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  • Martin Sosnoff

NYSE’s Pit Of Vipers

Some 60 years ago, I’d disclaim on growth stocks, promising my firm’s clientele 2% monthly gains in Polaroid and Xerox. My partners showed more conservatism and made me tone down my cheerleading. After all, widows and orphans still needed protection. So, more General Motors, U.S. Steel, Standard Oil of New Jersey and of course American Telephone. Conservatism, later, was torn apart just as today’s 60/40 pie construct is failing conservative investors.

General Motors needed bailout capital from the U.S. Treasury. Standard Oil’s proud name changed and U.S. Steel wobbled through successive economic cycles while AT&T fumbled its major entry into direct broadcasting and subscription TV. Nothing is forever. The average life of a growth stock actually is just 5 years or so. Disregard this axiom at your own peril.

General Electric, once the most blue of blue chips, is now a discard. Makes new lows, payout pennies per share. Twenty some years ago, GE was numero uno in the S&P 500 Index with a market capitalization of $416 billion. Microsoft was numero dos and a market cap of $291 billion, a most wide disparity that didn’t last.

In the Dow Jones 30, GE rests in last place today. Past 5 years, it has traded down from over $200 to $61. Market cap is well under $100 billion, yield next to nothing. So much for the polite investment world. It can turn into a killer.

I just bought back Alibaba which little over a year ago I believed was headed to $500. My new lot cost averages a hundred bucks. Wish me luck and pesetas. Also, I shed Boeing early on, in the $300 range, but I believed it had $500 written all over it. Then, the deadly 737 crashes made page one, everywhere. My original investment in Boeing dates back to early sixties when they introduced their 707 jet aircraft.

I can’t do what Warren Buffett can do. Hold onto a stock nearly forever. But, even Warren shed newspaper investments and does trade out of some bank stock paper. I owned American Express, early sixties, and did buy a block of Geico at $4 from a Goldman Sachs trader. I bid both sayonara after a couple of years. Warren held on. He has more money than I and a bigger foundation.

It took me decades to accommodate 5% daily volatility in a stock, even in oil futures, the S&P 500 and NASDAQ 100. Today, we’re talking about even oldies like Deere and Caterpillar giving up nearly 10% on days when growthies are in favor.

Bank stocks, normally stodgy paper, can oscillate 5% or more, up or down, overnight. They’re money market play-things. Widening to a 12-month perspective, sunrise or sunset can range as much as 50% up or down for a stock. Not just for stocks bringing bad news like Meta Platforms and Netflix, but even Microsoft which topped out at yearend 2021 at $350, now $257.

Play things like Occidental Petroleum show a 12-month range from $21 to $74. Gimme a break! Even polite Apple shows 30% easement from its high. All this while stodgy Exxon Mobil turned a double. Conversely, JPMorgan Chase stuttered down 40%. Its P/E ratio remains too lofty in its universe of bank stocks. Morgan Stanley is the big winner. Here, security analysis finally prevailed.

Two principles emerge from all such blood and thunder: Point of entry for a stock is critical along with sustainable earnings power. You need courage and moxie. I put weight on a stock’s price to operating cash flow because that tells me about a company’s wherewithal to grow its business footprint.

Disregard price-to-sales metrics and premiums over book value, dividend yield or even dividend paying capacity. Amazon, for example, invariably begins its quarterly financial report with its operating cash flow metric, year-over-year.

I admire Microsoft’s quarterly because it focuses sharply on results for each of its operating sectors. Then, shareholders can indulge in extrapolations from present facts and ratios. Still, consider any property selling at a huge premium to the market, say 40% to 50%, as per se vulnerable.

I remember Edwin Land holding forth at his annual meeting, at a Boston park ground. It was a pure show-and-tell performance, but then Land ran out of toys. Steve Jobs copied Land’s performance methodology. He’d hold up his cell phones and then proclaim on all their innovations. Land would talk about his low-cost Swinger camera. Everyone in the world would carry one on his shoulder.

For most stocks, a 10% price variance can cover a year’s trajectory, but Meta and its ilk do jitterbug 10%, daily. Same goes for rank cyclicals like Caterpillar, Alcoa and Freeport-McMoRan. Turnover for several investment partnerships does run near 100%, an indicator of poor management. Static ratio for Carl Icahn’s list and for Buffett’s is always on the high side, 80% or better. Traders end up with shiny pant seats, not foundations running into hundreds of billions.

Let’s face facts! The NASDAQ 100 Index is a gigantic car wash emporium. It uses dirty water and repeatedly humbles its clientele. The market, day after day, is filled with examples of irrational exuberance or its reciprocal sheer desuetude. I sense the hands of mathematicians who run serious money, seeking to exploit for eighths and quarters what they see as indefensible spreads. The market is filled with irrational exuberance, day after day, which is corrected by these trader-mathematicians.

Additionally, such PhDs press algorithms on leading indicators in the economy or rising interest rates. It can suggest a bet on low volatility, polite noncyclicals like healthcare and ethical drug houses. Short Deere and Caterpillar. Then, buy UnitedHealth Group. UNH, strangely, numero uno in the Dow Jones Industrials Index. The Dow franchise seeks to remain viable rather than a repository for U.S. Steel and other vicious oldies. These broad indices hardly matter any longer and look more ‘n’ more alike.

Warren Buffett, in one of his 30-page tours d’horizons, early nineties, disposed of the efficient stock market in one sentence, referring to Black Monday when the Dow, overnight, imploded in a 22% shrinkage, obviously, inefficient. Since then, academics have written dozens of papers rationalizing this event. They all ring hollow. How much of these academics’ gelt resides in the market?

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