By now, most everyone owning financial assets knows, or has been told by his advisor, that 2022 was a one-off year for stocks and bonds. Your bond portfolio is supposed to cushion paper losses from stocks but, it didn’t happen. Conservative investors suffered nearly 20% shrinkage in portfolios structured with 60% equities and 40% in bonds. Wealth managers forever run trillions of dollars in this pie chart construct.
Over 60 years, I’ve never owned Treasuries, excepting the cycle when Paul Volcker, the Fed's chairman, put interest rates up to 15%. I bought then a traunch of 5-year FNMA notes yielding 15%. My partners tried mightily to push me out the window of our 42nd floor office.
This cycle, I bought a bunch of 2-year Treasuries when their yield crossed 4% months ago. I now sit with a sizable loss in this paper as the yield curve between 2-year and 10-year paper turned negative, a rarity in financial history. Nobody is worthy enough to explain why this has happened, and when it could unwind. The Great Humbler, (the market) strikes again. Do what seems conservative and lose a bunch.
Meanwhile, the market looks to be selling at 19 times forward 12 months earnings power, Pundits still wax bullish, I’ve made money in a market selling at 10 times earnings, even 15 times earnings. But, can’t rationalize today’s heady outlook for the economy, interest rates, and S&P 500 earnings power reigniting. Wage inflation remains exuberant with the FRB still poised in tightening posture.
Finally, everyone can point to the come-uppance for properties, like Tesla, Meta-Platforms, Alphabet, even Amazon, Microsoft and Apple. All such carried a near uniform bullish consensus too long for the coming year. Just a few neutrals hang in. Nobody picked up on their coming earnings collapse. Nobody dares face the facts that you can’t build a reliable model for next year‘s numbers.
So gimme Exxon Mobil and I’ll build you an earnings model based on a range of quotes for crude oil and refining margins. Throw in that Exxon's future yield will be at 5% in today’s quotes. Such numbers are at least competitive with 2-year Treasury yields. When I reviewed a couple dozen 13f reports on high profile operators, I found nobody overweighted in energy except Carl Icahn. Still Carl traded out of his Occidental Petroleum position prematurely.
For the country, there’s a bedrock relationship between interest rates, inflation and the price-earnings level for stocks. Further, when the financial world struggles in disarray like the bank mortgage meltdown of 2008-’09, the market does sell down to book value. Lest we forget, Lehman Brothers was allowed to fail. It’s proud name of no avail, Merrill Lynch was forced to merge into Bank America, valued at $4 share, so no total tap out.
Similarly, in 2001, the blow up in financial assets, created a deep recession that destroyed value in all corners. The NASDAQ 100 index rested in shambles selling down to 200 from 1,200, thereby creating an eye-arresting sombrero formation. Nasty stuff. I keep telling myself stocks can sell anywhere.
NASDAQ “SOMBRERO”
Weekly High/Low Price & 40-Week Moving Average
My old friend, Leon Levy, who ran the Oppenheim operation, then shorted NASDAQ and went long, the Euro, a simple, but great spread. If you have to think about a great short for more than 10 minutes, it’s probably not a good to do. Past year, Tesla was a comparable short play on the basis that its business was no longer analyzable. Tesla peaked at over $400 a share but now ticks at 113.
Price compression in 2001 for big cap tech houses ranged from a modest 21% on Microsoft to 77% for Cisco Systems. This slide took place while Paul Volcker pressed interest rates from 7% to 15%. Thereby, Volcker rid the country of its
built-in inflationary expectations. Jimmy Hoffa’s Teamsters lost traction as the auto industry turned to dust. Wage increases of 7% per annum were history. The market sold down to book value, and yielded 5%. Chrysler was bailed out by the U.S. Treasury. I made lots of money in their $25 preferred stock which had traded down to 5 bucks.
It pays to watch how savvy businessmen invest their stock market capital. Kirk Kerkorian bought over 10% of Chrysler’s capitalization, some 28 million shares under $10, on the eve of C’s 1992 new model introductions. By yearend C ticked at $36 a share. Chrysler had reentered the analyst universe after appreciating 250%.
Individual net worth over $100 million was a rarity in the 1960s, comparable today with $10 billion. Everyone missed the call on the 1982 worldwide recession, ignoring the group of seven monetists led by Paul Volcker. The S&P 500 sold down to practically nothing. It took 18 years to get back to 1400. Presently, we’re at 3838. Nobody today is calling for a market above 4000 next 12 months. I’m at 3000 a year out because I sense recession around the corner with corporate earnings clicking some 10% lower.
We’ll see.