Copy of the 4th Quarter Review Letter



45 Lewis Street, Lackawanna RR Station

 Binghamton, NY 13901

Phone: 607-231-6330                                                     email: [email protected]

The following is a copy of the 2020 4th quarter letter sent to clients. It reviews the markets and the client account’s activity and performance for the 4th quarter of 2020.

The volume of books and articles that will be written about 2020 will reach to the boundaries of our universe.  Any time span that includes a presidential impeachment, a global pandemic, an economic shutdown, a disputed presidential election, and vast social divide is a good candidate for a defining and historic year. 


Of course, given these events, the economy and capital markets also experienced a historic year.  We had record high unemployment, a record contraction in economic activity, record low interest rates, and, after a broad painful stock market selloff, a recovery to record levels. 


Looking at some of these financial market details, the U.S. unemployment rate reached 14.8% in April and remained above 10% until September.  Government bond yields plunged to incomprehensible levels as the 10-year note fell below 40 basis points (0.40%) and the 30-year bond sank to 83 basis points (0.83%). 


Think about that – bond buyers were lending money to the U.S. government at less than 1/2% for 10 years and less than 1% for 30 years!  For those who have bond mutual funds in a retirement account or a target date mutual fund, you were part of the lending posse lining up to buy these bonds at ridiculous prices.  


The major stock market indexes fell over 30% from February’s peak to March’s trough.  The Russell 2000 was down over 40% in the same period.  The Russell is a broader reaching benchmark that is made up of small cap stocks and, in many cases, is more representative of the average stock. 


It was unclear, at the time, what was going to happen.  The economy was being closed and no one knew for how long and to what extent.  Further, there were estimates that the virus would claim millions of lives.  Uncertainty ruled the day. 


The equity market’s rebound began as a function of government programs to stabilize the economy.  The Federal Reserve announced astounding sized bond buying programs to inject liquidity into the financial system.  Our central bank’s balance sheet spiked from $4.1 trillion to $7.4 trillion or an 80% increase during the year.  This means that within a few months our Treasury Department printed a mindboggling $3 trillion and then turned it over to the Fed.  The Fed went into the markets and bought all kinds of bonds.  


The financial markets quickly regained confidence as they understood that the government was going to use all possible options and use them in an enormous scale.  The result was that the Nasdaq Composite recaptured its losses by June.  It took until August for the S&P 500 to recover and November for the Dow Jones Industrial Average and the Russell 2000. 


From the view point that Washington was back stopping everything, the stock market’s steady climb made sense.  However, looking through the lens that showed burning cities, an economy that was shut down, and an upcoming election, it was inexplicable.  Viewing this conundrum without seeking a logical narrative provides a possible answer.


Quantitative analysis and trading are playing a big role across the financial markets.  This approach is driven by hundreds of computer algorithms and programs.  The software scans the markets looking to capitalize on patterns or outlier events.  Although some do include headline keywords and other news influences, the variables usually look at things such price action, volume, volatility, and standard deviations.  They watch how differing asset classes trade relative to each other.  For example, the U.S dollar in the foreign exchange market vs. the S&P 500 or the 10-year Treasury note vs the price of crude oil. These seemingly unrelated markets can influence each other, and the quantitative models attempt to discover trends.  


Importantly, these relationships and their derivatives normally have nothing to do with fundamental and real-world developments.  Computer algorithms typically don’t care who won an election or about a switch in monetary policy.  These types of events will likely work their way into factors of price or the standard deviation of a security, but it may take some time.  In the meantime, the trend that the quants are following remains intact and that is what determines the trading. 


The use of quantitative trading has grown, and I think it is a big reason that the Dow can trade above 30,000 while the economy and small businesses are being crushed.  Of course, the reverse can be true as markets can be tumultuous despite rosy headlines.  


The stock market closed 2020 at record levels which contrasted with the year’s challenges.  The Nasdaq lead the way and the indexes had very good years. Here are the 4th quarter and full year performance numbers.



In addition to stocks, bonds performed well as the Barclay’s Aggregate Index (a composite of many sectors of the fixed income market) had a 7.5% total return.  Gold climbed 24.6% in 2020.  In general, commodities were higher during the year except for oil.  Crude oil fell to the single digits during the initial shutdown and recovered later in 2020 but was down around 20% for the twelve months.  The U.S. dollar fell against the other major currencies and the dollar index declined 6.7% in 2020.


I spent time throughout 2020 learning and trying to better understand the quantitative approach.  This included reading several books on the topic as well as adding a subscription to a math-based investment approach.  The combined influences helped your performance. 


One example of a quantitative assisted decision relates to Cerence, Inc. (symbol = CRNC).  The company develops voice recognition software for the automobile industry. The 3rd quarter review letter contains more details on the company.  CRNC was a strong performer in 2020 and it doubled in the 4th quarter jumping from $50 to $100 per share. 


On a purely fundamental basis the stock was overpriced in the $50’s but from a quantitative view, the trend was up, and the company is growing quickly.  In many cases, algorithms focus on relative performance (are things improving or deteriorating) more than absolute performance (traditional fundamental valuation).  From this perspective, we held the stock and were rewarded. 


Another holding that was included from a computer algorithmic basis was MP Materials (MP). This was purchased in November in the low teens and it closed the year in the $30’s.  MP is a rare earth mining company that came public via a SPAC (special purpose acquisition company).  SPAC’s are organizations that raise money with the goal of buying an operating business.  They are a growing part of the stock market and MP is one example. 


Returning to the old fashion fundamental research approach, Popular, Inc. (BPOP) also drove 4th quarter performance.   Popular is the largest bank in Puerto Rico.  There is limited competition as many of the U.S. banks have left the island.  This is understandable given the challenges to the Puerto Rican economy.  Natural disasters, a population exodus, and slowing business activity have hurt. 


As mentioned, Popular has a dominate position on the island.  When it was purchased for your account, the company was solidly profitable, and the stock was trading at half of its book value.  Our entry price offered a 4% dividend yield.  BPOP’s stock price moved from the mid-$30’s to the mid $50’s during the 4th quarter.  Despite this move, the stock remains cheaply valued. 


The capital markets overcame the country’s and the world’s struggles.  While they recovered and performed well, many of the issues are unresolved.  The events from last year will impact our world for many years and they will produce opportunities as well as new risks. I will look to balance these conflicting forces to help you grow your assets.     




Jeffrey J. Kerr, CFA

“And I Feel Like I’ve Been Here Before” – March Newsletter

Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA


March 1, 2021 – DJIA = 30,932 – S&P 500 = 3,811– Nasdaq = 13,192

“And I Feel Like I’ve Been Here Before”


As much as everyone looked forward to hitting the delete button on last year, the extensive optimism over the new year might be in for a test. Sadly, the first two months of 2021 look like they belong to 2020. To be sure, there is plenty of time left in the year to overcome our country’s challenges and return to some version a normal society. But the direction of current events is deteriorating rather than improving.

In addition to the news not improving, it looks like it’s been recycled from 2020. As you recall, last year began with a presidential impeachment. 2021 also began with a presidential impeachment. In late January 2020, President Trump was acquitted. He was acquitted this January as well.

The virus hit the U.S. in the first quarter of 2020. The country was shut down and the focus for the remainder of the year was battling the pandemic. This introduced the concepts of ‘Social distancing’, wearing masks, and working from home. In 2021, there are concerns over variants of the virus which could delay re-opening the economy as well as bring new challenges.

In February 2020, the stock market moved to record highs. Similarly, stocks traded to all-time high levels in February 2021. Of course, last year the capital markets panicked as the economy shutdown. Stocks plunged and the bond market froze on the unknowns over the severity of the virus’s impact on the population and the length of time that the economy would be shutdown.

The U.S. dollar rose against other currencies as it was viewed as a safe haven. The commodity markets plunged because closed economies have very little industrial demand. Crude oil futures traded at negative prices. This meant that the buyer of the futures contract got the oil and got paid to take it. In 2021, let’s hope this is a case of déjà vu instead of an actual repeat of last year’s disruptive events.

The first two months of this year have had some events that smelled like 2020 but were very unique to 2021. The Reddit/Robinhood/GameStop saga is something not seen before. A few weeks ago, this was the lead story on every news outlet including the non-business/financial channels. Strangely it has gotten very coverage after the “meme stocks” settled down.

The fact that journalists have moved on from the Redditt rebels does not mean that the risks have receded. This episode exposed some structural issues that have developed within the markets’ plumbing.

One of the strategies of the Robinhoodies was buying heavily shorted stocks. Hedge fund, institutions, and large investors had made massive bets against certain companies. When the Robinhoodies started buying these stocks their prices spiked higher. This resulted in big losses for the hedge fund crowd. As the losses escalated, the negative bets were forced to be unwound which meant more buying and even higher prices and larger losses. It became a violent cycle causing widespread pain.

During these events, many market blemishes were uncovered. It was known that many traders and hedge funds were using leverage to boost returns and measurements of systemwide borrowings have been near record levels. What was not as understood was that the leverage was on top of very concentrated portfolios with limited diversification.

Leverage wasn’t the only Reddit revelation. We learned that these market players were buying the same stocks. This institutional overlap and concentration isn’t a problem until the positions start losing money and the markets turn into a huge game of musical chairs.

These risks could ultimately become systemic. If an overleveraged player becomes impaired and are forced to raise cash, they will likely have to sell the positions that are heavily owned by others. This could cause other firms to suffer losses and make them sell which then forces the pain to ripple throughout the markets.

It is possible that these risks might be contained through hedging strategies. It is difficult to determine the systemwide summation of risk reducing hedging, but it is possible that it could be an answer. Another solution is that hedge funds and investment firms reduce leverage and concentration over time. Given the history of hedge fund trading, that is not an expected development.

While systemic risks exist, the markets continue to trade as if the party is nowhere near an end. The stock market indexes are up in 2021 but the leadership has shifted from large cap tech to energy and small cap stocks. Here is the performance of the major indexes for the first two months of the year.


The stock market rally could continue as the economy reopens and unemployment declines. The year-over-year comparisons will be

financial market supportive as 2020’s 2nd quarter numbers were among the worst in history. Also, judging pent up consumer demand for travel and entertainment is tricky but this could support even stronger GDP growth later in 2021.

The déjà vu from other parts of the markets did not spread to the fixed income market. In 2020 bond yields declined. First, yields fell as the collapse in economic activity crushed any demand for loans. Secondly, the Federal Reserve bought billions of dollars of bonds as a way of supporting the markets and the economy. This forced interest rates lower. The 10-year Treasury bond’s yield traded below 40 basis points (0.40%) last year.

It’s been a different story in 2021. The 10-year Treasury bond began the year around 90 basis points (0.90%) but closed last week at 1.46%. This may not seem like a significant move but on a relative basis it is an over 50% move in 2 months. Also, the 10-year bond is a critical, far reaching security in the fixed income market as many other products (mortgages, corporate bonds, etc.) get priced off the Treasury market. The 10-year’s higher yield will cause higher interest rates throughout the markets.

This rise in longer term interest rates is typically a result of economic growth or inflation expectations. The bad news for 2021 is that inflation worries are behind this increase in interest rates. Crude oil and commodities prices have climbed in recent months as suppliers and miners have kept operations at reduced levels. If inflation is the reason for this development, it becomes another risk to the stock market and is likely the reason for the tech stocks’ recent weakness.

The end of 2020 brought anticipation of a new and more pleasant time. Unfortunately, that hasn’t been the case. Some of the disappointment is an extension of last year’s developments. New issues have popped up in 2021 which have helped spread the cultural angst. Instead of suffering further déjà vu of 2020, hopefully we will be experiencing new and enjoyable events.



[i] David Crosby, 1970


Copy of the 3rd Quarter Review Letter




45 Lewis Street, Lackawanna RR Station

 Binghamton, NY 13901

Phone: 607-231-6330                                                     email: [email protected]


The following is a copy of the 2020 3rd quarter letter sent to clients. It reviews the markets and the client account’s activity and performance for the 3rd quarter of 2020.


There was a time when all stock trades were done on a floor of an exchange that had a physical location.  The New York Stock Exchange was the most famous but there were additional regional exchanges that included the American Exchange (also in New York), the Boston Exchange, and the Philadelphia Exchange.  Specialists and floor brokers were the men and women at these locations who handled the trades.

The world has changed so naturally the mechanics of trading stocks have also changed.  Computers handle most of the today’s transactions as floor brokers are as relevant as a phone book.  As progress has accelerated, computers have taken a larger role in finance.  Now, in addition to handling transactions, computers are widely used in research and investment decisions.

Financial markets used to seek out and reward successful companies that had growing sales and profits.  Things have changed and the correlation between strong financials and a rising stock price has decreased.  Math based algorithms look at a much different set of factors to make decisions which reward not so successful companies (as measured by traditional methods).

Computer programs and algorithms scan oceans of data within seconds looking for price patterns or anomalies that offer trade setups.  These algos are driven by sophisticated mathematical formulas.  Unlike traditional investment research which focuses on financial statements and economic conditions, computers utilize calculus and statistics as they concentrate on such things as price action, volatility, and correlations between asset classes.

This high-tech approach has changed the investment decision making process.  Algorithmic trading tends to be more frequent and have short holding periods.  It doesn’t rely on price-earning (P/E) ratios, book values, or dividend yields.  Instead, sales growth rates and relative movements (are things getting better or worse) are the focus.  Further, the rates of change of the indicators such as revenues and EBITDA is an important driver of the computer programs.  This can lead to stocks with upward price momentum becoming be a market leader even if its financial condition is weak.

This new landscape can be maddening as stocks that appear to have challenges and outsized risks surprisingly become market leaders.  As an example of this new landscape, “If you bought every company that lost money in 2019 that had a market cap of over $1 billion (of which there were about 261)…you’d be up 65% for far this year”.  (This quote is from Grant’s Interest Rate Observer, October 30, 2020.)

Institutions, trading firms, and hedge funds devote big resources to algorithmic trading and it is responsible for a significant amount of daily trading activity.  There is fierce competition to find the newest and most accurate program that provides an edge over others.  Algorithms are important part of the capital market environment and will continue to play an important role.

Given the importance of computer programs, I have tried to implement some of these approaches into my decision making process.  Many data providers now include a computerized ranking systems or similar type service offering recommendations.  On their own, none of these are the Holy Grail.  But, they become part of the equation and are helpful in determining such things as entry points and slowing price momentum.

As reported by The Wall Street Journal, more stocks have risen 400% or greater than any year since 2000.  Given that stocks plunged at the end of the 1st quarter, these moves largely took place in the 2nd and 3rd quarters.  The list of this year’s highfliers has many technology and biotech stocks.  Many of these names are losing money or are marginally profitable but the rates of change for their sales and EBITDA are improving.

Beyond these shooting stars, the broader stock market had a good quarter.  The indexes steadily rose during July and August but was down in September.  Despite the upcoming election, the capital markets’ chief focus was on stimulus programs and the possibility of another economic shutdown.  Here are the major averages’ performances for the 3rd quarter and year-to-date.


We had some positions that were helped by the algorithmic trading.  Cerence Inc. (symbol – CRNC) is a developer of software and artificial intelligence products that does voice recognition for automobiles.  They have relationships with every car maker throughout the world.  Until 2019, they were a division of another voice recognition software developer (Nuance) but were spun out in the 3rd quarter of 2019.

Cerence generates over $300 million of annual revenues and is forecasting growth.  The company has a history of working with auto manufacturers and is continuing to add features for new voice commands for the next generation of cars.  Importantly, they are involved in the autonomous navigation developments.

CRNC’s stock began the year in the mid-teen’s.  Since the markets’ lows in March, the stock has dramatically climbed.  It recently has traded in the mid $60’s.  At current levels, the stock is overvalued and could see a pullback if the market suffers a correction.  However, Cerence is experiencing positive rates of change across many indicators and that might be enough to keep the algorithms happy.

New Fortress Energy is another example of a fast growing company with a surging stock price.  NFE builds and operates LNG (liquefied natural gas) import terminals and facilities in smaller markets who need cheaper energy.  Current operations are in Jamaica, Puerto Rico, Mexico, Nicaragua, Pennsylvania, and South Florida.  New Fortress delivers LNG to these areas and converts it back to natural gas which is a lower cost energy source for the local economy.

NFE’s stock was in the low and mid teen’s as recently as June.  It recently reached $52.  While the company is young, New Fortress has been adding new operations and signing agreements for future projects.  The current growth rate is high and the potential for further expansion looks bright.

Once again, NFE is an overpriced stock and it took a large dip at the end of October on their quarterly report.  However, if business conditions are favorable and the company can execute on its growth plans, the stock price will recover and move to new highs.

There are many approaches to investing.  Computerized trading and algorithms have become a large part of the landscape.  This is a much different approach from the traditional research and portfolio construction methods.  While there have been much development and success using these new techniques, they have not eliminated risks.  Nevertheless, they offer additional pieces into the decision making process which will help spot future opportunities.