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The Timber Log

The Timber Log - 6/23/2021

By David Cleary, CFA | Jun 28, 2021 2:52:13 PM
The Timber Log is a quick highlight of Timber Point Capital’s weekly investment meeting.  If you would like to join the call or have questions about the content, please reach out to Patrick Mullin at pmullin@timberpointcapital.com
 
The information contained herein does not constitute investment advice or a recommendation for you to purchase or sell any specific security.

 

GDP continues recovery, growth estimates likely trend to 2% growth
  • 30-year yields down 30bps QTD and 17bps MTD, an indication that participants see economic growth slowing from post COVID recovery peak
  • Current GDP estimates for 2Q21 are 10.3%; longer term estimates likely to be much lower; we see trendline growth of ~2%-ish.

 

Fred Chart


Inflation expectations and concerns are subsiding

  • Velocity of money fell off cliff during 2020 and has not recovered – FRED chart
  • We know money into system is large but banks sitting on cash, decreasing the velocity of money; diminishes the concern over inflation
  • Recent spike in inflation attributed to logistics constraints and improved demand
  • Dollar bottoming, recent strength suggests inflation fears subsiding, up 1.7% MTD
  • Inflation sector beneficiaries have been weak recently, financials and materials both down 5% MTD
  • Secular grower Tech has experienced recent outperformance MTD up 5%
  • Our latest thoughts on inflation, click here

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Labor market participation may not be as strong as expected
  • Unemployed fell by 500k people to 9.3 million people in May; prior peak was 21.3 million people in April ‘20
  • Weekly data suggest employment accelerating, especially in seasonal industries
  • Labor market participation will continue to be closely watched as a key driver of reopening and continued economic growth
  • Powell expecting inflation rate to decrease and unemployment to increase – we believe unemployment recovery estimates will disappoint

 

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Covid-19 and vaccine rollouts are continued headwind outside of the U.S.

  • Continue to see US outperformance as investors pursue flight to quality as ROW continue to struggle with Covid
  • 30-Year prices up 6.5% QTD and 3.9% MTD, slower growth estimates and Covid worries in ROW
  • Dollar is a Covid beneficiary as ROW struggles with outbreaks


Biden tax and regulation policy favors small caps

  • If US enters a sustained period of low rates and declining GDP growth prospects, would favor secular growers
  • Acknowledge the possibility that supply chain shortages are likely to effect small caps; such shortages are likely to be sector specific


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TPCM asset allocation continues to favor risk assets

  • Asset allocation remains overweight small caps and overweight equities
  • Meaningfully underweight fixed income and of short duration
  • No meaningful changes to asset allocation in 3Q21 anticipated
  • Policy concerns could be headwind, unlikely in near term owing to filibuster
  • If Dems are unable get rid of filibuster, would have to wait until October to implement new legislation on tax policy via budget reconciliation
  • Split Congress and gridlock in DC are a bullish backdrop for risk assets


Written by David Cleary, CFA

David Cleary, CFA is the Founder and Lead Portfolio Manager at Timber Point Capital Management. Previously he spent 23 years at Lazard Asset Management where he held a series of senior portfolio management roles over multi-asset and global fixed income strategies. Additionally, he served as the firm’s global head of fixed income, a $26 billion platform. Prior to Lazard, David worked at UBS and IBJ Schroder, mostly in fixed income asset management roles. He began working in the asset management field in 1987 upon his graduation from Cornell University, with a BS in Business Management and Applied Economics. He is a CFA charterholder.

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