The market took a nose dive yesterday after a perceived- hawkish tone from the Federal Reserve, displayed through December's FOMC meeting minutes (transcript). While at the post-meeting press conference, Chair Powell promised a gradual, methodical approach to balance sheet reduction which he acknowledges market is "sensitive to," the meeting minutes showed the majority of FOMC participants wanting to go aggressive with balance sheet reduction, i.e quantitative tightening. Perhaps the most damaging sentence in the minutes was "many participants judged that the appropriate pace of balance sheet runoff would likely be faster than it was during the previous normalization episode." In other words, this means quantitative tightening this time may be more aggressive than previous times. The last time the Fed shrank its balance sheet amid interest-rate hikes, the stock market had a bear-market scare in late 2018. 

The market action yesterday before the minutes release was much similar to on Tuesday, with the cyclical-heavy Dow Jones Industrial Average leading, while the tech, growth-heavy Nasdaq was lagging. Even with the mass sell-off after the minutes, the Nasdaq took a bigger dive than the Dow. Even today pre-market, the Dow is up a bit while the Nasdaq is down. 

We have to admit, we have only been watching the Fed actions with regards to tapering and interest rate hikes, not so much about quantitative tightening. However, we do think that an aggressive quantitative tightening will be negative for the stock market, at least for now as investors are pricing that in. We think the market will be down for several more days. It's important to state that our economic outlook, or our investment playbook for 2022, has not changed one bit because of this. Every professional market participant understands that at some point, the Fed will have to reduce its balance sheet, which ran from $4 trillion in 2014 to now nearly $9 trillion. The problem is that market participants have not been pricing that in, so with the market at all-time high and there comes an additional tightening of monetary policy, the market has to come down. 

We have to re-iterate again about what kinds of stocks we believe will work in 2022 versus what will not work: tangible, reasonably-valued companies that make real products, sell those products, earn a lot of profits and find ways to return those profits to investors. During these sell offs, we urge you to take a look at companies like Ford (F) and compare to Rivian (RIVN); take a look at Visa (V) and compare to Block (formerly Square - SQ).  

Additionally, this time is a perfect example of why it's important to keep a cash reserve. We allocate our portfolio to have a 5% cash reserve, but as mentioned yesterday in our notes, we are sitting on a ~20% cash position after huge realized gains in Ford (F) and other trading activities. We are so ready to deploy the capital into the selling carnage, but again, we would like to wait for the next few days. 

We also have to admit that we were completely blindsided by the negative action that followed the minutes release. We didn't think the minutes would be any surprise to the market, given chair Powell gave a press conference right after the FOMC meeting. that was why yesterday before the FOMC minutes, we added to multiple names on our portfolio. However, as always, our buys are very incremental, we left room to buy more on the downside.

Added to Salesforce (CRM)

Salesforce traded down 5.4% yesterday at the time of our purchase. This was on the back of a downgrade from UBS, went buy to hold. They said sales are getting softer - MuleSoft is the problem - saying that they sold a lot last year and it was a pull forward. Additionally, CRM was part of the growth/tech cohort that is being hated on Wall Street right now. 

We largely disagree with the call and we viewed the decline as an incredible buying opportunity. The stock itself has been down 25% from its all time high, and we think at this price level a lot of possible bad news have been priced in. We don't believe CRM's business is slowing, but the stock has priced in a slowdown. If there is indeed a slowdown, we don't think the stock will come down much further. If there is not a slowdown, the stock is going to bullet back up.

We are also rightly positioned in this stock to be able to buy here. Recall our last post where we got out of the stock (out 2/3 of position). As a result, yesterday, we added back 1/3 of the 2/3 sold on Dec 21st. Effectively, our position in Salesforce has a weight of 1.55%, half of the allocated 3%.

Added to Skyworks Solutions (SWKS)

We added to our Skyworks position yesterday because we were underweight in this position and that stock has gone nowhere since we initiated it back in November. We identified a strong technical breakout on the name and decided to deploy our capital there. Following the purchase, Skyworks is at 2.65% of our portfolio, compared to the 3% allocated.