Forget The FRB Mumbles We Need Snappy Fundamentals

I remember Gerald Loeb, partner at E.F. Hutton, 65 years ago. He’d huddle in his cramped office, gazing at the ticker tape stream across his oversized desk. Gerald kept 2 hungry apprentices busy updating his chart books. Littering the floor, torn from newspapers, analysts research reports and crumpled wax paper from his breakfast. 

I learned a lot from Loeb without ever talking stocks with him. Get to your office early, like 7:30 in the morning. Then digest all the overnight news and develop a point of view on the daily market before the opening bell rings. Up, down or unch. 

I wonder today about all the trillion dollar fund churning day-to-day. Are players in the market for eighths and quarters like Gerald? Why are fund managers turning over most of their assets, quarterly? Why aren’t there more buy-n-hold artists like Warren Buffett? 

The symbolism of Loeb’s office wasn’t lost on me. He inhabited a cubicle rather than a spacious spread like the firm’s merger and acquisition group. This was the early sixties, the transistor just invented by American Telephone who freely licensed it to all corners. Fairchild Camera, Motorola and Texas Instruments surfaced as prime growth stocks. Sold above 30 times earnings, even early sixties. 

GML would tell stories on himself about how the business could pass you by. One day in Chicago Loeb was attending a Chrysler board meeting. Strangely, the headman kept darting out of the office and then back. Loeb later found out by reading his WSJ that Chrysler’s headman had to be discharged. He was giving company business to an entity solely owned by himself with no disclosures of such doings.  The Board fired him and a banner headline greeted readers of their morning newspapers. 

In the old days, stock concentration by institutions was extreme, 40% to 50% for key properties like IBM, General Electric and Exxon. Even the biggest, highly regarded companies do get in trouble when recession hits home. Many so-called Blue Chips got cut in half. 

Thumbing through my old chart book, I was struck by the dramatic cyclicality traced by price earnings ratios. When things got bad, the market plummeted to below 10 times earnings. Then, the up cycle for markets can take over and  last for a decade, rising to 20-times earnings. Today, the market shows some valuations pressure, but nothing drastic or definitive. 

My invested position now is just 25% of assets. Getting my cash is 10-year Treasuries yielding 4.3%.  This exceeds the rate of inflation by at least a percentage point. Consider,  the steel producer, Cleveland Cliffs, is closing one of its steel facilities. CLF has joined my under $10 raggamuffin portfoli0. Meanwhile, the Fed is still worried over inflation. No reduction is contemplated for interest rates near term. 

Loeb, mid-career wrote his terse, snappy book, “The Battle for Investment Survival.” It depicted his career on the Street as a tough trader. The tape wasn’t his friend, but an enforcer of reality, that can do you in if you’re on the wrong side of a cycle. Loeb looked for bits of information at the margin. This is totally opposite what Warren Buffett whose massive buying power is reserved for broad ideas that mature slowly, away from the tape’s action.  

Buffett would jump in when he saw a stock or industry group badly mispriced because of an event where the Street overreacted. American Express and Bank America, two widely separated instances saw the Street overreact and misprice these major property. 

This chart on valuation for markets over several cycles suggests markets go to both extremes, too high and too low. Valuation can probe the depths of under 10 times earnings, This is what candy stores sell at. On the exuberant side, markets can piece the 20 multiplier for earnings. We’re ending what I think is another cycle of overvaluation. It can be brought down by recession, rising interest rates and inflation. We’ll know soon enough.