Excepting energy, there were few places to hide during the March quarter. Unless you stood light in technology and financials, chances are you posted negative numbers.
Exxon Mobil basked in the sun while Microsoft and its ilk witnessed profit-taking day after day. It was time for outrageous specs like airlines and master limited partnerships, energy related, like pipelines and storage facilities. Most investors never heard of Enterprise Products Partners and Energy Transfer Partners, but they do tick millions of shares, daily, making new highs.
Mega-cap tech houses like Microsoft, Alphabet and Apple got challenged on valuation, even assuming fundamentals remained soundly entrenched. The Street is yet to come to grips with what is sustainable valuation for the S&P 500 Index. We are at 20 times forward 12 months projections. But, historically, in a period of rising inflation, valuation often gets crushed. During cycles of high inflation, the market can sell down below 15 times projected earnings. What I see coming.
Actually, in cycles when the FRB is vigorously pressing up interest rates, we’ve seen Fed Funds at 7% or better. Margin requirements can spiral up to 90% even as the country goes into recession for a year or longer. Nobody on the Street cares to parse such a harsh setting.
But, the reckoning is already unfolding. From yearend highs, properties like Microsoft have shed nearly 15%. Same goes for Alphabet, Apple and Amazon. Shaky fundamentals led to a 40% wipeout for Netflix and Meta Platforms. Meanwhile, Exxon Mobil sprinted ahead some 40%. Financials like Citigroup where the waters are roily, rest 3% below recent high ground.
Don’t take my word on disillusion spreading over several market sectors. Numbers are numbers and need to be parsed out. Even polite growthies like Home Depot and Qualcomm are wipeouts from their highs. There are no takers (no stories) for consumer cyclicals like General Motors and Ford Motor. They languish.
Lemme talk the talk on my own goods. Sold out Meta Platforms, Amazon and Home Depot. Pared Apple and dumped deep cyclicals that had great runs. This included Alcoa, Macy’s and U.S. Steel.
On the buy side, I dialed up Exxon Mobil into a major holding, increased MLPs like Energy Transfer Partners and Enterprise Products Partners. New positions included American Airlines Group and Wynn Resorts, beneficiaries of a more successful Covid-19 response, worldwide. Healthcare got more weight, namely Zoetis and UnitedHealth Group.
I’ve regrets for not paring down Microsoft, my biggest position, through appreciation these past 5 years. For me, it’s still the best-balanced tech house, but my ragamuffins like American Airlines Group and Citigroup got my new money, not $2 trillion-or-more mega-caps like Microsoft and Apple.
Consider, Exxon Mobil, after its zippy flight path, still yields 4% so get on board. Who woulda dreamed Exxon could be a 50% mover? I carry American Airlines at 7% and over a year ago bought its 6 ½% convertible debentures on its underwriting. This was a giveaway now trading at $140.
American Airlines is a typical “no guts, no glory” story. At the market’s bottom, March, 2020, my ragamuffins like Macy’s, Halliburton, Freeport-McMoRan, Alcoa and U.S. Steel were giveaways. They received hardly any analyst’s mention. Currently, the Street contends on whether Alcoa can be a stock from its current tick at $90, yes 90 bucks.
Armchair investors unite. You’ve nothing to lose but your chairs. Because the Street’s music sheets are so namby-pamby, do disregard their conclusions to make serious money. First off, challenge the traditional pie chart formulation of 60% equities, 40% in fixed income bonds. The Fed’s talk about coming to grips with inflation is still too feeble and late.
Possibilities that 30-year Treasuries head toward a 7% yield, not the Street’s 4% forecast. Inflation stays sticky, near 7%, no respite with spiraling quotes for commodities, particularly oil and the grains. Arabs aren’t our friends, so they’ll milk oil quotes imperatively long as possible. I’ve a long memory, dating back to when the Saudis took oil from $4 a barrel to $12, early seventies. (Punishment for supporting Israel.)
In summary: To hell with tech houses selling at 2 times the market’s multiplier. My standalone paper covers airlines, energy and MLPs. Wynn Resorts can weather Covid-19 and UnitedHealth Group and Zoetis cover healthcare. I dug a hole and whispered therein: That I held onto some Goldman Sachs, Citigroup and Morgan Stanley.
All this counts up to 60% long equities. Forget about the bond market. Spreads can widen for months ahead. My father had it right. General Motors is an SOB.