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  • Writer's pictureGerard Hallaren

Returns and Investments in a concentrated market.

Perimeter's average customer lost 3.4% in May this compares to the S&P 500 which gained 0.25% in the same period. Our performance was more in line with the Dow Jones Industrial Average which declined by 3.45% in May, and the equal weighted S&P 500 which declined by 3.99%. Much like last month, the move in the S&P was concentrated on relatively few extremely large capitalization stocks.


During the month we brought all accounts into conformity. This means the holdings of each customer are synchronized with each other. We do this to avoid style drift and to prevent Schwab’s allocation methodologies from impacting portfolios. This likely cost us between 5 and 10 bp.


This was an eventful month. Artificial intelligence became an investment term while most investors worried about the economy and market.


Artificial Intelligence


Artificial Intelligence, or AI, was the buzzword of the month. Nvidia – which is in your account – reported outstanding first quarter numbers and raised sales guidance for the second quarter by roughly 40% all on the strength of AI products. This helped our portfolio and took several large technology stocks with it. Unfortunately, we had sold our META stock for technical/risk reasons and did not participate further than Nvidia.


AI is not a new idea. I first heard the term during Jimmy Carter’s Presidency. It is a holy grail of technology. The science behind it is straightforward. Outcomes are modeled/forecast using standard statistical programming across MASSIVE data sets. We believe the “regenerative conversation” function triggered much of the sudden demand.

AI is a paradigm shift. For the last 10 to 15 years, enterprise networks have shifted to the cloud from in-house solution. This was an almost seamless move as the cloud providers replicated in-house functions. AI makes different demands on computational engines, thus many systems will be upgraded or extended for AI workloads. Statistics and big data management are becoming abstractions within systems.


Right now, I am looking for more AI investments. Hopefully, ones where the potential is not well factored into the stocks. Specifically, I am working on Google (which has probably forgotten more about AI than its competitors know,) Meta, Splunk, Mongo, and Oracle are my first topic. The next step is semiconductor firms.


The Economy and Stock Market


I expect we will continue to muddle along with the thought that “a recession is coming.” My expectation is that a recession will surface around the time of the Federal Reserve Bank’s second to last rate hike. Expecting trouble but not knowing when, we have targeted companies with pricing power, recession resistance, and consumer appeal in recession.

We continue to be in protection or preservation mode rather than value or growth.


Holdings


Weight in Portfolio

Sector*

Thought

15.4%

Fixed Income

Short term treasuries, and an intermediate term special situation.

8.3%

Cash

Targeted for Streaming and AI

22.3%

Consumer

Major brands, off price retail, and beer

18.3%

Energy

Mix of energy producers, service companies, pipelines, and technology.

12.5%

TMT -- Technology, Media, and Telecom

At 7.6% of the total portfolio, Iridium is our largest holding, the balance is Nvidia and Comcast.

11.1%

Banks/Financials

More than 10% in two Money Center Banks, about 1% in a regional bank

9.2%

Industrials

Anticipating infrastructure spending and a continuing strong aerospace market, we have a modest position in industrials.

3.1%

Open ended small cap

All of these are healthcare and medical technology. This has been the worst performing part of the portfolio. We counsel patience with the companies we hold.

* Sectors are Perimeter's classification and may or may not adhere to standardized industry classification. You can always see what we hold by logging into your account at Charles Schwab.

As always, I value your opinions and thoughts. Please don't hesitate to email, call, or otherwise contact me.


Yours,


Gerard

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