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  • Martin Sosnoff

Tech Houses Now Land Mines While Treasury Spreads Narrow

Aside from my traffic in junk bonds yielding over 7%. I normally steer clear of Treasuries as too polite and boring, a sector best left to polite investors. This is no longer the case as interest rate spreads between 2-year and 10-year Treasuries jitterbugged past year or so. Spreads that were 100 basis points now under 20 basis points for 2-Year paper.

I had to go back 35 years or so in my chart books to find such wide negative spreads favoring 2-year paper.

What were the players thinking and acting upon? I don’t talk to bond traders, hardly ever. I do realize that serious money was bet, that deep recession was around the corner, and would collapse the rate structure for all Treasuries.

But, this scenario so far hasn’t played out for bonds. I remember when Paul Volcker, FRB chairman in the seventies took bond rates up to 15%. Along the way, such action destroyed the Big Board. It sold down to 10 times earnings and yielded 5%. One of the great buying opportunities for guys like Warren Buffett to step in with a bundle of cash.

Today, if anything, Mr. Market feels overpriced. It sells near 20 times 2023 realistic earnings power and yields just a couple of percent. Polite investors are bullish. They see the FRB as wishy-washy. Not about to take away the punch bowl. I perceive the Fed as cowardly and reluctant to invoke harsh interest rates.

Actually, third quarter’s earnings, particularly for tech houses, proved mostly short of expectations, Microsoft the exception. You would think that Street analysts could get their numbers closer to reality, particularly tech houses, but they’re operating in the dark.

Now-a-days, when a tech house disappoints the market takes down its pants. Amazon dipped 6% overnight. Foul-ups were likewise costly for Alphabet (Google) down over a dozen, more than 10%. Take a dozen off Meta or 4%. The NASDAQ Index itself chopped over 3.5% in 2 days.

Dow Industrials politely hung in. Dow, GM, Ford and McDonalds hung in over 2 days of blood-shedding. The oils, I own OXY and X0M, hung in too. To sum up: Miss your numbers and lose your pants. The analyst consensus is worthless.

Turning to the bond market, even I like dealing with macro forces, back and forth drivers. Bonds at turning points can be as volatile as the Big Board.

I am sure bond traders fight for every basis point in their picks, but they’re armchair investors, players who construct GDP growth rates, inflation, FRB policy drift.

My experience with forecasting from the FRB, International Monetary Fund, and others is never on the money. Everyone misses on inflationary forces, GDP momentum and currency impact country by country.

The International Monetary Fund has admitted publicly that its forecasts proved to be valueless for projecting policy initiatives.

The financial press is equally valueless in analyzing quarterly releases on economic activity. When I got involved with playing 2-year and 10-year Treasury bonds. Instinctively, I feel getting a 5% yield on 2-year Treasuries was a risk free gift. Yes, there is opportunity cost risk, but just hold to maturity and you’ll come out whole.

The 10-year Treasury note is another story. If your entry point is wrong on such paper you’ll drop serious money. A year or so ago, 10-year notes were yielding around 3.5%. God only knows what drove them to over 5%. The alarming negative yield spread practically was erased in under a year. I don’t buy that 10-year paper will yield much more than 5% even in a recession.

I can’t remember last time I was only 30% long stocks, light in tech and heavy in energy. But, Microsoft and Amazon still get my money.

Each generation experiences tech house disasters. Look at this table on NASDAQ properties. Down drafts can run up to 70% on disappointing number fundamentals.

I know, nobody promised me a rose garden. Catch the blood-letting in 2001 for the big names in the NASDAQ 100.

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