- Martin Sosnoff
Growthies To Languish On Death Row
After her demise, when I opened Mother’s steamer trunk, I found under a tangle of costume pearls mildewed stock certificates of Royal Dutch Petroleum, General Motors, U.S. Steel and other so-called blue chips of the 1940s and 1950s. Pop would mutter to himself “Son-of-a-bitch, they never go up.”
There were no high-tech plays then. Bell Laboratories didn’t invent the semiconductor until 1961 and then they licensed it to all comers. IBM was mainly an electric typewriter house. The revered were ethical drug houses like Merck which sold at 30 times earnings, but presently ticks in low teens. Iconic GDP names like DuPont, General Electric, even U.S. Steel and General Motors filled out passive investors’ portfolios. Not exactly the “Good Ship Lollipop.”
Newly minted MBAs from Harvard sought employment at these so-called blue chip houses. Then came Wall Street’s turn, still recovering from the 1929 horror show. Everyone then wore starched white-collar shirts and sat at boxy desks with neatly piled paper stacks. Until tech houses took off, the Street was more stats oriented than conceptual. Today, Goldman Sachs got 237,000 applicants for their training program.
Nobody’s pounding on the doors of Equitable Life Insurance and its ilk. What I have against Equitable is they never invited Jewish graduates to apply for employment. The Street was comparably unbiased, but Goldman was noted as a Jewish house, Smith Barney, Waspy and Merrill Lynch strongly Irish. Trading floors stood as free, noisy arenas of capitalism. Traders thrive on noise and chaos, hour after hour.
I didn’t own a pair of black shoes with laces before arriving on Wall Street in my late twenties.
Once there, I was brilliantly mentored by a silver fox who dated back to 1929. The days of “Who cares, nobody cares.” Best advice I ever got was “Don’t believe more than 50% of what you hear or read.” Secondly, when interviewing managements, never take notes. You want spontaneity and you won’t get it with a yellow pad on your lap. I remember the late head of Xerox, Joe Wilson, haranguing analysts who asked dumb questions. “Do your homework,” he’d chide.
Nothing’s changed since early sixties on analyst meetings with management. No singular insights. Some 42 analysts rate Apple a buy. No sells and just 2 neutrals. You can repeat this box score for a dozen tech houses. Street music sheets carry little value added.
My core belief presently is interest rates are headed much higher than expected. In a few months we’ll see 10-year Treasuries yielding over 4% and then headed higher. The Fed holds $9 trillion in Treasuries that need to be banged out, but don’t count on it.
Does anybody but me remember when the prime rate for single-family mortgages was set at 7% by our big banks? If 30-year Treasuries do yield over 5% a year from now, home mortgages will be written at rates between 6% to 7%. For decades the only mortgages held at 4.5% dated back to early postwar years. Faded rate history. Mortgages could get caught mashed in the grinder once the Fed gets religion.
When Jimmy Hoffa extracted 7% wage hikes from automakers for his Teamsters, automakers gave in and the country’s inflation rate hit 7%. Detroit lost market share to Volkswagen and Toyota. General Motors and Ford became patsies in world markets.
When a country starts losing market share in key industries like autos, chemicals and energy, its stock market does break down to as low as 10 times earnings. So far, nobody is talking such misery. Nobody cares to own uncompetitive operators. Right now, industrials seem shaky, like railroads. We’re seeing declining carloadings numbers. If prices for petrochemicals breakdown it impacts major energy houses like Exxon Mobil and others like Dow Chemical. Petrochemicals is the second biggest profit center for Exxon and has proved to be viciously cyclical, cycle over cycle. Railroads now are seeing declining carloadings.
If I’m right on interest rates escalating far above consensus numbers, sector rotation could be fast and furious. First, consider the price-earnings ratio of the market currently. We could see a drop from 20 times the earnings consensus to 15 times a downward revised earnings number. I rate this as an even-money possibility. Unless you’ve repositioned yourself to overweight defensive noncyclicals, underperformance sets in.
We’re beginning to see traditional sector rotations. Healthcare properties like UnitedHealth Group, Zoetis, Eli Lilly and Merck have turned buoyant. UnitedHealth is the biggest weighting in the Dow Jones Industrial Index, some 9%. Zoetis, which few of us can even pronounce properly, is a snappy performer bouncing some days 3% to 4%.
Meanwhile, GDP stocks like industrials have begun to fade. But, rails like Union Pacific and Canadian Pacific Railway still are actively recommended properties, but act toppy. General Motors is a heavy piece of paper, ticking at new lows, down over 40% from its 52-week high point. Pfizer and Eli Lilly have turned into snappy performers from deadweights. UnitedHealth Group is in big cap territory now with a $550 billion market cap, making new highs on some successive trading sessions. Not Ford’s time, practically cut in half past 12 months.
Rubbed my eyes looking at Citigroup, nearly 40% shy of its 12-month high. I can no longer forecast bank stock earnings, worrying about the gobs of variable rate loans on their books. Overall credit losses could mount more than expected. Earnings probably top out in their high-margin wealth management business on lower securities market asset values. I still hold onto some Citigroup, Bank of America and Morgan Stanley paper despite their heaviness. The lesson here is value stocks can kill you, too.
All-in, the setting for passive investors is filled with potholes. For me, it’s 50-50 whether The Iceman Cometh.
Trolling for tuna in the Gulf of Mexico, I glanced down at the bait bucket with the fish swimming tranquilly. My God, I thought. They’re on death row and don’t even know it.