Get Your Hands Dirty, Pick Over $10 Paper
Call me a junkie, even gunslinger, because my inventory is mainly “darkest before dawn” stocks sporting leveraged-balance sheets. Not exactly institutional quality. If the country doesn’t approach normalcy by mid-2021, I’m wrong and should give back plenty before exiting my shabby $10 and $20 picks.
Not that I don’t own paper trading in the hundreds and thousands – like Amazon AMZN , Facebook, Alibaba BABA , Goldman Sachs GS and Microsoft MSFT . But, I expect they’ll be outstripped by General Electric, Macy’s M , Enterprise Products Partners EPD , Halliburton HAL and American Airlines AAL . Throw in Freeport-McMoRan FCX and Williams Companies.
I do draw the line on U.S. Steel, Alcoa AA and Occidental Petroleum OXY , but they’ve all bounced at least 50% from recent lows. My implementation is less than perfect. At times, balance-sheet analysis gets in my way and I chicken out. This is a mistake. Frustrated, I ripped up my Chartered Financial Analyst card as an impediment. Then, I did add to Macy’s and General Electric with good results.
Guiding precept is hardest things to do make you the most money. I applied this directive in the art market for over 50 years and found that several canvases showed rates of return that far exceeded venture-capital plays that panned out.
I wasn’t around for the Impressionists in the 1860s when work by Monet, Manet, Cezanne and Degas sold for the value of their frames. Manet’s Olympia, sparked a virtual scandal, but ended up in the Louvre Museum 50 years later.
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A Jean-Michel Basquiat painting sold for $2,500 in 1982 but got knocked down at auction this year for over $100 million (to a macho money manager). Some “very ugly” paintings I own by Georg Baselitz, Jenny Saville, Frank Auerbach, Cecily Brown and Anselm Kiefer have gone to the moon.
Also short changed in the 1870s were Velázquez and Goya whose work sold for a couple of thousand francs. The rule is when great masterpieces are offered in quantity, chances are they won’t sell. Delacroix was never understood by more than a handful of collectors. Can you imagine a Monet selling for 300 francs?
The saying is you never appreciate a work of art until you live with it. The same goes for jittery stocks that test your belief during violent market undulations. They make new lows, turn into analysts’ “sells,” no longer buys. When wrong, you pay the piper. I tapped out on Lehman Brothers in 2008 but, same time, bought Bank of America’s BAC preferred stock for $5, par value $25. Never focus on one stock. You need a handful.
Stocks once deemed quality-institutional holdings like General Electric lapsed into desuetude, approached bankruptcy or like GE GE , bottomed out in mid-single digits. Then, they do double or triple on some evidence of a turnaround.
As I write this piece, I see MLPs like Plains Group Holdings up a zippy 10% intraday. Thus, extrapolating on OPEC’s agreement to go slow on monthly increases in oil supply.
If you believe as I do, that the FRB sticks with near zero money market rates, you should own MLPs that haven’t overextended themselves on distributable cash flow: Williams Companies, Enterprise Products Partners and Magellan Midstream Partners MMP as well as Kinder Morgan KMI qualify. Institutional money managers shy away from such highly-leveraged bastard payout properties.
Although no great thirst for airlines and aerospace stocks, I do play them with convertibles like American Airlines and Spirit AeroSystems SPR debentures. So far, so good.
Long term, I applied to the financial world my sure sense of the struggling visions of artists of my generation. Consider your portfolio as a harem of voluptuous bodies. If you don’t feel the great desire of possession, throw them out the window. I know, this is sexist. I’ll show some sporting instinct, the thrill of the chase for discovering new beauties and making them your own. We are talking about power, self-assertion and conquest coming into play.
Any stock can exist as part of an industry worth exploiting. Finally, anything you buy can’t be a random pick, but fits into your conceptual investment framework.
There are two books on art dealers and art collectors that anyone seriously involved with financial markets needs to read and devour: Duveen by Meryle Secrest and Paul Durand-Ruel: Memoir of the First Impressionist Art Dealer. Brash art collectors and market operators can look foolish, at times overpaying and coming late to movements like Impressionism. Money, persistence and emotional commitment to what you see make great collections and portfolios possible.
Apple AAPL is a good example of a growth stock in distribution while Citigroup C has a future, up 40% past month and discounting a recovery in net interest margins and the peak in loan charge-offs. Goldman Sachs just bounced up 20% from book value while Freeport-McMoRan and Halliburton show up days of 5% or more. Trillion-dollar properties like Amazon and Microsoft now churn aimlessly while General Electric and Macy’s show much late foot. The market thirsts for prospective leveraged earnings power as in airlines, U.S. Steel and Alcoa.
Buoyancy in ragamuffins makes sense, because polite stocks already have discounted the country’s return to normalcy. The S&P 500 Index sells at 19 times prospective earnings for 2021, a full valuation, speaking historically, unless you expect interest rates to hover near zero next couple of years.
In our entire postwar financial history near zero interest has never happened. Trendline rates, both short and long term, held at 5%, often 7% to 8%. I’ve never heard of an FRB chairman ever longing for inflation at least 2%, maybe 3%, but that’s what we’ve got today.
Chances are, my cost of carry on high-yield bonds, contemporary art and real estate sticks near 1%. For the first time, I’ve dropped down and bought a single B debenture. Then, I dug a hole and whispered into it “U.S. Steel.” Go! Go! Go!
What about The Donald? He’s no longer a market variable. I’d hoist him onto the walls of Notre-Dame Cathedral as a replacement gargoyle in plein air. Eye him adumbrating his fully disruptive persona, in a hard-edged scowl.
Sosnoff and/or his managed accounts own Amazon, Facebook, Alibaba, Goldman Sachs, Microsoft, General Electric, Macy’s, Enterprise Products Partners, Halliburton, American Airlines convertibles, Freeport-McMoRan, Williams Companies, Enterprise Products Partners, Magellan Midstream Partners, Kinder Morgan, Spirit AeroSystems debentures, Citigroup and U.S. Steel debentures.