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  • Martin Sosnoff

S & P 500’s Death Toll:“Higher For Longer” FRB

We’re in a morality play. Pretty sure the S.O.B.’s take away the punch bowl. Before long they’ll have Fed Funds at 6%. Hope I’m wrong on this call, but memory crowds in on how high rates did ratchet over a persistent course of inflation, past 50 years. Ugh!

High interest-rates weigh on price-earnings ratios, always. When the Fed is proactive markets never sell much above 15 times earnings. Today, we’re near 20 times. Nobody cares to note this exception, historically speaking. Much bullishness still melded into today’s market turbulence.

This “complacency” is reflected in the comparatively low spread between 10-year Treasuries and junk bonds. When leading economic indicators wax weak, such spread can stretch to 600 basis points, then peak even higher. Presently, the spread is just 200 basis points, an indicator of complacency or sheer ignorance. It never lasts.

I detect now, some craving for high-yield investments, and corporate bonds, because investors find the market pricey. Take Amazon, Meta Platforms, and Tesla. I fell for 2-year Treasuries when yielding 4%. Elevate to nearly 5%. I know, just hold to maturity and you’ll come out whole. Players must assess opportunity cost while this paper languishes.

The old story: Doing what’s considered prudent at the time of commitment ends up costing you serious money. The predicament of passive investors married by their wealth managers to a 60/40 pie chart construct has already cost them over 20% capital shrinkage. The wealth management profit center for banks and major brokerage houses now is stuttering with asset shrinkage and earnings easements prevailing.

Most professional and individual investors as yet, never faced an FRB ready to plunge the country into deep recession because of its inflationary setting. Unrelentless bumps in Fed Funds rates do create market panics. The classic case is when Paul Volcker took Fed Funds up to 15%.

Such an act was to counter Jimmy Hoffa‘s bleeding of the auto industry with 7% wage hikes. The Big Three caved in, but raised car prices, and thereby made themselves uncompetitive with Volkswagen and Toyota. The market panicked down to 10 times earnings and book value.

A comparable panic today would cut the market in half. Yes. Down 50% and then yielding 5%. The 3% mortgage on my home has matured and the bank now wants 6 5/8% for a renewal. They should DD on their way home from the office. Is it any wonder that Home Depot, a great play on home construction and reconstruction is now a faltering growthie?

Actually, my memory bank on a stridently pro-active FRB dates back 50 years. Shorting growth stocks then in the 1973–’74 recession was a great to do. Even the recession of 2008–’09 destroyed NASDAQ properties, taking that index down from its near 5,000 peak to 1,000. The decline during the 1973 to ‘74 recession was comparably disastrous for players.

I remember (fondly) hondling with a bunch of options traders. Word spread that everything I shorted turned to sawdust. My numero uno trader at Solomon Brothers was Symphony Sid. We named him thus for his running patter on open trades, minute-by-minute. I’d be selling Roids (Polaroid) on the Chicago Options Exchange, the CABUIE. Who says you can’t milk market panics?

Go back 35 years or so when the market sold at 15 times earnings, not today’s multiple near 20. Over the decades we experience lows at 10 times earnings and highs at 25 times

My takeaway is the multiplier of 15 seems the reasonable and fair construct. Not so bearish, nor exactly bullish. It’s where I like to flex my muscles, specifically, an entry-point for prime growth stocks. It’s where Buffett stretched his muscles for Berkshire’s megaton buy of Apple, now his core position, perhaps good for the next 20 years.

I think in years, Buffett thinks in decades. I’ve a 5% position in Apple, Buffett’s at a multiple of that 5%. When the market was no rose garden, I remember chasing Microsoft down at near 12 times earnings, not 25 times its present multiplier.

NASDAQ’s weighting can elevate to 50% of the Big Board, but traditional wealth managers do ignore this index, fearing its volatility. But there are years like 2014 when it exceeded the S&P 500 by 50% while its share volume topped the traditional index. Call it a blow off.

Buoyancy is possible when the real yield on Treasuries stays above 2.5%. Today, we are looking at a real yield next to zero. History holds you need that 2.5% to attain a market multiplier of 16 times earnings. Present market rests overpriced, historically speaking a recurrent quandary. We’re saddled now with a back stiffening FRB leader, likely pressing half point bumps on Fed Funds. The path of least resistance is higher for longer, not exactly a bull market setting.

I thought the market would froth at the mouth over the recent wage contract won by the pilot’s union for more than a 30% hike over three years or so. In 1973, when Jimmy Hoffa was pressing for 7% wage increases from the Big Three automakers, they gave in, and became even less competitive with foreign automakers like Volkswagen and Toyota.

The Fed, under Paul Volcker went crazy over such inflationary constructs for the country and pressed interest rates up to 15%. Scared out of my mind, I bought 5- year FNMA notes yielding 15%. Believe me, it was one of the bravest plays I ever pulled the trigger on. Bravery is a seldom mentioned attitude for money managers.

Currently, GM trades at 10 times earnings,maybe too extreme a case. I’d give em 12 times in a healthy consumer setting. Even note our Fed and US Treasury periodically bailed em out of their stupidity. Suddenly, I’m heavy in oils like Exxon Mobil and Occidental Petroleum, solid value paper.

I’m convinced oils can attract buyers, that the value sector is cheap enough. We’ll see soon enough. I sense too, pent up demand for airline travel from the consumer, with a pickup in business travel ahead. Airline paper is my sole luxury, namely United, American, and Delta. Scary stuff.

My mother used to hold onto stocks forever. At least her “customer’s man” bought her legit properties like Royal Dutch Petroleum, General Motors and General Electric. I found mildewed stock certificates for some in her steamer trunk and had a hell of a time getting these so-called blue chips to pay out past due dividend declarations. Such starched white collar operators went through all the motions of running a business, but were left at the post.

I remember Andrew Mellon, when he was Treasury Secretary, chiding such operators for living in stupidville cycle after cycle. They created their own recessions by overexpanding at the top of the cycle, and then sharply cutting back when their cash flow dried up.

This dumb game didn’t change until Bell Lab invented the transistor in 1961. The technology sector then took off and we never looked back. I fell in love with Fairchild Camera and Motorola good for some years.

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