated value, so theoretical upside over a 3-5-year time frame is around 20%.  That’s quite uninspiring.  We’ll continue to put cash to work in the handful of stocks in the group selling at two-thirds of value or better.  At the same time, we’re adding new high-quality companies to our watch list, patiently hoping Mr. Market will eventually offer them to us at much lower prices.  A recent investment strategy article contained a timely thought on patience from Warren Buffett, Berkshire Hathaway’s Chairman and largest shareholder: “The stock market is a device for transferring money from the impatient to the patient.”


Stock market indexes were mixed in March, with smaller cap indexes down 2-5%, while the large cap indexes rose from 2-7%, led by the NASDAQ Composite.  For the quarter, all indexes are in positive territory, although with wide variance.  For instance, the Dow is ahead by only 0.4% while the S&P 500 and the NASDAQ are up over 7 % and 16%, respectively. Investors(?) appear to be crowding back into the same few overly popular overvalued over-owned big-cap stocks that have been prominent over the last few years.  Interestingly, if you excluded just nine of the above-referenced stocks, the S&P 500 would be down for the quarter.   All the indexes we monitor have declined sharply over the last twelve months, with the NASDAQ notching the largest decline of 14%.  Though down a little, our group* of portfolio stocks has performed relatively well over the periods discussed.

Steve Nichols, CFA • Bill Warnke, CFA •  Andy Ramer, CFA

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.