It’s one thing to see a 5 dollar ragamuffin self-destruct, but, polite paper is fading up to 20%, overnight. I’m talking Ford and General Motors, both with hefty yields of 7%, but not exactly covering their payouts these days.
The so-called Magnificent Seven aren’t exempt from overnight pessimism either, lots of volatility priced into Microsoft, Tesla, Eli Lilly along with IBM, Netflix
and Nvidia. They can flub in football scores, too.
What’s going on? Well, instant collective disbelief in a company’s outlook can arise overnight. Could be a spotty earnings report like Motorola’s some 30 years ago. Today, delayed recognition that after all, the automobile business can get buried by investors on disappointment in new model
entries. Ask management at Tesla, Ford et al.
Decades ago, they took IBM out to be shot because nobody understood as yet that the Watsons were too wedded to committees, unable to react rapidly to changes in the data processing sector. No longer did electric typewriters carry much weight in their results.
If you believe as I do that the market is overvalued, selling near 20 times earnings power, the first thing to do is deal with your equity exposure. I’m long at 50% year-to-date. Reduced Microsoft and Alphabet. Don’t own banks but remain heavy in Goldman Sachs based on heightened trading activity and strength in investment banking.
My biggest overweighting is in Master LImited Partnerships in the energy sector. These stocks, Enterprise Products Partners, Energy Transfer and Plains All American Pipeline carry approximate 7% yields. Everyone should be yield hungry, but not in General Motors. MLP’s don’t pay out more than their internalized free cash flow generation.
My concept on Treasuries goes against trend. I expect contraction in sharply negative yield curves on 10-year vs 2-year Treasuries. It soon ends. Past couple of weeks the yield spread has already closed in from nearly 50 basis points to 18 points. Everyone should own 10-year Treasuries which seem headed for a 5% yield in years to come.
Discount our Federal Reserve Board who can’t predict rates or inflation any better than you or me. I assume we’ll get no immediate help from them on lowering the discount rate. A quarter point shrinkage has no investment significance, and is already discounted.
If ever there was a time to be a traditional pie chart investor, it's now. In fixed income, a lot depends upon whether you're in corporates or Treasuries. For corporates, I demand a 7% yield so I’m in a lot of 5-year duration BB paper.
My central idea on equities is value sectors, namely financials, can outperform, especially brokerage houses like Goldman Sachs. The play is on trading volume.
Still, I feel trapped in my low cost growthies like MIcrosoft, Amazon, but I’ll tough it out so long as I like their fundamentals and can model next couple of years earnings power. Can’t do this with Apple, Tesla and Meta so won’t play there.
Net, net despite hyper-volatility, there's money to be made, particularly if you’ve learned how to stand alone, then pick up the pieces here and there.
Hyper-volatility and overtrading are indicative in trillion dollar asset pools with turnover rates over 100%. Contrast this with operators like Buffett whose volatility is minimal past 50 years. Look for high static ratios in your money managers.
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