What to do when your pets act like basket cases? My first act is to turn off my Bloomberg console. Why torture yourself if you’ve got a bear market on your hands? Normally, I hold on to polite paper – stocks with strong financials and position on the board. Exxon Mobil stays put but Energy Transfer Partners gets shed along with Hess.
Commoditization of the stock market is here and now. Not only oil futures range over 5% intraday, but second tier paper like Hess and ConocoPhillips jitterbug as much as 10%. Even polite Exxon Mobil can be a 6% mover on down days.
Commodity cyclicals like Halliburton, Schlumberger, Freeport-McMoRan and U.S Steel show down days approaching 10%, too. Traditional financials like JPMorgan Chase and Goldman Sachs tick off 4% with Morgan Stanley, once a good performer, even more volatile.
Past 12 months, I’ve inventoried many such bozos, watching outsized gains melt off the page. There’s nothing wrong with taking short-term gains before they become long-term losses. Let Warren Buffett hold American Express for decades upon decades.
If stocks trade like commodities, it’s because they’re commodities. Not something to fall in love with. Their volatility is manageable except in bear markets when high double-digit stocks sink near single digit paper. American Airlines Group is getting close, along with Ford Motor. AT&T dwells in the mid-teens as does Macy’s and Cleveland Cliffs, down from $34.
All the financials, including Goldman Sachs and JPMorgan Chase get wiped off my board. Not enough difference in operating outlook between Morgan and Citigroup to hold one rather than the other. Some 10% intraday swings in oil service paper like Halliburton and Schlumberger suggest you bang ‘em both out. They are really just 1 stock. Only the names are dissimilar, not the operating outlook.
Sooo, when you don’t like the numbers dancing on your machine, kill off the machine. Then, ask yourself, what kind of player do you wanna be? Do I dare imitate Warren Buffett and hold positions throughout the business cycle? Or, am I ready to turnover my portfolio into cash and look for a better entry point down the road?
Understand where the country is in the business cycle and how long cyclical vulnerability may persist? What about wage structure in the country, worldwide competitive mettle and technological primacy? When does Federal Reserve Board policy emphasis ease up?
If you cannot answer such questions with conviction, you’ve no right to be bullish, on margin or concentrated in cyclically vulnerable market sectors or overpriced growthies.
Meantime, the Street’s music sheets on the market prove worthless, even hurtful to your financial wellbeing. They’re nearly universally bullish or at least constructive on long-term investing. This is because wealth management is a major profit center for big banks like JPMorgan and brokerage houses like Goldman Sachs. They’ll be last to rock-the-boat, sticking religiously to their investment pie construct of a 60/40 equity to debt ratio.
In the current downshift this construct is failing investors now down as much as market indices. Tracking quarterly music sheets, they continue to overestimate earnings for the S&P 500 Index and then place a high ratio on these numbers. This is uncalled for, particularly in a cyclically vulnerable business setting with rising interest rates and the shaky outlook for corporate earnings power.
I’m still seeing projections for the market selling at 20 times earnings. Unless you believe the Federal Funds rate doesn’t get bumped up above 4%, the market rationale at even 15 times earnings is suspect. Just review previous cycles of Fed tightening. The market has sold down to 10 times earnings, yielding 5%.
Such a present yardstick would cut the S&P practically in half. It’s happened before – under Paul Volcker, early eighties, and in the financial meltdown of 2008 - ‘09. Stocks sold at book value, not 2 or 3 times book. Stocks should be selling at no more than 15 times forward year’s earnings power which has topped out and could work lower.
The median Street projection puts the market at 20 times optimistic earnings power for 2023. How else can major wealth management houses hold clients in their traditional pie chart construct? Year-to-date, such percentages carry no edge in performance. Clients are down mid-teens in their portfolios.
What I’m reading now from major houses like Goldman Sachs is the market’s soundly based at their 3,600 projection for the S&P 500. I’m at 3,000 because I see declining earnings and higher interest rates. The Fed has much catching up to do. Conceptually, I can rationalize Fed Funds at 6%, hand-in-hand with choppy earnings power, particularly for major industrials, financials and commodities plays like oil, steel, copper and aluminum.
The harsh correction in tech and internet paper must run its course. They’re all getting cheaper by the day. Meta Platforms is a shadow of its former self, its headman now talking about headcount correction after years of mid-teens expansion with rising R&D budgets in all operating sectors. Microsoft is down over 100 points from high ground, Tesla lost over 200 points, Netflix a shadow of its former self, along with Alphabet, Amazon, Cisco Systems and Alibaba. Energy’s long bull run could be over with futures already $20 off the recent high point. There’s nowhere to hide any longer. Tech houses are like parked wrapped motorcycles with no visible destination point in sight.
So far, my retreat into 2-year Treasuries, now yielding over 4%, seems premature. Unrealized losses mounting up into serious money. Don’t ever think that acting conservatively can’t cost you deep losses.
Ask yourself “What kind of player am I?” Dare I imitate Warren Buffett, buying and holding big, solid companies that can endure anything the business cycle offers up? Or, am I ready to kick out holdings based on where the country is in terms of the business cycle, competitive edge on wage structure, technological primacy and finally, Federal Reserve Board policy emphasis?
If you can’t respond with conviction, you’ve no right to be bullish, on margin or concentrated in cyclically vulnerable sectors like commodities, financials, even industrials.
The major failing for the Street’s music sheets is they remain stubbornly bullish about the value of the market. Not only is the earnings power put on the market excessive, but the price-earnings ratio allotted is too high - at 20 times forward 12 months’ projections, is a pedantic fallacy.
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