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  • Martin Sosnoff

Soft Landing Fully Discounted As Financial Assets Jump The Gun

The market already has discounted a soft landing for financial assets, housing and iconic art. Nobody expects the FRB to rock the boat with more than token changes in the discount rate. Commodity prices tick in a benign channel, well below historic highs for oil at $100 a barrel.


Single family home prices hang in. Sole prospective disaster in real estate is focused on recent years construction of high rise office buildings. There’s a distinct surplus here but misery will be focused on banks and wealthy operators. Nobody cares about them.


Unless you believe our current business cycle remains benign for years ahead, you’ve no business as an active player. Today, a bad entry point into financial assets could cost you 15% to 20% shrinkage in asset value.


Listen to what bulls are projecting: They see the S&P 500 index at 5,600, presently 4,600, selling above 20 times prospective earnings. Nobody talks about the market's premium over book value of at least 25% or that the yield for stocks now rests under 2%. Any pundit who’s optimistic always projects a market with ample upside. Otherwise, why speak out?


Problems in financial markets that as yet get glossed over and to date pooh- poohed. Meanwhile, nobody comes up with a coherent response why the huge negative yield spread between 2 and 10-year Treasury paper


I dug back into my files on Treasury yields dating back decades. I couldn’t find a negative yield spread between 2 and 10-year paper of any consequence. More scary today is scant focus on this outlandish spread-why it happened and what do players read into this conundrum.


Are there huge operators betting trillions upon trillions for or against the spread to last? . Is there a player with open-to-buy like Warren Buffett who does place a trillion dollar bet one way or the other? If you believe recession is around the corner, this is a timely play for big boys.


Worth reviewing is the amount of carnage you can suffer if your entry point on a stock is faulty. Also, note how much and how fast you can lose serious capital by overstaying markets.


The NASDAQ 100 Stock Index, for example, sustained an 80% shrinkage from its high in 2000 to the bottom, below 1,000 in 2002. Today, NASDAQ ticks near 16,000, but on down days does sluff-off 3% while the S&P 500 volatility runs much lower.



Price-earnings ratios for S&P 500 stocks have sold below 15 times earnings, for decades, on iffy earnings power, high interest rates, and an inflating bias in the economic setting.


My call for the market combines an earnings projection with a tentative price-earnings ratio considering all other variables like interest rates and inflation.


History weighs in heavily. My call combines earnings with the price-earnings ratio you’d think the market should reach. Then, forecast earnings or at least trend and direction with some accuracy. Next 12 months, I am at 16 times earning for my valuation with earnings power showing minimal recovery. Put the market at 18 times projected 2023 earnings. Explain the market selling presently around 21 times earnings, at four times book value, and yielding 1.5%. Historically, markets yielded over 5% in hard times.


If too optimistic, it’s a long way down. In times of crisis the market does sell at book value and yields at least 4%. Unless earnings boom next 12 months (not my call) the market can easily shuffle down 10% to 20%. I’m under 50% long in equities which historically for me is a very conservative posture.


Next six months can show whether the market has late foot, and not over discounting any recovery in store.


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