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  • Martin Sosnoff

Nobody Escapes The Great Humbler

Shooting season’s extended on mega-cap paper that disappoints. Bad earnings numbers chopped down Netflix, Meta Platforms, Alphabet and Amazon. Price erosion even in staunch earners like Apple and Microsoft tot up to more than petty cash. Downside crescendos rang up near 40% for Meta Platforms and Netflix.

Measuring the penalty for wrong-footedness on an earnings call is a good current indicator of how overpriced the market can get to. On markdowns of 5% or so the market can seem sensible. But, these days, even staid (but overleveraged) properties like General Electric are taken out to be shot on a bad quarterly report. I remember decades ago how they executed IBM.

Cycle after cycle, the bullish consensus congeals on growthies. Normally, over 40 so-called institutional analysts do carry buy ratings, maybe with 2 neutrals. On bad numbers, 40 analysts go to neutral. Rarely do you see an outright sell called out. My old, old friend, Jerry Goodman, now gone, wrote a column titled “The Day They Red-Dogged Motorola.” This was pre-cell phones. Analysts had to dive for a landline to call their office and withdraw their long standing “buy” recommendations. Nothing’s changed in 40 years except we’ve got cell phone access.

Strangely, today, only the Street’s market pundits stay calm, even reassuring to their clientele. Nobody expects rampant inflation to be a prolonged affair. The FRB won’t panic on Fed Funds interest rate escalation. Historically speaking, the market deserves to sell at 20 times projected earnings power they say.

The Street invariably errs on the side of bullishness. Good for their business and keeping their clientele fully involved and invested.

Frankly, I prefer 5-dollar ragamuffins, not so-called trillion-dollar beauties like Apple and Microsoft. I’m thinking of my plays made 18 months ago in Macy’s, Halliburton, U.S. Steel, Freeport-McMoRan, even Alcoa. All ran around the clock as much as 4 times. Sold out but not forgotten.

I’ll leave most of the mega-caps alone. Yes. They’re over 25% of the market’s capitalization, but I see no value added on sharp penciling their numbers. Obviously, players in trillion-dollar paper prefer to think they know what’s what.

I detect excessive egotism on management’s part on having a high-priced stock, definitely in the hundreds, hopefully, soaring into the thousands. Warren Buffett’s responsible for such nonsense. You never split your stock because it’s not a value-added enhancement. A stock doesn’t have to sell at $50 a share for everyone to be attracted to it. And, yet, Berkshire Hathaway years ago gave in and issued a second class of common stock with a face price in the hundreds.

I used to think it was easier for a stock trading at $100 to rise to $200, then for a 5-dollar number to double over a year. This no longer applies because we’re in a market setting where it takes sizable incremental buying to move trillion-dollar capitalizations like Microsoft and Apple. Look at how Icahn’s initial position in Occidental Petroleum didn’t need to draw down big bucks to build a sizable position.

Escalating prices for oil futures did Icahn’s work in transforming a near bankrupt leveraged oil property into a huge winner. Latest 12 months, Occidental is a triple. Not so for Apple and Microsoft, poor acting paper despite good fundamentals. High price-earnings ratios are the drawback.

Amazon’s a good example of a world player in e-commerce unable to avoid the hangman after posting lousy numbers. I admire what Amazon delivers to consumers (low prices), but the company is impossible to model and management’s guidance to analysts for me is a big joke. You can drive a truck through its high-low projections, an insult to the Street. The Street doesn’t get it and grabs onto anything available from Jeff Bezos.

I’m shedding solid growth stocks like UnitedHealth Group and Zoetis solely based on my perception of their priciness. Fundamentals remain soundly based. The penalty for being wrong on a company’s fundamentals is stretching out past 20%, overnight, even for basic industrials like General Electric and Boeing, which has wiped out years of good market performance. With the advent of jet aircraft, Boeing became my darling stock, but that was 60 years ago.

My problem now is I don’t carry any stocks in my shoulder bag that I think can take me to the moon. Commodity plays are long gone, excepting energy, but Exxon Mobil is just a polite stock, in the right place for now. I’m full-up in bank properties based on widening net interest margins on loans. We’ll see.

Not allergic to growthies when reacting down to their price quality level. Just re-bought the old Facebook which now looks like it’s selling at 20 times forward 12 months numbers, finally a working multiplier. I refuse to use Facebook’s new name, Meta Platforms. How pretentious can you get? Buffett’s Berkshire Hathaway carries the most pretentious price point, somewhere in the thousands. Why not signal these honchos to drop their pants and we’ll measure tool size?

Bulls still believe the Fed’s gradualist approach to inflation is workable with modest quarterly hikes in the Fed Funds rate. Wish ‘em luck but the rate of inflation to me looks like 7% ahead unless oil quotes do a flop. Metals like steel, copper and aluminum did their flop, frequently dropping 5% day after day.

Nobody cared.

Once out of step with the Big Board, consider how awful results can run. Tiger Global Management just announced performance dropped 25% during April. Amazon and Meta Platforms, major holdings, fell apart. This is live by the sword, die by the sword kinda investing. When you look at Berkshire Hathaway’s top 10 you find banks and American Express. Not that Buffett can’t underperform. Nobody’s perfect.

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