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  • Martin Sosnoff

Our Inefficient Mart Stocket

The swing from optimism to pessimism is best depicted by the NASDAQ 100 Composite Index spanning over a decade.

I dare anyone to project what financial markets look like, even 6 to 12 months ahead. Be right, rejoice in your success and end up with billions. Alas, nobody gets it right for very long. Unlike music, nobody’s born with perfect pitch.

First, plug in the country’s growth rate, inflation, corporate earnings progression and Treasury bond yields, short and long term. Take a stab at net exports, housing stats, blah, blah, blah. I’m happy when I do approximate major trend and direction of the numbers, but nobody’s perfect.

After all, the market is the Great Humbler. I’m seeing new punditry comparing recent, years’ boom in technology with the blow-off in 1999 – 2000. But, it’s a false comparison. Fundamentals for tech houses are sounder today than 2 decades ago. Yes, we’ve got $2 trillion market capitalizations like Apple and Microsoft, but they’ve position on the board and solid numbers.

My file on growth stocks dates back to late fifties. Semiconductors, jet aircraft, color television and then Syntex’s birth control pill got approval. Railroads, utilities and oil stocks turned into wallflowers, but Boeing’s 707 jet put away railroads. Peabody Energy was deemed a socially acceptable growth stock. Then, nuclear power tarnished American Electric Power. Hertz and American Express filled an explosive consumer demand for credit and mobility.

But, the setting in 2000 was insatiable demand for tech houses, many hardly more than concepts on paper. Yearend 1972, growth stocks peaked at 2.7 times the market’s valuation. Succeeding market cycles witness declining growth stock valuation until the late nineties.

When NASDAQ 100 Index soared in its 1998 – 1999 sprint to 5,000, big capitalization stocks like Merck became sources of cash for money managers’ redirection. Low interest rates and dormant inflation invariably create rising growth stock valuation. After the tech collapse of 2000, Alan Greenspan then dropped Federal Funds to 50 basis points in January of 2001, and the market got busy discounting economic recovery. NASDAQ rallied almost 15%, overnight.

The market traded at over 20 times earnings in 2000, equivalent to where we stand currently. There was a fundamental reason for such optimism. Operating profit margins for tech houses traced a distinct upwards slope. There was much accounting largesse, too, like writing off intellectual property and substituting stock options for big increases in salary.

The present tech cycle is different. Beneficiaries of exponential computer power and miniaturization no longer are the black-box assemblers like Hewlett Packard or integrated circuit pioneers like Intel. Rather, it’s the packagers of entertainment, information and telecommunications who leverage technology. They are now household names like Apple, Alphabet, Netflix, Twitter, Meta Platforms and Amazon.

You might consider them overpriced, but they earn serious money. Analysts rationalize such overvaluation by substituting yardsticks like operating cash flow. Amazon invariably begins all its quarterly financials with this metric. Blah, blah, blah! Growth stock analysis remains a fuzzy business of statistical legerdemain. If a company is compounding earnings at a 25% clip, believe me, it will sell at twice its growth rate or 50 times prospective earnings.

Be mindful, that nobody promised you a rose garden. And yet, lemme go back to pressure cooker time. In December of 2000, Microsoft touched down at 40 bucks, one-third of its 1999 peak. The market was saying Microsoft had lost it. Just another IBM with hapless management. But a month later Microsoft hit $61. (Presently, $335.) Yes, NASDAQ had rallied, but not 50%. When cloud computer software took off, Microsoft became a stock to own for the next 5 years, maybe longer, despite healthy competition from Amazon.

By the spring of 2009, during the financial meltdown of our banks, the entire stock market sold down to book value and 10 times earnings. It’s then that you’re supposed to lick your chops, plunge into frigid waters and never look back. It worked, too, during the Cuban missile crisis, the deep recession of 1973 - 1974, in NASDAQ’s 2000 comeuppance and still again, in the spring of 2019 and in 2020 when the great leveler, COVID-19, permeated all developed countries, bar none.

What about present times? Well, the market sells at 2 times book value, 20 times earnings and yields under 2%. If hard times set in, it’s easy to construe a massive correction that if following precedent, cuts the S&P 500 Index in half. What’s more, there’s no place to hide, even in the bond market, and get a decent return.

Call the market frothy, but half my assets remain in technology and financials. Other half holds in high yield bonds with BB ratings and a duration span no more than 5 years. This paper is money good unless we plunge into a deep recession that lasts for years.

Not my call.

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