By Ross Silver, Principal
In the Fall I wrote about seeing squirrels around my office that seemed outsized and how I took their large size as a sign an awful winter was coming. I was laughed at by many who read this newsletter and many called me crazy (we all know I am crazy). Why did I mention monster squirrels running around as if they had swallowed five large pizzas in a newsletter that discusses finance? The answer, animals know more than us when it comes to understanding the land and that is because their day to day is outside. Having an expert as a guide has always worked for me and in this case the experts were squirrels.
What seasonal insights was I able to ascertain from looking at the gigantic squirrels? When I see a once skinny varmint beefing up, that sure seemed like a “tell” that they knew that ugliness was coming. I went into full-fledged snow mode and prepped my home and office for winter mayhem. Much to my surprise, the majority of winter had been moderate and I assumed I had misread the shapes of the squirrel’s bodies and as such I should prepare for Spring. I was thinking about what seeds I was going to put in the soil around my house and office and then suddenly and without warning, wham, 4 feet of snow in 3 days. How about them apples Ross? While thinking about Spring I started thinking about all the things people do in the Spring and looked at Spring stocks such as athletic equipment makers, seed companies, etc. That turned out to be a waste of time as we have been in winter mode across the majority of the U.S. throughout this month despite it technically being Spring. The lesson here, never ignore an outsized squirrel, they know things that will affect your life.
On the economic front, the yield curve inverted on Friday which led to some panic selling. This whole conversion is about fluctuations in the price of Treasury bonds, with “yield curve inversion” standing as a shorthand for the prices of different kinds of bonds arranging themselves in an unusual pattern.
One way a government or company can borrow money is to sell a bond. A bond will have a face value (say, $100) and, like any loan, will pay an interest rate (say 3 percent). It will also have a maturity (say, five years). A $100 bond with a 3 percent interest rate and five-year maturity is like a $100 loan at 3 percent interest that needs to be paid back after five years. Another way of talking about it would be to say that this five-year bond yields 3 percent.
The truth, however, is that nobody really knows if this unusual configuration of bond prices (that’s what a yield curve inversion is) really means that a recession is coming. But it’s certainly not good news. And while you wait to see if economic disaster strikes, you might as well learn what the hell it is the analysts on television are talking about, I hoped my explanation helped. If not and in super simple terms, inverted yield curve bad for stocks and economy, Ross is short the Russell 2000 specifically.
The Sports Desk
I was in Vegas last week for my annual event with some fund managers and friends for the college basketball tournament. I have not seen much college basketball this year but from what I have seen from the top teams, Duke cannot shoot, Virginia struggles to score but can defend, UNC looks balanced but can struggle to score consistently and Gonzaga has played teams that would lose to my 40 and older recreation league team. The only team I felt safe backing of the #1 seeds is Virginia and back them I did to win the whole tournament. That bet looked awful at halftime of their first game where they fell behind a #16 seed yet again. Fortunately, Virginia found themselves and rolled in the second half. My home state Oregon Ducks look nasty, they could be a Final Four team and so does Florida State and Houston. I think The Ducks, Houston and Florida State are playing in the Elite Eight this weekend.
The Kentucky Derby picture is getting more clear. As it stands today the only horses I trust are Hidden Scroll, Game Winner and Code of Honor. The Florida Derby is this weekend and will tell us more but my guess is it will tell us Hidden Scroll is a freak and Code of Honor is legit. I have Hidden Scroll in a futures wager to win it all, that maiden breaking win was something else. More to come on the Derby in our newsletter next month.
Thank you for reading!