Markets ended a good year on a weak note, as the Santa Claus rally never came. Two of the three major domestic indexes lost value this month. The benchmark S&P 500 lost 2.5% during December. The Dow Jones Industrial Average lost 5.27% while the Nasdaq Composite Index was the lone winner for the month, gaining 0.48%, but also ended December on the weakest note, falling the most in the final five trading days of the year. From a sector perspective, only three of the 11 sectors finished in the green (communication services, consumer discretionary, and information technology). The eight sectors that finished in the red all lost at least 5%, with the materials sector losing almost 11%. Finally, safe haven gold had another lackluster month, and our gold tracking position (Ticker: IAU) lost 2.05%.
As we just noted, market performance this past month was weak. Not only were headline figures negative, but we were also experiencing weak breath where most stocks had been trending below or well below their historical moving averages. Retail investors have been very bulled up on the market, buying call options at rates not seen since the end of 2021 and holding major index futures of more than $100 billion (net long), a record amount. This retail-dominated euphoria is all happening at a time when corporate insiders have the fewest open market buys in over a decade, providing evidence that the people who might know the best have some concerns. Still, as investors with time frames of at least three years, we need to continue to invest, but the points mentioned above require us to have a degree of measure in allocating our capital.
In our November letter, we wrote about the recent move higher the 10-year U.S. Treasury had made. In December, the 10-year U.S. Treasury interest rate took another leg higher and ended the calendar year, pushing 4.6%. Risk assets came under pressure for the better part of the month as the benchmark U.S. Treasury rose. The most interest rate-sensitive sectors and assets felt the worst of it and contributed materially to the previously mentioned breadth issue that plagues participation in the market. While we expect this benchmark interest rate to take a breather over 60 days, this variable warrants our attention throughout the spring and summer months. As Washington, DC, gets reshuffled, we will be keeping an eye on our proposed policy changes and what those implications could be for the debt and deficit of our country. As of right now, current market sentiment is pushing the 10-year U.S. Treasury interest rate higher because of perceived tax cuts (TJCA continuation, etc.) and growth in deficit, while a moderate wave of refinancing and new issuance of Treasuries will take place in the coming months.
We are positioning our investment ideology around a higher long end of the yield curve. We want to identify sectors and investment positions that benefit from a higher-than-average 10-year U.S. Treasury interest rate. Over the years, we’ve written about our various investments within the banking industry. The banking industry will benefit materially from the current shape of the yield curve. At its core, banks make money by borrowing at the short end of the yield curve, which has been going down over the previous few months as the Federal Reserve has been cutting borrowing rates between banks. They lend and make investments on the long end of the yield curve, which has seen interest rates move higher since September. As this spread widens, bank profitability should too as well. We believe this could create a situation where the banking sector outperforms in 2025. We are mindful of the risks associated with real estate and credit deterioration, but our bank investments generally have little exposure.
Please see the following updates on existing positions held at the firm:
Enbridge Inc. (Ticker: ENB)— The Midstream giant increased their annual common stock dividend by 3.0%, effective March 1, 2025. Enbridge also reaffirmed guidance for the Fiscal year 2024 and expects to finish near the top end of the EBITDA range (close to $18.3 billion). The company leadership issued guidance for 2025, and the company projected EBITDA of $19.4-$20.0 billion and DCF per share of $5.50-$5.90. Finally, the company confirmed its 2023 to 2026 growth outlook of 7-9% for EBITDA growth, 4-6% for adjusted earnings per share (EPS) growth, and approximately 3% for DCF per share growth. We continue the structural setup for Enbridge over the coming years.
iShares Gold Trust (Ticker: IAU)- As we mentioned at the beginning of the letter, the precious metal had another poor month. The Federal Reserve’s hawkish cut took gold another leg lower as the market adjusted its expectations for rate cuts next year. The expected pro-growth policies from the incoming administration have pushed up real interest rates and economic expectations, which could force the Fed to stop their rate cuts sooner than expected and possibly raise rates towards the end of 2025 if the prospects of tax cuts bring a wave of capital expenditures and spending. We have always mentioned that our “gold playbook” would involve owning during the shift in monetary policy and selling shortly after the first rate cut. As such, we started selling down our gold position in October and continued in small tranches throughout November and December.
Peoples Financial (Ticker: PFBX)— Peoples Financial Corporation (PFBX), parent of The Peoples Bank (the “Bank”), announced the declaration of a regular semi-annual cash dividend of $0.18 per common share and a special dividend of $0.08 per common share for a total payable of $0.26 per share on December 13, 2024, to shareholders of record as of December 09, 2024. We watch the upcoming proxy battle between activist shareholder Joe Stilwell and the management team. We continue to believe there is unrealized value for PFBX shareholders that shareholders could realize with a bank sale.
Sila Realty Trust (Ticker SILA)- The Tampa-based medical-focused real estate investment trust (REIT) reported good numbers for its third quarter. The REIT completed a $50 million tender offer, repurchasing shares from the public at an average price of $22.60 per share. Management also entered into a lease amendment with one of their most prominent tenants, Post Acute Medical, that extended each of their 15 property leases by 20 years. There are no changes to the base rental terms for each property. The REIT maintains a strong portfolio of medical-focused real estate with good occupancy levels (over 95%) and low payout ratios (approximately 70%).
While disappointed with December, we are encouraged with our performance this year. We are positioned attractively for what should be a volatile 2025. Don’t hesitate to contact us at 1 (800) 780-7726 with any questions. We hope you had a good holiday season and a great New Year’s Day!
Best regards,
Stash J. Graham