Equities are off to a surprising start to 2023 with the Nasdaq already up over 10% and poised to post its best January performance in over 20 years. We will see if this trend holds as we get further into earnings season.
My view is the market is much closer to a near term top than a bottom. Fourth quarter results have seen a rash of disappointing guidance and layoff announcements across myriad sectors of the economy.
In addition, after more than a decade of historically low to near zero interest rates, cash has value again. With the three-month Treasury yielding north of 4%, cash is a viable investment alternative for the first time in many, many moons. Thanks to the aggressive monetary tightening regime by the Federal Reserve, interest rates rose sharply in 2022 and savers could make a decent yield without going out on the risk curve.
These rising interest rates also pushed rates higher for discounted cash flow valuation analysis and was a key reason growth names got absolutely shellacked in the market last year. This monetary tightening has deeply inverted the yield curve, which is historically a sign a recession is on the horizon.
Higher yields make me much more comfortable holding very high allocations in cash within my own portfolio while I await patiently for better entry points. I doubt I am the only investor in this situation.
Cash is also king in the housing market. Higher mortgage rates have pushed down housing affordability to near record lows. If an investor talks to real estate brokers, one understands many more homes are coming back on the market as financing falls through or buyers get cold feet as they contemplate their all-in monthly payments for their new prospective purchases. The all-cash buyer is absolute gold in the current housing market and can use that leverage to demand and usually get significant concessions.
Corporate credit is dearer as rates have headed higher. The lower- and middle-income consumer has already seen default and delinquency rates move significantly higher in recent quarters. Auto loan delinquencies are now higher than they were at the peak of the financial crisis nearly a decade and a half ago. I expect corporate default rates to rise in 2023.
I am also finding I am spending more time looking at corporate balance sheets when I am sizing up prospective new small and midcap names to potentially invest in. I am mostly avoiding any small biotech names that will likely need to raise additional funding over the next 18-24 months as I believe tighter credit conditions will be with us for a while.
In this vein, I plan to add Douglas Elliman (DOUG) , a new name, to my portfolio this week via covered call orders. The company has become the sixth largest real estate brokerage in the country and has aggressively expanded in fast growing markets like Florida.
This is a contrarian play as I expect the housing market to moribund in 2023. However, the company has remained profitable despite difficult conditions and pays over a 4% dividend yield to boot. Best of all, half of its just under $400 million market cap is represented by the net cash on its balance sheet. And that is a good feeling in this 'Cash is king again' market environment.
