May generated positive gains across the board for the major domestic equity indices. The performance was certainly a welcomed sight as it was such a weak April broadly for risk assets. The benchmark S&P 500 grew +4.8% for the month. The Dow Jones Industrial Average and the Nasdaq Composite Index appreciated by +2.3% and +6.8%, respectively. Precious metal gold grew by +2.17%, but the overall performance was marred by mid-month selling pressure, which saw gold give up -3.5% in a week.
The focus of the prior couple of years has been the growth of inflation. April brought a soft Core CPI (Consumer Price Index) reading of +3.6% year over year (+0.29% month-over-month). The April Core CPI figure is the lowest month we have seen so far this year, suggesting we could be at the start of a disinflationary period. April Core PCE inflation grew by +2.75% yearly (+0.25% month over month). When we observe the report’s details, we see signs of inflationary impulses in specific categories. Both car insurance and recreation services increased over the last couple of months. Separately, according to the NFIB (National Federation of Individual Businesses), a net 38% of small businesses have recently increased compensation to their employees, and a net 21% plan to raise compensation in the coming 90 days. Both of these metrics are historically high and put a damper on any ideology that involves inflation quickly falling and returning to a 1% handle, which is where inflation sat during the previous cycle. On an important note, the growth in primary and owner-equivalent rent (housing rents) eased. Overall, the April CPI and PCE reports were a good development for participants looking for a rate cut later this year. There are still variables that the Federal Reserve would like to see come into line before getting utterly comfortable with actualizing the monetary policy pivot. We still believe that inflation will moderate slowly throughout the year while maintaining a higher floor than historical norms. We think Fed officials will keep rates within the current range as economic activity cools.
Speaking of the domestic economy, the recent Beige Book report (released on May 29th) signaled that the economy’s growth and, perhaps most importantly, the labor market’s growth have slowed. The Fed Districts reported slower growth levels compared to the April report. Across the regions, there was consistent concern about retail spending as consumers further pare discretionary purchases. This concern was confirmed by the initial reading of the BEA’s personal spending data for April, which generated an anemic +0.2% increase (+0.7% increase in March) and was below consensus estimates (+0.3%). Personal income growth also slowed during April, growing +0.3%, down from +0.5% in March. Supplementary, the most recent University of Michigan consumer sentiment survey reported the lowest score in six months as participants were concerned about the future of the labor market and higher prices (inflation expectations). Finally, the recent U.S. durable goods orders report showed that business investment remains quiet outside of anything related to Artificial Intelligence. The difference between core goods shipments and core goods orders continues to widen, indicating that the near-term prospects of business investment remain weak.
Please see the following updates on existing positions held at the firm:
Franco-Nevada- (Ticker: FNV)- The global royalty company issued a top and bottom beat on first-quarter estimates. Earnings came down from the year prior as the suspension of their investment in Cobre Panama continues to be negotiated. Remember, a part of our investment thesis was the optionality of restarting Panama’s largest mine. We believe it is a matter of “when,” not “if,” the mine restart occurs. We expect FNV to receive a nice dump. In the meantime, the position has performed well since our initiation late last year, as the company has benefited from the rise in precious metal prices. Overall, the company still maintains no debt with more than $2 billion in ready capital to invest. Lastly, the company announced that the quarterly dividend increased 5.88% to $0.36 per share.
Equity Commonwealth- (Ticker: EQC)- Our special situation REIT is at a crucial juncture. The company has announced that by the end of the year, the management will reveal plans to either acquire another real estate firm or liquidate. The REIT holds a substantial amount of cash equivalents, approximately $2.17B, yielding over 5%. The company estimates the cash per share to be $19.95 per share. We initiated our position in the mid to low $18s, which aligns with the current trading range of the company’s stock. In addition to the cash, the REIT owns four office properties, free and clear, which could be worth another couple hundred million dollars. The next few quarters will determine the remaining real estate’s fair value range. Our preferred stock position also accrues tax-advantaged interest at over 6.5% annually.
Enbridge, Inc. (Ticker: ENB)- The North American midstream giant’s recent top and bottom line beat for the first quarter 2024 continues to impress. In the near term, the Gas Distribution and Storage unit is poised to grow earnings at higher rates through the Summer. We closely monitor asset sales as there is a cash need for their pending utility acquisitions. Enbridge is also committed to expanding its terminal capacity in Corpus Christi, as evidenced by its recent acquisition of two docks and adjacent land. The company’s scale, project backlog, and leading assets provide a strong case for owning this company in a relatively low-growth sector. The cash dividend yield remains above 7.1%.
CF Bankshares, Inc. (Ticker: CFBK)– The Fairlawn, Ohio-based community bank posted acceptable numbers despite a tough start to the year for the bank’s stock price. We have been opportunistic about the price levels as we have recently initiated a position. Overall, the bank continues to hum along. The bank continues to generate good loan performance metrics while positioning itself for a possible sale in a few years. The bank has been buying back stock at more than a 20% discount to tangible book value. This share repurchase will continue in the coming quarter. We own more than 2.5% of the shares outstanding. As we look to the year’s second half, we see an environment where funding costs stabilize, and asset yields reprice higher to help generate higher margins.
May was a bounce-back month for risk assets after a weak April. As we mentioned in our last quarterly call, we believe markets will continue to have a positive bias over the next couple of quarters. The next couple of months could be a bumpy ride as the Fed’s June and July meetings and subsequent press conferences could counter the recent growth of market participants pricing a rate cut this year, which provided favorable tailwinds to stock prices this past month.
Best regards,
Stash J. Graham
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