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  • Martin Sosnoff

Street Wisdom Worth Approximately Two Cents

Some 60 years ago, when I first subwayed down to Wall Street, equities, excluding utilities, mainly were deemed vulgar expressions of speculative excess. Bonds remained the go-to investments for passive investors.

Yes! There were a handful of steely-eyed operators like Jerry Tsai and Jack Dreyfus who ran mutual funds. Jack discovered Polaroid in the fifties and turned it into his religion. He visited the racetrack, a player many days in the week.

I discovered Xerox early on. The analyst in the adjoining cubbyhole was a Rochester boy with a degree in chemical engineering who knew Kent Damon, Xerox’s chief financial officer. Their 914 office copier based on xerography was fast, dry and used plain paper. The scalability of office copying was comparable today with Apple’s iPhone.

I got lucky in the portable phone sector, too. My son, Scott, was a marketing executive at Nextel. As an aside, he told me that the industry’s projection of a saturation rate of 15% was insanely low. Nextel, as a stock, ran around the clock 10 times before analysts put up realistic saturation rate expectations.

My problem today is I’m running out of under $10 ragamuffins to play with. Alcoa, not long ago in the teens, trades in the nineties. It’s a soccer ball traders indulge in and intraday it can jitterbug nearly 10%. Yes. Microsoft has doubled off its March 2020 low, but that just meets the market’s gain. Macy’s was a great trick from disbelief in single digits to high twenties bullishness.

I retain MLPs that zig and zag with oil futures. Fundamentally these pipe transporters of oil and natural gas control steel pipes in the ground, good for a hundred years of life. Shareholder payouts largely are returns of capital, so untaxed. We are talking about 6% yields. My go-to’s are Energy Transfer Partners and Enterprise Products Partners, which can bounce 5% intraday depending on where oil futures tick.

Last gutsy spec embraces airlines. Namely, the convertible and common stock of American Airlines Group. The coward’s play is the 6½% convert. No more volatile than Tesla or Netflix. The deep basic is American can access the bond market for capital infusions. I see trillion-dollar tech houses no better than market performers.

If you believe as I do that the S&P 500 Index is fully priced, only speculation at the margin can work out. Street pundits starting with Goldman Sachs, believe the market deserves to sell at 20 times 2022 projected earnings. No recession lurks around the corner and no FRB rocking the boat with more than half point bumps. With a 7% inflation rate persistent, this is whistling in the dark while commodities markets bubble over. Not just oil, but copper, aluminum and wheat. You name it.

Historic valuation metrics confirm that when inflation boils at 7%, an aggressive FRB can take money market rates up to 7%. Margin on stocks can be slapped on at 90%. Next 12 to 24 months pundits don’t even whisper about such a possibility. In previous cycles, 7% inflation took the market down to 10 times earnings, approximating book value. Today, we’re at 2 times book. JPMorgan Chase, our most polite bank stock yields 2.6%.

All the strategy music sheets I see play the same tune: Stay fully committed. After all, even in the Arab oil embargo in 1973 when the Saudi kingdom took oil from $4 to $12 a barrel, the market decline was contained at 16%.

The Cuban missile crisis they say, showed only a 3.8% decline. Nothing calamitous happened. The Russians relented. What if they pressed their medium-range missiles onto the prepared Cuban sites? I remember the market’s antique mechanical tape running hours late. There were no reliable quotes for major capitalization properties like IBM, Polaroid and Xerox.

Pundits today see core CPI inflation declining from 7% to under 4% by yearend. Chances of a recession are deemed no higher than 20%. In this scenario, S&P 500 earnings reach $225 a share so the market at twice that number is a good working market, possibly a 7% gainer. (I’m using Goldman Sachs projections.) Seems plausible, but already revised down from their yearend projections. For me, any sniff of fish takes the market down a snappy 10%.

I haven’t run across anyone breaking the market down into major sectors like technology, financials and energy. (More than half the market’s asset value.) I’m overweighted in energy but underweighted in technology and market weighted in financials, mainly banks and Goldman Sachs. Trillion-dollar capitalizations by definition are too widely owned for my tastes. Beware of GDP stocks like autos, machinery and chemicals. Industrials don’t shine in a rising interest rate setting.

The course of oil quotes is impossible to chart, but I sniff more international trouble may massage Exxon Mobil and MLPs like Energy Transfer. Rank speculations cover American Airlines and Wynn Resorts. Non-cyclical growth plays include Zoetis and UnitedHealth Group, but they make you pay up for ownership.

I can’t remember a time when the air was so filled with speculation, particularly trillion-dollar algorithm driven houses that day trade for eighths and quarters. Not that Warren Buffett distinguished himself in the market past several years despite low portfolio turnover. Consider, nobody has factored into valuation the possibility of an elongated cycle of Covid-19 variations cropping up around the world. Further, I fear the ongoing slide in junk bond paper is a non-academic indicator that the Fed sticks cowardly as an inflation fighter. Gimme Paul Volcker, McChesney Martin, even Alan Greenspan who knew how to stand alone.

Tech houses were out of favor, but non-durables like Coca-Cola hang in. Healthcare held up, too.

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