Investor Insights

September 2021 Investor Report

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

By: Stash Graham

A news-laden September produced losses across all three major American indices. Developments ranging from a hawkish Federal Reserve to questions about the Chinese corporate credit markets created a wave of selling pressure that persisted from the start of Labor Day weekend. The S&P 500 was down just under -5%, while the Dow Jones Industrial Average was down -4.29%. The technology-heavy Nasdaq was the big loser for the month as the index fell -5.31%, as a rise in interest rates on the long end of the yield curve put long-duration investments in red. Our precious metal gold-tracker position (ticker: IAU) was down -3.24% as the U.S. Dollar generated the most interest from safe-haven investors. The S&P 500’s September performance was the worst monthly return since the infamous March of 2020.

The month of September revealed murky August economic data. The University of Michigan consumer sentiment survey continues to wallow in the low 70s (not a good score). Consumers complained about poor buying conditions (high prices, little supply) and concerns with the delta variant. Speaking of high prices, consumers have reiterated that inflation over the long term (5-10 years) dampens their enthusiasm to buy goods. The consumption of goods is the crucial driver for economic growth in the United States. Unfortunately, projected economic growth in the United States continues to be revised lower. Two months ago, the Atlanta and New York Federal Reserve regional banks and big bank economist teams projected 6-7% economic growth rates for the 3rd quarter in the United States. All of the growth projections for the 3rd quarter have been moved materially lower; for example, the Atlanta Federal Reserve now projects for 3.7% growth of the American economy for the 3rd quarter. On September 3rd, the New York Federal Reserve has decided to suspend their GDP forecast, citing the need “to work on methodological improvements.”

Earnings season has begun for American businesses as they report how their summer months (July to September) concluded. The early returns so far have been relatively mixed. FedEx Corporation, formerly known as Federal Express, the largest transportation/logistics company globally, produced a bottom-line (earnings) miss that shook shareholders’ confidence. FedEx’s shares were down more -9% on the day of earnings as the company reported that increases in labor wages have materially eaten into revenue. Thus the earnings report produced the big earnings estimate miss—higher labor costs paired with difficultly finding workers. Separately, customer discretionary stalwart Nike delivered a top-line (revenue) miss. The company reported supply chain issues that prevented the company from meeting estimated sales targets. Higher marginal expenses in shipping further weighed on revenues. On the day of the earnings release, Nike’s share price fell more than -6%. These are two examples of situations that we warned about in our June letter. Increases in wages and materials could put a lot of businesses’ earnings under pressure. Separately, persistent supply chain issues could prevent multi-national conglomerates from getting out their average amount of product, limiting sales growth. We believe the supply chain issues will be taken care of quickly, not uncertain on higher wages. 

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

WPC Carey (Ticker: WPC)- The industrial-focused triple net lease REIT announced a slight increase to their quarterly dividend. The trust will pay out a $1.052 dividend to shareholders on October 15th. We welcome the dividend increase, even if it is a slight increase. A dividend increase speaks the management’s comfort in the growth and direction of the company in the near term future. Speaking of development, the company, a few days before the dividend increase announcement, told the public that the REIT recently completed approximately $200 million in transactions and maintained pace for a record amount of transactions for a calendar year. 

The Kraft Heinz Company (Ticker: KHC)- On September 23rd, the company announced the acquisition of Brazilian food condiment maker Hemmer. The companies did not discuss the terms of the deal at the time of this note. Still, the purchase confirms a trending development where the packaged good giant is starting to acquire smaller condiment businesses worldwide. For example, just 90 days ago, Kraft Heinz bought a Turkish condiment maker, Assan Foods.

Agree Realty (Ticker: ADC)- RBC Capital’s real estate analyst Brad Heffern initiated coverage of our triple net lease REIT with an “outperform rating” and an $80 price target in the middle of the month. The report detailed how he thought that ADC had one of the highest quality real estate portfolios in the sector with good counterparty tenants. In addition, Brad projected high annual single-digit growth rates in adjusted funds from operations (AFFO). This analyst report confirms what we thought of Agree Realty when we started our position in the REIT back in June. Looking forward, we would like the management team to meet some of these projections as this would help create capital gains and collect the monthly dividend.

Osprey Technology Acquisition Corporation (Ticker: SFTW)- One of the largest SPAC merger arbitrages came to close on September 10th. We received $10.054 per share in cash. On average, across the firm, we started our position on July 14th for $9.96. The annualized return for this investment was a little more than 5.71%, which is attractive considering the annualized interest rates for short-term, low-risk assets like investment-grade bonds or U.S. Treasuries. We sent out a digital brief earlier this month explaining the strategy and why we are using this strategy for a portion of our accounts. If you did not receive the brief or have any further questions, please feel free to out to us!

As Congress will reach the government debt ceiling in the next couple of weeks, we are monitoring a few different situations that will probably take the back pages of financial news headlines but are as important, if not more. The continued deceleration of projected growth of our domestic economy. Sequential consumer sentiment surveys detail dismay from purchasers of goods due to high prices or lack of availability. Meanwhile, global money supply growth has continued to fall for the better part of this year. As mentioned in previous letters, a contraction in narrow money supply growth typically leads to a pullback in global manufacturing new orders. Since June, we have witnessed continual declines in monthly international manufacturing new orders, which typically leads to weakness in earnings for non-technology, cyclical companies (see FedEx and Nike for possible early examples).

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.