Broker Check

October Newsletter 2022




October 4, 2022

…Until the Job’s Done.


It was with shock and concern for the safety of the residents of Florida and the states on the East Coast, that over the weekend I watched the news of the monumental loss of life and property from the devastation wrought by hurricane Ian. This loss brought on by Mother Nature will be felt for many years (even decades) to come as the cleanup efforts are now underway. The personal loss of lifetimes of memories and family heirlooms cannot even be imagined; even as the economic toll is now being estimated at as much as one hundred and twenty billion dollars. And sadly, much of the property losses are apparently uninsured. Our thoughts and prayers go out to all of those who lost everything! Now would be a good time to support the efforts of the Red Cross for those in need.

Also on my mind is the negative economic impact being felt by Americans as losses in retirement portfolios and in large and small businesses alike continue. We will continue to feel the pain during the Fed’s actions to bring down runaway inflation that is pushing the global economy into a recession. Our securities markets closed the books on the first nine months of 2022 at the worst nine-month levels since 2002 (after the events of 9/11). Although it may turn out to be different from the 2008 financial crisis, it is starting to feel like another train wreck may be on the way.

In spite of all the negative news out there, we do believe that the “bottom” is in sight and a further crash is avoidable if the Central Banks ease up on their race to bring inflation under control by rapidly raising interest rates. Yesterday’s round of new economic indicators suggests that five-year inflation expectations declined to 2.7 percent; the lowest since July 2021, which would indicate that inflation may have peaked. Even the Bank of England applied the brakes to its interest rate hikes and began buying bonds to stabilize the market conditions. Although the chairman of the Federal Reserve recently went on the record saying the Fed will raise rates “until the job’s done”, there are some Fed watchers that are now saying that it is time to slow down to avoid a crash. 

Only time will tell. In the meantime, the impacts on the Income side of your portfolio have been significant as all interest sensitive positions have been “marked-down” by the rising interest rates on new issues. The bond market is swooning in its effort to keep the ship afloat and avoid another 2008 Lehman moment.

Even as many of our American companies are laying off part of their workforce as demand for their products weakens, the overall employment side of the economic equation remains surprisingly strong. If employment can withstand the tug-a-war, the economy has a good chance of avoiding a deep recession.

So, what does it all mean for the future of our managed portfolios, both for clients in retirement and those still saving for the future? The volatility will certainly continue, even as the markets shot up yesterday and again today on the first trading days of the last quarter of 2022. Most portfolio positions have now been revalued to near 52-week lows, reflecting the reality of no more zero rate borrowing and government giveaways. The price-to-earnings ratio that is used to value a corporation’s stock value is now down to under 18 as of September 30th; having been over 30 one year ago. Meaning that good companies are now “undervalued” in the marketplace and have a very good chance of rising up to more traditional valuations as the economy recovers, all an opportunity from our viewpoint.

The enclosed Quarterly Portfolio Review includes a Portfolio Summary reflecting performance and activity going back as far as ten years ended September 30, 2022. You can see that the gains and losses line reflects losses (primarily UNREALIZED) in the last twelve months that totally wipe-out all gains for all three of the periods reported. Thankfully, the dividends and interest received is sizeable over all three periods; enabling the aggregate portfolio of equity and income positions to reflect ten-year total returns of roughly forty-four percent. The last ten-year period reflects the periods of the Great Recession, Covid-19 and the current Inflation/Recession.

Looking back further to the fifteen-year period September 30, 2007, through September 30, 2022, we can add the low period in 2008 and 2009 when the Financial Crisis brought on by the collapse of Lehman Brothers and the mortgage-backed bond market brought the securities markets to its knees, while the U.S. banking system was revamped to avoid a similar crisis in the future. Based on the current concerns over Credit Suisse’s liquidity, some commentators are keeping a sharp eye on the bond markets as the Central Banks around the globe navigate the current rate increases meant to tame the inflation we are living with. Although the situation is centered in Switzerland, the global banking system could be in some peril. We point this out as an illustration of what happened to our managed portfolio in 2009, compared to the current value declines being reported.

Please look at the fifteen-year graph prepared by Laura that depicts the course of our aggregate portfolio in percentage returns beginning on September 30, 2007. 

  • With 9/30/2007 being the base line (that is 0.0%), the portfolio declined in value (primarily UNREALIZED LOSSES) by roughly forty percent as of 2/28/2009.
  • Over the ensuing twelve years, the portfolio survived the Great Recession and Covid-19 and returned roughly one hundred and thirty percent to reach a net total return through December 31, 2021, of roughly eighty-nine percent.
  • Between the start of this year and September 30th, the portfolio declined in value by roughly nineteen percent to a fifteen-year net return of roughly fifty-two percent as of September 30th.
  • Only time will tell if the next twelve years will be a repeat of the recovery from the 2008 Financial Crisis.

Our expectations are that the equity portfolio of high-quality positions will rebound with the economic recovery envisioned when the inflation situation is controlled. The value of the income portfolio could be a different story as the interest sensitive positions held in the portfolio from purchases made when interest rates were very low may be permanently impacted; although the interest rates bargained for when the purchases were made will continue to produce cash flows into the portfolio for distribution and accumulation. If the equity value growth returns to our historic levels, the combined portfolio value will be in a position to meet reasonable future expectations. The market returns being experienced right now from expectations of monetary policy easing are a “good start” to that rebound. In any event, we expect the total yield on the combined portfolio to sustain five percent, or more, cash flows to meet client needs.

We are once again focusing our attention on our rebalancing strategy that we have employed over the years to produce the long-term gains we are known for. In that process, we will “harvest” tax losses in taxable accounts to help minimize the tax burden on the portfolio from the capital gains dividends that have come into the portfolio this year from “selling high” in early 2022. The proceeds will be put back to work in a combination of buying high-quality equity positions at historically low valuations and by buying new issue bonds at current rates of five percent, or more. When the process is complete, all portfolios will reflect the current risk profile of each client established to meet each client’s individual goals for growth and income.

As a reminder, please logon to and review your personal information attached to your investment accounts.  As we approach the transition period over to Schwab as custodian, this is a “housekeeping” item they have asked each client to review.

In closing, I note that my long-time mentor and investment hero, Warren Buffett, recently turned 92 years young and continues to be “going strong” as he guides Berkshire Hathaway to continuing levels of investment greatness. Although I am not nearly as old as Warren, I continue to enjoy the part I play in helping each and every one of our clients to reach their goals. In that process, I do very much take pride in the confidence you have shown in our part of your investment journey! And, as I have said before, Jeannie’s and my portfolio is invested side-by-side with each one of our clients’ portfolios.

Please contact any of us if you have any questions.




Intelligent Investment Management, LLP