What If The Covid-19 Vaccine Is A Late Arrival?

Normally, it pays to extrapolate positively, but the darkest before dawn scenario already has been discounted by the market. This is true for growthies, but even viciously-cyclical paper like Halliburton HAL and Freeport-McMoRan FCX past three months more than doubled off their lows.

Plenty of exceptions:  Airline managements can’t stop the blood from flowing. Materials plays like U.S. Steel and Alcoa AA find few takers. Anything related to energy, inclusive of pipeline MLPs is dead in the water. Even higher-quality names like Enterprise Products Partners EPD and Williams have withered away. Who dares buy Exxon Mobil XOM making new lows at $34? Its high was over $80. Occidental Petroleum OXY has succumbed by 82% after an acquisition-minded management foolishly overleveraged its balance sheet.

I’d love to find a reason to buy paper trading near five bucks. Think of stocks like Ford Motor F , General Electric GE and Macy’s M . MLPs could double practically overnight on any hints of cyclical recovery, their yields now in double digits. This paper finds a bullish analyst consensus but the market is saying midstream pipelines face diminished throughput and a lower rate structure next couple of years. I’ve ridden them down so I’m wrong to have inventoried these mothers.

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I’ve a soft spot in my heart for Boeing BA . At the advent of the Jet Age, 1959, I leveraged myself totally to buy their convertibles on 10% margin and scored big. Before the 737 crashes I rode Boeing, seeing it as a $500 stock. After the first crash, I checked out, but made a mind bet to buy it back at $150.

Looking at Boeing’s chart, some support traces out around $150. But, I’m reluctant to step in. What if the 737 gets recertified shortly and then another aircraft crashes? There would be no bottom for the stock considering its newly-leveraged balance sheet.

This is bear market kind of thinking. I try to fight it off, because normally, I’m a darkest before dawn player. Anyone can still rationalize buoyant growthies like Amazon AMZN , Facebook, Alibaba BABA and Microsoft MSFT . After all, they’re beneficiaries of the world’s shut-in populace. Anything tied to cloud computing, home delivery of retail goods, home entertainment and personal communication waxes buoyantly.

How about FedEx’s quarter, blowing through analysts’ projections by more than 25%? Conversely, shopping centers remain islands of grief and need to reinvent themselves, possibly, as residential construction sites. I’m allergic to Macy’s, a core shopping center tenant. When you stroll up and down Fifth Avenue, Madison Avenue, too, you’re alone except for a couple of bikers and electric scooters in the streets.

What if the country struggles, not just to yearend but successive quarters past midyear, 2021? Bank stocks are a good example today of diminished expectations. There’s no play in net interest income around the corner. Citigroup C sells at a 40% discount to book value, at $100 billion vs. book of $173 billion.

Citigroup’s normalized earnings power, maybe $18 billion, current numbers maybe $7 billion. Nobody’s ready to discount any recovery coming. JPMorgan Chase JPM still sells at a 20% premium to book value. On my earnings estimate at $22 billion, JPMorgan is at a bank-premium multiplier of 13. Plenty of room for disappointment.

Where else is there room for disappointing earnings with rich price-earnings multipliers presently attached? Well, basic industrial earnings power comes into question. High-quality stocks like Deere, United Technologies UTX , Caterpillar CAT and MMM are expensive along with unexciting tech houses like Intel INTC , IBM IBM , Cisco Systems CSCO , Oracle ORCL and Hewlett-Packard HPQ . Maybe Walt Disney’s DIS operational comeback is deferred, but the stock now discounts recovery in theme parks and film production. Not so fast? Profit margins for entertainment houses like these could weaken.

I remember when railroads sold at 10 to 12 times earnings. Now they’re at 20 times forward 12-month numbers. Most of the operational deficiencies were corrected past few years for Union Pacific UNP and others. But, Berkshire Hathaway’s BRK.B Burlington Northern Santa Fe is showing flattish numbers, quarterly.

Net, net, without robust GDP momentum and still flattish pricing, there’s no leverage coming for the industrial sector, around 10% of the S&P 500 Index. Financials, also a 10% sector, remain captive to the profoundly flat yield curve, even up to the 30-year bond rates of 1.5% for Treasuries.

Materials, a 5% sector could stagnate while oil, no longer a major S&P 500 sector, languishes. Price-earnings ratios for nondurables growth stocks are in high ground with no big earnings stories likely from product extensions. Same goes for pharmaceuticals with the cloud of excessive-domestic price points for prescription drugs. I’m painting a picture of flattish earnings power for the S&P 500 Index. No immediate zippiness in sight.

A handful of trillion dollar plus market capitalizations carry the market. The stocks, Amazon, Apple AAPL , Facebook, Alphabet and Microsoft approximate 25% of the market’s capitalization. There are no other good stories around in big-capitalization paper. So far, these pretties rest immune to the stagnant-economic setting.

It’s why I own them, but valuations became stretched past five years. Price-earnings ratios can’t define Amazon, Facebook and Alphabet today. You need to employ operating cash flow, free cash-flow yield and Ebitda on 2022 numbers to rationalize today’s price levels. The only exception is Microsoft, my biggest position, but I own Amazon, too, with undefinable earnings power next couple of years.

Hope I’m wrong on deep skepticism about the world’s resolution of the pandemic at hand. Too tough to call, as yet. Premature to be a stock picker in a pricey market that’s discounting the healthcare solution by yearend.

Portfolio structure, not stock picking, is the immediate issue. I’ve solved this by cutting equity exposure to 60%, with a growing content in high-yield bonds. You’re supposed to be aggressive when the market sells at book value, not two-times book, where we rest today. Think of Citigroup at a 40% discount to book. Then ask yourself how much room is there on the downside for the market.

Boeing was test flying its 707-jet aircraft in 1959. Polaroid then couldn’t keep up with pre-Christmas demand for cameras and film. The stock market was to begin a multiyear run, particularly in tech houses.  During 1960 when I was hawking Polaroid and Xerox XRX to our firm’s institutional clients, the managing partner called me on the carpet for promising our clients too much. I was promising 2%, monthly.

FedEx then grew out of an MBA thesis submitted in Yale’s business school. This was like Mark Zuckerberg starting up Facebook in his dorm room. You gotta be early to score big.

It’s not early, today.

Sosnoff and/or his managed accounts own Halliburton, Freeport-McMoRan, Enterprise Products Partners, Williams, Ford Motor bonds, Amazon, Facebook, Alibaba, Microsoft, FedEx, Citigroup bonds, Walt Disney and Apple.

msosnoff@gmail.com

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