Bloomberg_10_24_23

EntrepreneurShares Market Update (10/2/23)

EntrepreneurShares — First Thematic Investment Strategy in Entrepreneurial, Disruptive, Innovative Stocks

INFLATION RISKS GOT A DOSE OF FUEL — FED “PLAYBOOK” WILL NOT WORK HERE -- (LOCKED IN LIMBO)… • Middle East are creating a spike in Energy costs • “Cost Push” scenario a distinct possibility (oil drives costs up on many products/services) • Fed raising interest rates may not help alleviate inflation — higher rates will not necessarily alleviate employment or housing • Inflationary spiral stemming from oil will not be as bad as 1970s, but will exacerbate existing situation • Stubborn labor market will keep unemployment rate low (4.3M baby boomers eligible to retire each year) and economy resilient • Job firings will concentrate on technology firms with H1B and foreign workers (also outsourcing) • Tight real estate inventory (reluctance to leave low prior mortgage rates) will help keep housing prices elevated (30-40% of CPI) • Mortgage rates are approaching 8% and 10 year Treasuries are now at 5%, this will further add to cost push • Real estate prices may remain sticky until children of deceased parents (80% homeowners) start selling inherited properties (3/4 sell) • Prediction: within 10 years there may be a major crash in housing prices in retirement communities (pockets of rising/falling prices) EARNINGS SEASON IS A BUST: MACRO NEWS IS DOMINATING MARKET MOVES • First two weeks of earnings season have been overshadowed by Macro Economic news • This week is a huge test — biggest of season —if overshadowed by macro news, then season will essentially be over… • Good economic news appears to be muted in impact, bad news is magnified — Tesla case in point • So long as the focus is dominated by Middle East tensions and Treasury rate increases, company-specific news will be secondary • We expect Markets will continue to focus on Macro news over company specific news throughout the third quarter • The 3 rd quarter, in our opinion, will be a lost quarter and lost opportunity for companies with strong earnings FED RATE HIKES APPEAR ON HOLD FOR FORSEEABLE FUTURE • CPI spikes in Aug (0.6%) & Sept (0.4%, increasing risk for future rate hikes, despite the expectations that rates will NOT change Nov 1 • Increases in shelter (30%-40% of total) Sept. 0.6% should dissipate over time, but low inventory will keep costs elevated • Rising energy costs and low unemployment rates (3.8%) create risks for further rate hikes • Strong labor market will keep economy resilient, but it is showing signs of a slowdown • Fed may be forced to raise interest rates higher in future to slow down spending and reduce cost spirals • Fed rate hikes have lost some effectiveness due to low unemployment and sticky housing prices • Summary: rising interest rates and energy costs (which create a demand push for other products/services) create an inflationary spiral

RECESSION RISKS LOOM-PERFECT STORM BREWS WITH HIGHER INTEREST RATES, OIL PRICES AND ECONOMIC DRAG • Probability of an economic recession is rising • Rising interest rates, sluggish economy, global tension, low housing affordability and rising corporate (4.6%) and subprime (6%) default rates • Rising energy prices will also add to the Cost-Push inflationary spiral • Continued spending by consumers with stubborn inflation may cause Fed to raise rates • We initially expected a “Goldilocks” scenario for 2023/2024— now becoming less optimistic • China slowdown will reduce global GDP growth • Strong labor market will take sting out of economic slowdown in US, but it will slow down and may approach a recession WAR IN MIDDLE EAST, HAS FAR REACHING CONSEQUENCES: IRAN EXACERBATES THE PROBLEMS • Conflict will create a rise in Oil/Energy prices • 50 year anniversary of last Middle East Oil embargo — not a coincidence • This time, US is largely independent on oil production/needs • Spike in oil prices will exacerbate inflationary risks • Defense contractors (Lockheed Martin, Northrup Grumman, General Dynamics) may receive a windfall • Iran’s involvement can rapidly escalate all of the potential risks • US global support is now being stretched — Ukraine/Israel/Russia/China (creating domestic funding/budgetary issues) • Divided opinion on handling of the war-and extreme positions from far left--may be a deciding factor in next US election WE ARE TAKING RISK OFF: INCREASED ENERGY AND HEALTHCARE EXPOSURE • Macro economic risks are overshadowing company-specific opportunities • We are reducing IT, Real Estate and Consumer Discretionary weights and shifting more resources to cash, energy and healthcare • Risk Off environment • Focus on companies with solid cash flows and stability • Shift toward larger cap weights • Unfortunately, exposure to Middle East needs to be reduced MAJOR EARNINGS WEEK — JUST AHEAD OF FED MEETING • Mega Cap Tech: MSFT, GOOG (Tues); Meta (Wed); AMZN (Thurs) • Defense Stocks: Boeing, General Dynamics (Wed); Northrup Grumman (Thurs) • Oil: Exxon Mobil (Fri); Chevron (Fri) • Fed Meeting: Nov 1 • MSFT, GOOGL, AMZN, A) If Positive: Could stabilize Markets; B) If negative, Macro Economic and Global Tension will dominate

We are reducing IT, Real Estate and Consumer Discretionary weights and shifting

US REAL ESTATE PRICES SHOULD EVENTUALLY DECLINE (BUT NOT IN NEAR FUTURE) • Mortgage rates are approaching 8% • Housing inventories are low due to sellers being reluctant to give up historically low mortgages • Housing affordability is at an all time low • Eventually, baby boomers (or surviving offspring) will sell their homes and create a market decline • Case-Shiller Index shows housing levels nearly double the pre-2008 market crash • Once housing starts to decline, then inflation will drop and approach negative levels (housing is 30-40% CPI) • Second home purchases have increased since the pandemic — this added risk can accelerate during a down period CHINA REAL ESTATE CASTS A SHADOW ON GLOBAL GROWTH • China economic slowdown, caused by overexpansion (Evergrande) has been keeping global growth muted • China stocks have suffered, though contagion has not (yet) spread • China real estate slowdown has kept a lid on building materials (in some areas approaching 50% of purchases) • Major commodities have actually dropped YTD (assisting with US inflation) • Deflation in China could potentially spread to global markets (especially with a global economic slowdown)

• 30M retiring baby boomers, create a once-in-a-generation, impact on employment rates • 6.4M unemployed but 4.3M eligible for retirement (eligible retirees may exceed 10-15M on sidelines) • Unemployment rates will not rise appreciably despite sluggish economy — many foreign nationals are the ones being fired

AUGUST LOSSES ACCELERATE IN SEPTEMEBER W/RISING INTEREST RATES o Equities experienced a difficult August — this is now being extended in September (traditionally weakest month of the year) o The fall has coincided with a rise in the long bond yields (rising by 60bp since June 1) and weaker expectations o September is usually most challenging month of the year (falls by 0.7% on average) o Speculative, loss producing, high debt equities are the most vulnerable along with speculative, money-losing equities o September is shaping up as another difficult month (w/few positive catalysts expected in near future) o CPI results are now mixed — eye on labor costs and real estate sales levels and price changes (Mortgage rates 7.23%--22 year high) o Next key indicator will be October 12 (next CPI) — energy is still rising in September … o Next Major Catalyst will be Oct 31/Nov 1 Fed meeting — Fed likely to indicate an end to rate hikes (key signal to # expected rate cuts ’24)

YIELD CURVE HAS INCREASED AT LONG END — AND DANGER IS INCREASING o Most of the recent action related to the yield curve (Fitch & PPI) has been to long-end of the curve (coinciding with expectations) o 5yr, 10 yr and 30 yr rates have all increased o Rates have increased approx. 60 basis points from June o 30 yr rates at 4.4% are still well below historical levels (e.g. 8/31 2007 — 4.85%; 8/31/1981 — 14.8%) o Long Term treasuries may be overbought — hedge funds are shorting (offset risk on equities) o Speculative stocks will need to adjust with higher rates (most of impact is over) o Economy is resilient — no major danger yet though signs w/manufacturing and other areas of contraction. RESILIENT ECONOMY HAS, SO FAR, AVOIDED DISASTER, BUT TIME IS RUNNING OUT o Inflation had been under control though recent energy spikes have created an increase in Sept CPI o Energy in September MTD continues to rise o Unemployment rate is low though has been rising recently (from low of 3.4% to 3.8%) o Long term rates, though rising in recent days, are still well below historical averages o Rising 30 year bond rates can cause problems for regional banks that invested long-term o Mortgage rates above 7.2% should slow down real estate market (inventory and sales are dropping) o Mortgage rates (30 yr fixed) are now at highest levels since July 2001 (22 yr ago) o Housing inventories have been declining for many years, but apartment construction is at highest level in 50 years INVESTORS SHOULD AVOID THE FOLLOWING AREAS: o Long term bonds — rising interest rates will cause bond prices to fall further o Commercial real estate — rising interest rates, falling occupancy levels and soft prices will continue to cause problems o Regional banks — rising interest rates, coupled with potential cash run, increases exposure to liquidity risk on LT bond investments o Highly speculative stocks with long-term horizon — as interest rates rise, future cash flows have lower value CONCENTRATION RISK AMONG MAJOR INDICES IS NOW GREATER THAN EVER • Russell 1000 Growth Index has generated 50% of returns YTD from 3 stocks (AAPL, MSFT and NVDA) • Russell 1000 Growth Index has generated 75% of returns YTD from 6 stocks (AAPL, MSFT, NVDA, AMZN, TSLA, GOOGL) • Many funds also generate most of their returns from 5-10 concentrated positions • Concentration risk in major indices is now among the highest ever • Investors are exposed now, more than ever, to a handful of stocks that could plummet. • Investors should examine that concentration risk of their investment portfolios and reduce the weight that is generated by only a few stocks • Investors should try to spread out their holdings to many stocks or investments to improve safety

WHERE WE ARE INVESTING NOW o

Entrepreneurial companies — with diversification across many holdings o Reduce concentration risk — more equity positions o Entrepreneurial companies with shorter duration o Entrepreneurial companies with low debt (bank exposure to companies that have refinancing needs) o Entrepreneurial companies that do NOT have elevated Market Cap/Rev or relative valuations o Markets will recalibrate with new interest rate scenario — stock pickers market o Pockets of optimism still exist, earnings have provided mixed results, short term horizon is less bullish o September/October will remain choppy o November/December may end year on higher note (compared to September) o CPI data had been steadily dropping but Sept had major spike — October may also be elevated. Nov & Dec may see CPI dropping again o Fed may FINALLY signal rate hike end on Oct 31/Nov 1 meeting o Key focus will shift on number and timing of future fed rate drops (reduced from 4 to 2 at recent Fed meeting)

US UNEMPLOYMENT RATE IS STILL NEAR A 50 YEAR LOW – SOFT LANDING STILL MORE LIKELY THAN A RECESSION Despite Federal Reserve tightening, the US unemployment rate is still extremely low @ 3.8% • Unemployment rates are still among lowest US has experienced in 50+ years • Technology companies continue to announce 100,000+ layoffs o Most layoffs are coming at the expense of H1B foreign workers o H1B foreign worker layoffs do not appear in unemployment statistics o US has 80m baby boomers which have started to become eligible for retirement since 2012 o 4.3m are becoming eligible per year (6.01m workers are unemployed as a basis of comparison — 3.8%) o As more baby boomers retire, the unemployment rates would otherwise drop (if not for weakening economy) o The Federal Reserve is worried about wage inflation — this could become a problem in the future as companies rehire tech o There may be pent up demand for retirees to leave work force o Unemployment will likely remain low due to seniors leaving workforce (eventually)

• ETF Fund Flows in US Market

During the past week, US market is showing stronger interest in non-US Equities.