I was just a kid when Ted Williams batted 406 for Boston. An awesome hush would grip the stands, when Williams, all business, settled into the batter's box. I remember the wound up stance of this coiled killer. Ted’s laconic advice was “wait for your pitch.” He never swung at a ball outside the strike zone. William's could define the seams on an incoming ball as it shot out of the pitcher’s grasp.
Consider, Warren Buffett didn’t always bat over 400. Pre the monstrous position taken in Apple, at 43% of Berkshire Hathaway’s assets, he underperformed the market over a 5-year stretch, from 2014 to 2019. Nobody’s perfect. You could say, too, that Buffett overstayed bank stocks. Exit points stand as critical as entry points for performance.
Optimism and pessimism are Siamese twins. Over 5 years, Berkshire also underperformed a peer group of insurance properties. The peer group was irrelevant because BRK was much more than Geico and its reinsurance holdings. Decades ago I bought a block of Geico at $4 a share from Goldman Sachs after determining that the Pennsylvania Insurance Commissioner didn’t care to preside over Geico's insolvency.
But, I banged out my Geico around $12. Buffett has held on since the early sixties and later took out public shareholders. I carry 5% positions in Apple and Occidental Petroleum, but don’t rate a seat in their boardrooms.
The ebb and flow of optimism and pessimism in financial markets is continuous. Living through market cycles dating back to the early sixties, I’ve concluded that regulators like the Federal Reserve Board, fumble monetary policy more often than not.
Our FRB employs hundreds of economists who deal with financial ratios ad nauseum. How could they ignore banks expanding their ratio of loans to deposits past 2 to 1? Banks like First Republic were at a 4 to 1 ratio while JP Morgan rests at 2 to 1. I can’t figure out how volatile the deposit base is at Schwab so I don’t play. If anything, Schwab’s price – earnings ratio, rests too high for my money. The recurring bust of brokerage houses suggests they should sell near book value and 10 times earnings.
If curious about what can go wrong in our financial system, go back to the 1973-74 recession. It was precipitated by the collapse in real estate values, throughout the country, not just NYC and California. I remember when the euphoria for gold and silver collapsed, too. My first apartment in The Dakota, NYC, cost me $87,000 in 1973 and I was deemed an insane optimist.
Lest we forget, optimism took utilities to 25 times earnings in the eighties. Analysts projected continuous dividend growth on their longish slide rules. I remember Xerox and Polaroid selling at 50 times earnings, 3 times market valuation. Nobody could handle then technological comeuppance from Sony, Nikon et al. Today’s horseback projections for Amazon, Meta Platforms and Alphabet are comparable with the growthmanship in stocks the early sixties.
Until we see some stability in the rate of inflation, and interest rates the market's multiplier should be closer to 15 times earnings, not today’s number, 20 times earnings. Bulls choose not to deal with such valuation issues.
Whenever I wax too bullish, I review the malaise of 1973-’74. Note the enormous variance between actual vs forecasted GDP, year-over-year, cycle to cycle going back some 40 years.
My working hypothesis currently is the market is entering the beginning stage of rewinding its growthmanship compatible with JP Morgan’s nifty fifty back in 1972.
The alternative to Tesla and its ilk is prime grade corporate bonds yielding over 5%, which covers pension fund requirements. The widening spread in the yield curve between 2-year and 10-year Treasuries is an aberration unlikely to persist much longer. It’s saying, a deep recession is around the corner.
The revolution of rising expectations for growth stocks is stuttering. Nobody ever got his projections on the money for Meta Platforms, Amazon and Alphabet. I’ve added to positions in MLPs like Enterprise Products Partners yielding 7%. Tesla acts like a Jumping Jack while Exxon Mobil, selling at 10 times earnings, quietly trades near new high ground.