Can Good Times Kick In?
Updated: Jan 3
I devoured the Great Gatsby some 70 years ago, but didn’t quite penetrate to Fitzgerald‘s theme which is you can’t relive the past, and it’s too dangerous to try. Lucky for me, the money game is always about tomorrow, not yesterday's mistakes. Learn never to look back, gaining zilch from mistakes. I blot them out. Count your winners. Play Go: Press your pieces aggressively across the board.
I saw this in the Korean War as a young infantry commander. The Chinese troops crossed the Yalu in their arctic clothing. We retreated in old World War II field jackets and boots, frostbitten, wet, and miserable. Harry Truman didn’t want to spend the money for his “Police Action.” If color TV existed in the fifties Truman would’ve been toast. But, the public learned nothing.
Point-to-point, since the millennium, the market has experienced the tech bubble of 2000-01, touching down under 1,000. Again, under 800 in the financial meltdown of 2008-09. Today’s market pundits flirt with 4,000 for the S&P 500 in 2023. Yet the bullish rationale is flimsy: The Fed relents soon, doesn’t up Fed Funds much above 5%. Nothing bad happens to the economy. A consumer led recovery takes hold. The market responds and sells at a high teens price-earnings ratio, maybe even at 20 times forward earnings.
This kind of bullishness is what wealth managers deal out to their clientele, who have lost nearly 20% of their capital past year. The traditional pie chart construct of 60% equities, 40% fixed income paper proved deadly. Bonds declined, inclusive of Treasuries, AAA corporates and high-yield paper. Haircuts aren’t supposed to happen to serious conservative investors, so they say.
Savers are no longer disenfranchised by low interest rates. For years, bond investors made just 1.9% on their assets, particularly 10-year Treasuries. Now we’ve got a negative yield curve with 2-year paper yielding 4.3% and 10-year Treasuries at 3.9%.
I’m locked in with a paper loss on 2- year notes. Many of the corporate bonds I own with 5-year’s duration and BBB or better rating are pushing 7% rates of interest. Unless you see deep recession around the corner, this is a to do.
Handicapping the 2023 market finds me in negative territory by 10%. I see the S&P 500 Index closer to 3,000 than the 4,000 number talked about. My book says interest rates move higher, while corporate earnings disappoint. The technology sector, after shrinkage of 50% or more in stocks, like Tesla,Amazon, Meta-Platforms et al still sells at twice the market’s price-earnings ratio, on fundamentals still shaky. Tech seems headed to sell at 1.5 times the market multiplier which I see settling down to 15 times earnings. (Did I scare you?)
All this reminds me of the 2001-02 cycle. NASDAQ was in tethers and the economy stalled out. Both Democrats and Republicans were at odds on how to revive the economy. By the summer of 2001, the penalty for announcing earnings below the consensus rose from 10 to 30%. what we’re seeing currently. Previous years, haircuts ran 5% to 10%. The S&P 500 Index in 2001 slid below 1,200. Capital spending dried up and the consumer stood loaned up to his eyeballs.
NASADAQ 100 Top 12
Yearend 2001 Shrinkage
I’m amazed how money managers deal, or fail to deal with reality, how they rationalize high valuations and act on what they expect to unfold. Money management for me is an ongoing battle of many short term decisions, and a few long-term calls. If you’re a perfectionist visit some graveyard site where nobody talks back and you no longer have to jump through rings of fire.
Money managers, controlling aggressive capital should be rated on a ratio of 50% S&P 500 and 50% NASDAQ 100. This forces them to take a stand on issues like the Internet’s growth pace. Can it capture a bigger share of the advertising dollar? No matter that half a dozen companies comprise half the index's valuation. Apple’s market capitalization 8 years ago was little over $5 billion, now measured in the trillions.
Berkshire Hathaway’s portfolio of eight years ago, if held onto, would have destroyed Buffett's reputation. Wells Fargo and Coca-Cola then comprised 41% of assets under management. Buffett's awesome achievement over 60 years of investing is best captured in the following chart on growth stock performance. The average life of a growthie last no more than 5 years, and only 10% of growth stocks last more than 10 years.
SHARE OF COMPANIES PERSISTING IN
THE BERNSTEIN GROWTH STOCK UNIVERSE
Maybe 5% of growth stocks hold primacy over 20 years. Tesla is a dramatic example of an innovator becoming hugely overvalued, but no longer analyzable. This is unlike Apple whose trillion dollar market cap is no more than 1.5 times the market's price-earnings ratio. Anyone owning paper at 2 times or more above the S&P 500 Index is reaching for the stars but late to the game.
In the investment world, nothing is forever. Individual investors should parse their portfolio for seaworthiness. Below are my largest holdings. I’m about 40% in equities, 40% in 2-year Treasuries and 20% in debentures with credit ratings of BB.
SOSNOFFS LARGEST HOLDINGS
Company of Assets_
Enterprise Products Partners 8 %
Boeing 5.5 %
Microsoft 4 %
Williams Companies 4 %
Delta Air Lines 3.8%
Occidental Petroleum 3%
UnitedHealth 3 %
Exxon Mobil 3 %
Eli Lilly 3 %
Energy is a major construct, followed by an overweight in Boeing. I was early on Boeing which I perceived at the bottom of its aircraft production learning curve. I’ve followed BA since the early 60s when they introduced their 707 that ushered in the jet age. Overweighted in non-cyclical growth stocks, like UnitedHealth and Eli Lilly.
My portfolio is notable for what it’s naked on. No financials, no internet paper, basic industrials, or consumer cyclicals, like retailing. An exception is Delta Air Lines, which I consider a luxury. Every portfolio needs one gut play. Corporate flying needs to kick in. What shapes a great operator is his extreme sensitivity to that fine line separating order from total anarchy and loss of control.