CAZ Investments Quarterly Letter 2022 – Quarter 4

4Q 2022 – A Year to Forget

2022 will be forever known as one of the worst bear markets for stocks, but it will be more renowned for the damage done to investment portfolios from the obliteration of the 60/40 stock/bond allocation. When the dust finally settled, the 60/40 allocation experienced its worst performance in ~85 years! Those investors that refused to heed our call for caution and maintained highly aggressive positions in cryptocurrencies, meme stocks and overhyped areas in general, took a horrific beating with some commonly owned securities declining by more than 80% for the year.

The results for both stocks and bonds would have been much worse if we had not seen a reasonable market rally in the early months of the 4^th quarter. As we write this in mid-February, the markets have shown their optimistic bent again and we have rallied in the first six weeks of the new year. From here, it is going to be very, very hard for stocks to make meaningful progress higher. It is not impossible, but the headwind of stubborn inflation and a tight labor market, which leads to a resolute Federal Reserve (“Fed”), should continue to provide plenty of cold water to put out any new sparks of optimism.

For this reason, and many others, we remain very concerned about the risk/reward in the markets and would strongly recommend investors focus on the old adage, “the return OF my money is more important than the return ON my money.” Therefore, we remain a “1” on the CAZ Scale, and we strongly believe that the risk/reward from these levels is not favorable. There are better opportunities than we have seen in a while, but the overall risk/reward is very skewed to the negative from here.

What is most interesting about the markets right now is the disconnect that is beginning to become quite drastic between the messaging from the Fed and the behavior of both the fixed income markets and the stock market. The Fed has made it very clear that they want to see a 2% inflation rate and a more normalized job market. Yet the fixed income markets are forecasting that the Fed is not only going to stop raising rates very soon, but that they are actually going to start CUTTING interest rates by the end of the year. This is leading to optimism in the stock market that the Fed is no longer going to be a headwind and might actually become a tailwind. Well, one side of that argument is going to be very, very wrong!

You would be right to surmise that we believe a key risk is that the Fed will raise rates higher than investors are expecting and that could cause a meat cleaver to be taken to stock valuations. We are most concerned about stagflation, as we know that is historically the worst possible environment for both stock and bond investors. Thus, we continue to allocate our personal capital to investments we feel will persist in most any economic environment. In order to help you efficiently understand precisely what we are thinking investors should do, we have added to the bottom of this letter the summary of our annual Themes for 2023 event. If you were able to join us in person, this will serve as a refresher and something for you to be able to refer to. If you were not able to be with the other 300+ from around the world, we would strongly encourage you to do so next year, and this summary will provide you with a snapshot of the outlook for our core themes. Themes is designed to be on the 3^rd Thursday of each year, so we are scheduled for January 18, 2024, in Houston. Please hold it on your calendar as we would love for you to join us.

We look forward to a very productive year, and we are very close to determining the best way for us to allocate capital in a very unique way to take advantage of the market dislocations. Stay tuned for more information. We are grateful for your partnership. Please let us know if there is anything we can do for you. All our very best!

The Team at CAZ Investments