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  • Writer's pictureGerard Hallaren

Reducing Risk

Perimeter's average account increased by 0.66% (66 basis points) compared to the S&P 500’s gain of 1.46%. The equal weighted S&P 500 gained 0.24%, which tells us that relatively few stocks contributed to the gain. The S&P 500 value index gained 1.72%, Nasdaq 0.04%. The Dow Industrials outperformed the major indices and gained 2.48%

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From a risk perspective, we began the month with a little less than 10% in cash and ended it with about 22%. This increase was part risk management, we wanted less risk. And then some timing. We took a large gain in Oak St. Health and sold several smaller losing positions. As of this letter, we are in no hurry to replace the cash with treasuries.


Strategy and Tactics


During April we moved to protect rather than participate in the market. This was done with considerable thought and reluctance. We are concerned that the market’s apparent disbelief of the Federal Reserve’s stated intent to raise rates. On the minus side is the narrowing breadth and declining volume of trading in the stock market. Fewer and fewer stocks and fewer and fewer investors account for the higher prices. You can see this in the difference between the capitalization weighted and equal weighted versions of the S&P 500.


More constructively, first quarter earnings have generally been better than expected. Much of the “better” has been from price increases. Near the end of the quarter, The Bureau of Economic Analysis projected that current dollar GDP grew by 5.1% while real dollar GDP grew by only 1.1%. In other words, prices grew more quickly than volumes, thus reinforcing the Federal Reserve Bank’s perception of high inflation and was a factor in our decision to keep cash on the sideline.


As I look at our top 10 holdings, 7 are companies with pricing power (Proctor and Gamble, Iridium, Wells Fargo, JP Morgan, Lilly, Linde, and Honeywell. The remaining 3 are energy related. Of these three, we believe Kinder Morgan’s pipelines and Halliburton’s oil field services give them pricing power. The last company, EOG Resources is an oil and gas producer with little or no pricing power.


As always reach out with your questions, concerns, and thoughts.


Gerard

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