Investor Insights

August 2021 Investor Report

Published: October 14, 2021Updated: October 14, 2021

By: Stash Graham

The month of August produced good returns across the variety of portfolios managed by the firm. The balance of our long equity positions (like Dominion Energy; up over 4% on the month) with our SPAC Arbitrage strategy (average approximate annualized rate of return between 5-6%) provides a means to appreciate with the market but also have safeguards in place. Events in the fall months (Delta variant of COVID suppresses economic growth, Government Fiscal Spending becomes de minimus, Government shuts down, etc.) could put downward pressure on markets. For the month, all three of the major domestic indices appreciated. The Dow Jones Industrial Average was up approximately +0.6%, while the S&P 500 was up almost +3% for August. The technology-heavy NASDAQ was also up over +3% for the month as the technology sector was outsized performers on the back of comments from the Federal Reserve. While telegraphing that tapering of asset purchases will begin in the winter, the central bank is also signaling that they will be very supportive as the high frequency indicates a significant pullback in the economic growth of the country. All of this is occurring when inflation figures continue to remain at levels compared to recent historical norms.

The decline in economic growth projections for the 3rd and 4th quarters of 2021 should not necessarily be surprising to the GCWM’s partners. The end of Federal weekly transfer payments of almost $80 billion (on average for July) will begin to damper demand for goods immediately. The spread of the Delta variant of COVID has also curbed travel and hospitality stays. The average room rate in the tourist destination, Las Vegas, has decreased by 50% over the last month. The services sector, which has roared back for the better part of the year, is now dealing with another round of possible customers deciding to stay at home. On the plus side of the ledger, the child tax credit will shortly be the only income supplement program in place of meaningful size; however, for July, the program paid approximately $45 billion per week on average. Thus, there is still a big hole in income and cash going into the economy through purchases of goods and services, independent of what is occurring with COVID. National health data is starting to indicate that the worst of the Delta variant looks to have peaked earlier in August, but the economy will still feel the after-effects.

Inflation continues to remain elevated regardless of the transitory description that has accompanied the rise in prices. New Inventories levels in the Dallas Federal Reserve Manufacturing Survey have declined for July and August. A lack of new orders is undoubtedly an event that we will keep a close eye on as this metric tends to be a leading indicator for economic activity into the near-term future. Notably, leaders from the chemical sector (a leading-cyclical sector) told the survey that the cost of goods and transportation remain elevated and are increasing even as demand for their products is not growing at the same rate as earlier this year. Supply chain issues are likely to persist, at least in the short term, as demand starts to fall off. If top revenue growth cannot keep up with rising expenses, profit margins will likely be pinched unless companies can quickly cut costs elsewhere. This stagflationary dynamic will be crucial to monitor as we enter the fall months.

Please see the following updates on existing positions held at the firm:

Regeneron Pharmaceuticals (Ticker: REGN)- The $68 billion pharma company had a great month of August, appreciating by more than +17%. The stock price increase came early this month as the Wall Street Journal reported that sales of the REGEN-COV cocktail had increased almost nine times sales from 60 days ago. Their treatment sales are on the back of a significant increase in COVID-related hospitalizations across the country. Their antibody treatment is one of the very few ways to treat hospitalized COVID patients. Former FDA Commissioner Scott Gottlieb was on CNBC and recommended all hospitalized patients get the Regeneron treatment. As we wrote in the spring, notable changes to the compensation structure of senior management indicated strong bullishness from all leadership parties at the company. While the stock has run up materially since our initiation, we still believe the runway is there for more growth even if the company takes a breather this fall. COVID variants are not going away during the winter months, and we are likely to be dealing with another troublesome variant during the spring of 2022.

Public Service Enterprise Group (Ticker: PEG)- On August 12th, the utility holding company agreed to sell its 6,750-megawatt fossil generating portfolio to a newly formed subsidiary of ArcLight Energy Partners Fund (a fund controlled by ArcLight Capital Partners) for approximately $1.92 billion. The deal is expected to be completed late in the fourth quarter of 2021 or the first quarter of 2022. The company continues to move away from traditional power sources that generate lower returns on equity for alternative sources where state regulators continue to award higher returns for shareholders.

W.P. Carey (Ticker: WPC)- On August 9th, the triple net REIT completed a 4.5 million share secondary offering at $78.00. This secondary offering put some pressure on the stock price the following day; however, we are very comfortable with this offering. The main reason we are satisfied is that the REIT was able to issue shares above net asset value (NAV). Net asset value is estimated to be approximately $66 per share. The $12 difference between the NAV and the price the REIT offered will be accretive to our position in WPC when the REIT purchases more real estate. The total estimated capital raise was a little more than $350 million.

As we start the fall, a wide range of events has yet to come to pass that the market is seemingly shrugging off. Complacency in financial markets remains at all-time highs as the Federal Reserve indicates that the monetary support will still be there even if tampering of asset purchases starts. Interestingly, even with all of this monetary support, liquidity in markets continues to be very poor. We are witnessing sharp moves lower if a company does not beat its second-quarter expectations. As year over year inflation rates remains north of +5%, being in cash or money market accounts is not an option either. It might be the lesser of two evils, but this is what our SPAC arbitrage strategy is for. In a few days, we will be sending out a SPAC arbitrage brief that will remind clients what the process entails and why we are taking this approach.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Graham Capital Wealth Management, LLC (“Graham”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Graham and its representatives are properly licensed or exempt from licensure.