Today was a very sad day with Russia executing a rather substantial invasion of Ukraine.  The events certainly shook up markets, causing a massive selloff to begin the day, only with the indices ending up positive, bolstered by Technology stocks.  It’s obviously a tragic scenario and it seems as though Putin is committed to “demilitarize” Ukraine, or whatever that means.  NATO nations have been pretty light-handed in the sanctions that have come thus far, but of course I’d expect those to escalate, if the situation worsens.  A big problem is that Europe is quite dependent on Russian energy, so Russia could literally turn out the lights to some extent.  Raging inflation seems likely to get worse in the short-term as a result of this conflict, which puts pressure on all the Western countries.

In relation to our investments, financial stocks sold off a bit as rates declined on the flight to Treasuries.  Financial stocks have been strong performers in this challenging market going into today, so a little profit taking on the fear is not shocking by any means.  What I will tell you about rates, is that we aren’t betting on a huge amount of rate increases.  If we only had 2 or 50bps this year, it wouldn’t shock me, as I don’t think the economy is that strong without the stimulus of the last few years.  Sometimes stocks trade on one factor in the short-term, but in any environment I can foresee, I expect the intrinsic value of these companies to grow substantially, which ultimately gets reflected in stock prices.

Volatility also increased, which usually causes short-term mark to market losses on our sold options positions.  Fortunately, we’ve added considerably to Technology mostly via our conservative put selling strategy.  We’ve been writing about that conservatism in investment strategy, often selling puts 50% below current prices, which will pay big dividends if things get worse. If markets stabilize, we will make a very nice amount of money.  It was an immensely volatile day, but this is a very different situation than the pandemic/global lockdowns.  The economy is still functioning fine in most of the world, outside of the immediate conflict areas.  This means that our investments should continue to be nicely profitable, with strong earnings and cash flows.  Their strong balance sheets allow their management teams to buy back stock at discounted valuations.

One great example of a company that is performing exceptionally well is Assured Guaranty (AGO).  Through a combination of retained earnings and accretive stock buybacks, the company has grown adjusted book value per share from $77.86 at the end of 2017, to $130.67 at the end of March this year.  The company today reported an exceptional 4th quarter, and the normal book value metric has grown to $93.19, from $58.95 at the end of 2017.  All of this was accomplished despite dealing with the grueling Puerto Rico bankruptcy process and record-low interest rates.  We should have Puerto Rico’s debt fully restructured within the next few months to a year tops, and AGO has been able to actually release substantial reserves due to their conservative accounting over the last few years.  AGO is a huge beneficiary of higher interest rates, as more municipalities seek insurance to lower their financing costs.  Municipal finances have never been in better shape due to the massive stimulus over the last few years, along with the generally strong economy.  While the stock has performed great, the undervaluation is as severe as it has ever been given the fundamentals.  The company bought back 14% of its stock just last year and I think they might buy $1.5 billion of stock over the next 2 years with PR resolved, which is nearly 40% of the market capitalization of the stock.  Unless the stock doubles or triples, these would all be hugely accretive to all key metrics.

Our thoughts and prayers go to the people of Ukraine and all those impacted by the tragedy of war.  As disgusting and morally horrendous as it is, war isn’t generally that devastating to equity markets over the long-term.  Of course if it became a nuclear event, or a World War, that is a very different scenario, but I definitely wouldn’t panic.  Hopefully a ceasefire and mediation can occur as soon as possible.  We will keep watching things and keeping you up to date with what is relevant in relation to our investments.