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Good afternoon everyone!

I’m sure your Thanksgiving preparations are in full swing. I’ll be spending the holiday in Arlington with one of my best friends and his family. We’re going to…a Chinese restaurant. Kinda excited, not going to lie. Don’t fret though: Mom and Dad are FedEx’ing some pies to my apartment, which I will be enjoying with a glass of Barry Switzer wine.

Two brief updates. First: people love to take victory laps whenever they get things right, but it is disingenuous to never write about when things go “wrong,” at least in the short-term. As our clients are aware, we recently made a small real estate (REIT) purchase in our Strategic Income Portfolio, and unfortunately, the position has moved against us over the past few weeks, even as stocks more broadly have moved higher. We are not hitting the panic button though: this is a small position and we’ll give it time to play out. Second: we look at some broad market data that supports our view that the probability of a near-term recession is still low.

Tanger Factory Outlet Centers (SKT) – Picking the bottom is hard.

For those invested in our Strategic Income Portfolio, we recently swapped out of a bond ETF to purchase a shopping center REIT, to the tune of about 4% of the model. The TL/DR (too long/didn’t read) thesis: we bought a conservatively managed company, with a sound balance sheet, that has sustained or increased its dividend over the last two decades, even in the Great Financial Crisis.

As the “Amazon Effect” has battered retail-focused mall REITs, Tanger has gone along for the ride, and we took a small position at what we think was a good discount. But since we purchased earlier this month, SKT has lost about 10%, so it warrants a blurb.

The Strategic Income Portfolio’s primary goal is consistent dividend income, with a secondary goal of capital appreciation and even then, with no real time horizon for in mind. While nobody wants to see a stock they own go down – particularly over the last several weeks, when the broader equity markets have reached new all-time highs – know that the dividend, as long as it is maintained, acts as a buffer against market volatility.

We will continue to hold this stock so long as fundamentals dictate a high probability of maintaining or increasing the payout, knowing that there are often bumpy price movements along the way.


Macro data points.

Long-time clients are aware of our MONCON recession indicator, which Dave has written about here and here. While we continue to be in MONCON 5, there are some other data points that caught my eye over the last week, and reinforce our opinion that a recession, while inevitable, is not likely in the short-term.

Ned Davis Research recently published a piece with their own (simplified) checklist, which includes a combination of yield curve inversion metrics, S&P 500 margins, unemployment and consumer sentiment. None of those metrics are flashing red. Elsewhere, building permits are at their highest levels since 2007, and housing starts, while weaker than analyst forecasts, remain near their highs. Lastly, we are at the tail end of third quarter earnings. While earnings growth is slightly negative on a year-over-year basis, the number of companies reporting both revenue and net income above analyst estimates is above their respective five-year averages.

In short: things look pretty good. As always, things can change in a hurry, which is why we preach that clients have 12-18 months of cash at their disposal, to weather downturns and avoid selling at troughs.


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