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  • Martin Sosnoff

Roids On The Cabuie

My 1973 – ‘74 caper in the options market yielded enormous percentage gains during this bear market. I handled market makers, day in, day out. Word spread that everything I shorted or sold naked, turned to sawdust. My number one trader at Solomon Brothers “Symphony Sid,” shepherded my orders onto the floor.

“Roids” is short for Polaroid while the “Cabuie” was the Chicago Board Options Exchange. We called him Symphony Sid because of his running patter on pending trades, minute by minute. Can you imagine? I had the perfect rhythm and sure-footedness of a white tutu ballerina while I wrote 1-month and 3-month options, covered and uncovered.

Will America ever sell at a deep discount, again? I’m tempted to trot out my old sandwich board proclaiming “Sell or Repent.” Why now? I find the Street’s music sheets on the economy and financial markets too bullish and vapid.

Interest rate forecasts you see currently strike me as foolishly timid and minimal. Today’s pundits can’t reckon with interest rates escalating not much more than 25 to 50 basis points. As little as 2 weeks ago they forecasted 1.6% for 10-year Treasuries, which now tick at 1.78%.

My working hypothesis is to consider 10-year Treasuries at 4%. Why not? Wages are getting bumped up more than 4%. Commodities like aluminum, copper and steel are still firming as are home mortgage rates. I don’t see the mortgage rate sticking even at 3.3%. During the entire postwar period such rates rarely dipped below 4.5%. I paid over 7% for my financing while JPMorgan was reluctant to give me any financing, because mine was a one-of-a-kind property where they had bad experiences. My mortgage just reached term and was paid down.

The implications of the consensus forecast on interest rates being willfully optimistic spills over into the stock market where a yearly gain of 8% is typed in as earnings advance nearly 10%. Even optimists don’t advance price-earnings ratios, already elevated above 20 times forward earnings. In short, no room for disappointing earnings and higher interest rates built in.

Consequences for being overly bullish never seemed so great as today. I base this belief on a review of previous cycles when stocks sold down to 10 times earnings and yielded 5%.

Consequences for being wrong-footed never seemed greater. Nobody’s projecting sharply higher interest rates, escalating inflation or a sizable correction on the Big Board. After all, the stock market rarely sells for over 20 times earnings for very long. Recessions, wars and overspeculation intervene. Start with the Cuban missile crisis. Then, work your way forward to the crazy mortgage capers by our banks and brokers during 2008 – ‘09. The deep recession of 1973 – ‘74 was real estate induced, a painful washout.

One of my favorite charts is this sombrero etched in NASDAQ where capers of overspeculation date back to 2000. It caused a recession and a wipeout in the technology sector.

As a money manager dating back to early sixties, when I ran my own hedge fund, the assault on valuation from an economic cycle and Federal Reserve Board policy changes played heavily in markets. Geopolitical tempests like the Cuban missile crisis, even President Kennedy’s contretemps with Roger Blough over steel price increases, panicked financial markets.

Let’s leave Black Monday and 9/11 out of the picture as too far-fetched to discount. Dealing with just polite variables like earnings disappointments, rising interest rates and escalating inflation, you’d find deep swings in valuation for stocks. Nobody escaped punishment, barring short sellers.

The eerie quality in markets is the foreshortening of the confidence level in successive cycles. General Motors and DuPont both reduced their cash dividend early in 1975. Nobody saw it coming. But, in the early sixties I remember money managers loved utilities for their orderly growth rate of anywhere from 5% to 8%. The Street bid utilities up to 30 times earnings. Speculation confined efforts to extrapolating growth rates using the least squares method based on corporate capital spending programs and baseload prospects over a moving 5-year period. Analysts slipped impressively long slide rules and felt secure. Any 9-figure portfolio with under 10% in utilities seemed naked.

But, step-by-step, the continuous pattern for utilities got dismantled. End of 1970, paper values had been cut in half. Many companies lost their AAA bond ratings and sold to yield 8%. Yes, 8%. Meanwhile, interest rates had surged from 4% mid-sixties to nearly 9% by 1970.

Long term charts on utilities, even AT&T, carved downward ski trails. Stocks that had sold at 30 times earnings then languished at 10 times earnings. Whenever you hear that XYZ is a polite investment, run for the hills.

There is no polite paper. Gimme the Roids and I’m a player.

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