My title above is a child’s expression. We used to go door-to-door, begging for pennies, nickels and dimes. Neighbors were kind of generous.
But, today, I feel stock market operators are like dirtied fingered children hoping the FRB treats them as kindly as their mother’s neighbors did decades ago.
Let’s assume the FRB is fixated on orderly growth, reasonable mortgage rates and solid home building. This is not the stuff of bull markets, already at 20 times 12 months earnings power.
In this pricey pricey setting I can’t find as yet, any new growthies that can make me richer. Growth stocks can sell at 1.5 times the market. Nobody has to own pricey bank stocks like JP Morgan. Commodity cyclicals act like death warmed over, particularly steel, aluminum and copper.
All such negation could happen between now and yearend. The concept of a nifty 7 stocks will then be compared with JP Morgan’s one decision stocks back in 1972. The deep recession of 1973-’74 destroyed growth stocks whose earnings dropped comparably with cyclicals.
Today cyclicals like U.S. Steel, Alcoa, Ford et al have faded badly. Possible turnarounds like Macy’s, Rivian and American Airlines find no new money. Carl Icahn’s concoction of low grade energy plays could rest in the low teens while big oil properties like Exxon Mobil go nowhere.
Finally, we’re seeing a reversal in the spread between 2 and 10-year Treasuries. A year ago, there was a sizable negative yield curve in 10-year paper. I started buying 10-year Treasuries when their yield was as much as 60 basis points below 2-year paper. Today the negative yield spread has been wiped out.
What were the players thinking? They had to be betting that the negative curve would widen further. That in a deep recession American Treasury yields work remarkably low. But, so far, we’ve had the reversal, 2 and 10-year Treasury paper both yield approximately 3.2% in parity.
Note on the chart, when interest rates fall below 2%, the market can sell below 15 times earning. So the market today, possibly can base near 11 times earnings. Treasuries yielding above 3% normally get a P/E ratio around 16 times earnings. So the market hasn’t fully discounted a collapse in interest rate levels.
The yield disparity players of yesteryear struck out. Anyone short 10-year Treasuries past year missed out on a major rally in such bonds. My trading is in 2-year Treasuries and high yield corporates. The thirst for yield grows stronger not weaker. In a weak earnings situation just so long as bankruptcies don’t proliferate in 10-year paper rated below BB I’m hanging in.
The Fed’s 50 basis point cut reinforces my appetite for high yield debentures and growth stocks. I bought more Microsoft and Google. Wish me luck.
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