In Gridlock We Trust
Is the market crazy, celebrating the new realism of gridlock, that nothing earth-shaking passes muster in the Congress? If you buy this, run out and press the Nasdaq 100 Index. Then, go back to sleep. Nobody gets taxed to death unless you sit with $50 billion in unrealized capital gains. The financial aid spigot holds open while Democrats do battle for an inclusive healthcare package.
Olden days, I promised clients that Polaroid and Xerox XRX would compound 2%, monthly. But, I had to cease such patter after the firm’s managing partner drew me aside, warning I was too promotional. Sylvan presided, a starchy Harvard man who could parse a balance sheet within 30 seconds. Same for income statements.
Early sixties, we all bought gray flannel suits in Brooks Brothers, fedora and all. Everyone had a mackintosh from Abercrombie & Fitch ANF hanging in the closet. My conformity ended by 1964 when I opened my own hedge fund and grew a full beard. I flashed on all this while watching daily post-election fireworks on the Big Board.
The Federal Reserve Chairman should keep scratching his head, build GDP models and speechify. His patter rates above-the-fold placement in the Wall Street Journal and the New York Times NYT , but pass it by! Absence of negatives turned into a powerful motive force. Less chance of unforeseen consequences.
Big question is where should capital flow to? I love my junk bonds, yielding 5% or more to maturity. I’m adding traunches here and there. Growthies can jitterbug next couple of years, exciting stories attached, but, stretched valuation hangs in the air.
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What’s to buy that’s washed out? Financials have gotten too cheap. Goldman Sachs GS trades at book value and 10 times earnings. Citigroup’s C still considered a can of worms. Energy stocks drift in a slow growth setting. Too much oil in the world, the demand-side stagnant.
I’m nearly double-weighted in tech paper, biggest position Alibaba BABA , which I construe differently than the market. Chinese regulators coming down on Jack Ma is understandable. Ant Group was too successful scaling up their unsecured personal loan business. Ma’s ranting over regulators’ pawn-shop security focus was a multi-billion dollar mistake.
What’s to do? Prime industrials already trade in a comeback mode. I’m talking about Deere, Caterpillar CAT , Dow, DuPont de Nemours DD , Honeywell and General Motors GM . The residual is a bunch of ragamuffins still ticking under 10 bucks: Ford Motor F , General Electric and Occidental Petroleum OXY . I bought GE GE , but won’t look at their financials, afraid I’d bang it out.
MLPs like Plains GP Holdings and Energy Transfer could fly with oil futures ticking into the forties now. What about bleeding airlines like American Airlines AAL ? Don’t forget poor Macy’s M , a $7 number. U.S. Steel just inched above $10.
Too dangerous to cotton onto one or two stepchildren. A dirty dozen, or at least half a dozen makes you look professional. Here goes for me: Halliburton HAL , General Electric, American Airlines (debentures), Plains GP Holdings, Teva Pharmaceutical Industries and Macy’s.
I remain top-heavy in big capitalization paper selling in the hundreds, Amazon AMZN ticking over $3,000. My experience is it’s easier for a three-figure job to levitate majestically, the analyst fraternity rooting them on with upgrades.
Amazon was the star five-year performer even though it’s a fool’s game to attempt building an earnings model. I can analyze a property flirting with bankruptcy easier than projecting Amazon’s earnings progression next couple of years.
The reciprocal issue is how deal with a company that’s too successful, like Alibaba, drawing stringent regulatory oversight. I see internet houses like Facebook and Alphabet doggedly headed towards self-regulation, intensive monitoring of errant messaging. Employment rolls at Facebook sprint ahead 30,000 plus, quarterly, while R&D spend is enormous, greater proportionally than any other major tech house.
In Alibaba’s case, Jack Ma was summoned onto the carpet by financial regulators who feared Ant’s small loan business had grown too large, that it carried potential for destabilizing the country. We saw this here in 2008 – 2009 when major banks’ open-to-lend for risky mortgage paper created the financial panic that saw the demise of Lehman Brothers, Merrill Lynch and Bear Stearns and brought banks like Citigroup and Bank of America BAC to their knees. They needed serious bailout money for survival.
Years ago, my initial attraction to Alibaba as a stock was based on projections that Ant Group would build out into a major money management organization. Not just money market funds, but management of bonds and equities through joint ventures and start-ups. This thesis still holds water.
Ant can build money management coverage as broad as any world player. BlackRock BLK , for example.
It can grow into the world’s biggest money market fund. Once the yield curve steepens operating profits can surge. Here, too, our banks and brokers are subjected to regulators’ sensitivity on dividend paying capacity. Anything under 10 times earnings that’s viable, gets my money starting with Citigroup and Goldman Sachs.
Never thought I’d hear an FRB chairman praying for inflation to surface. Consider in 1982, Paul Volcker blasted interest rates up to 15%, destroying the stock market which sold down to book value, 10 times earnings, yielding 5%. Inflation ran at 7%. Thank General Motors and Ford for increasing hourly wages at 7% to appease Jimmy Hoffa and the United Auto Workers.
Because of such checkered history, I pass on automobile stocks. General Motors needed serious bailout capital in the 2008 – 2009 financial meltdown. Present management I rate as passable, but where were they while Tesla TSLA reigned supreme in electric cars? Let somebody else own General Motors for good margins on pick-up trucks. It never lasts.
Lemme step back and whip punditry on not dealing with market valuation. Historically, we dwell today in high ground, over 20 times normalized earnings. Price-earnings ratios already factored in minimal interest rates, inflation and a benign FRB.
Cost of carry for debt never rested so low. Demand for housing can stay buoyant, but GDP needs higher personal consumption expenditures to carry the country to full employment. Timing is still conjectural.
An unintended consequence of taxing fat-cats is that it could accelerate capital transfers to personal foundations. Guys with tens of billions in unrealized gains need to pay something. After all, the price-earnings ratio for growth stocks is reaching the 1972 level. I hold myself partly responsible for such insanity, irrepressibly pushing up growthies. Why shouldn’t Jeff Bezos pay up? After all, he’s never revealed much on Amazon’s numbers to anyone following his stock.
I’d help our new maximum leader with some numbers. Let’s say tech at 25% of the market valuation is at $10 trillion, and honchos own 20% or more of their company’s capitalization. Put this residual at $2 trillion. Tax this sum at 25% and I’ve raised $500 billion. A handful of overachievers thereby afford a sizable stimulus package for the needy. Thank you, Warren Buffett, Jeff Bezos, Bill Gates, Mark Zuckerberg et al. As yet under the radar are operators like the Koch brothers, families controlling natural resources and real estate geniuses like Sam Zell. (I love you, Sam.)
Capitalized value is a powerful metric. Consider, Facebook’s shareholder equity, latest quarter, tots up to $117.3 billion, but market value is $850 billion. Facebook sells at over seven times book value. Guys in work boots need infrastructure projects putting them back on payrolls.
Sosnoff and/or his managed accounts own Facebook, Amazon, Goldman Sachs, Citigroup, Alibaba, General Electric, Ford Motor bonds, American Airlines bonds, Halliburton and Teva Pharmaceutical Industries bonds.