No Snappy 2025 Recovery

For me, Tesla’s blow-out quarter is the final elevation point for this year’s market surprises. Looking at major sectors of the market like technology, financials, commodity cyclicals like copper, steel and paper. I can’t find any latent bloomers ready to burst forth. 

Major commodity cyclicals like oil aren’t ready with the fundamentals for pressuring price points. World demand is sluggish. So only a snap back in commodity pricing can do the trick here. Not in the cards near term. Let somebody else hold onto coppers and aluminum, too. 

Don’t look over your shoulder and expect the Fed to make you whole.  Long term, the Fed has gotten in my way by raising the discount rate to counter inflation. Only to create the next recession. 

Anyone counting on the Fed to bail out the country by stimulating growth doesn’t retain the financial history of the country. The Fed can be mercurial like Alan Greenspan or draconian like Paul Volcker who took us up to 14%, turn of century. So ask yourself the question, what does your portfolio reflect on interest rates next 12 months. 

I don’t see inflation as the country’s major issue currently. But, so far I’m wrong on sector concentration and stock selection. While I did cut back on banks, I’m still weighted with Citigroup and Bank of America. I’m light on energy, seeing no shift upward coming in oil quotes. The world isn’t growing fast enough and there’s plenty of reserve supply availability. 

Goldman Sachs, an overweighting is my luxury to encompass an upside in commodities trading and hyper deal activity. My biggest outright speculation is American Airlines which obviously needs a backdrop of strong GDP for consumer demand momentum. Otherwise,  earnings can disappoint and we’ll have a 10 dollar stock.

Everyone should inventory a couple of stocks that are ranked “sell”.  My list includes American Airlines, which can fade to single digits or burst through to high teens, presently 13 bucks and change. 

My tech portfolio, underweighted, embraces Microsoft, Amazon and Alphabet. I can understand these stocks so I hang in. But, I’m underweighted in tech where I can’t rationalize its valuation. 

Over-all, I find myself underweighted the market, around 60% long. The other 40% rests in 2 to 10-year Treasuries and high yield corporates. Because recession is not my call for the economy my corporate bond portfolio rests in under 10-year maturities with BB credit ratings. I need my sleep

I took the other side of the spread between 2 and 10-year Treasures. A year ago 10-year paper was selling at a 60 basis point discount to 2-year Treasuries. Such negative yield spread in Treasuries is very unusual. Holders here were dead wrong. They must have been projecting a deep recession and wanted longer maturity bonds to carry them. 

Today, 10-year paper has erased the discount to 2-year bonds. It sells now at a 20 basis point premium over 2-year bonds. My guess is its premium can go much higher. We’ll see. 

My old friend, Leon Levy, who headed Oppenheimer decades ago carried a comparable spread in the Treasury market with great results. I’m talking hundreds of millions on the line. If you don’t have courage to stand alone, you shouldn’t play in the game. 

Implement what you believe in. If you’re wrong, then change and start over. The graph above shows how out-of-favor a group can fall. Look what happened to tech stocks when the market soured on them. Not ancient history as yet. Tech houses selling at 20 times earning power later sold down to 10 times earnings. All it took was a business downturn and the bulls fled. 

The market just red dogged Microsoft and its ilk. The penalty for shading your numbers is up to 5%, overnight.