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  • Martin Sosnoff

The Inefficient Mark Stocket

OK! So I can’t spell. But, I’ve lived through some of the most harsh, bruising financial markets over the past 60 years, I wasn’t around for the ‘29 Crash but, so what?


I didn’t have $10,000 to my name until late fifties. Absent money brokers, I could never have played in the convertibles bond market. A 10 point margin did the trick.

I’d curse McChesney Martin at the FRB, notorious for taking away his punch bowl and raising margin requirements to 75%, even 90%. Paul Volcker, later on nearly destroyed Wall Street with 15% interest rates. Anyone who stayed the course got his burnt fingers.

Hardly ever spoken about is that polite investors got chopped 16% past year. The traditional pie chart mix of 60% equities, 40% fixed income flamed out.


Bonds suffered in unison with stocks. Henry Kaufman, Salomon’s chief economist, was known as Dr. Doom, with his counterpart at First Boston, Dr. Death, Al Wojnilower wrote at length about all that was dangerous in financial markets. When I asked Henry whether his traders at Solly listened to his warnings, he said (sheepishly) “Absolutely not!”

Nobody listens to economists and market letter writers with skimpy batting averages. I’ve a soft spot for Jim Tobin’s Q Ratio that deals with the rate of return in fixed assets over many business cycles. A low return on corporate assets signifies low valuation for stocks. The Q Ratio is one of the few concepts I respect and heed.

Price-earnings ratios are skittish and dangerous to rely on. First off, as change in their composition. Components in the Dow Index bear little resemblance to what they signified decades ago. It’s now more in growth stocks with fewer industrials. The NASDAQ 100 now is top-heavy in a dozen growthies, mainly tech houses like Microsoft, Apple, and Amazon.

The S&P 500 Index leaves me cold, too, but is at least more representative about sector weightings. Technology now is over 20% but financials, industrials and energy are substantive Index weightings, too.

Warren Buffett in one of his 30-page tours d’horizon in Berkshire's annual reports disposed of the “efficient market” in one sentence. He was referring to “Black Monday” when the Index dropped 22% overnight and came near to imploding, obviously inefficient. Academics composed countless papers rationalizing this event, but they surely ring hollow.

Today, BB rated debentures approximate a 7% yield which seems right considering our inflation rate is under 5% and the country is still growing at least 3% to 4% per annum. BB paper has yielded as low as 5%, but I remember in the eighties deal mania you paid 9% for credit to do deals, a cross to bear. It led to a cascade of LBO blow-ups.

Last week in July 2000, the market sliced about 25% off benchmark properties like Nokia, Texas Instruments and Applied Materials. End of cycle jitters took over for semiconductors and wireless handsets filled the air. Even Microsoft was taken out to be shot.

Nobody but me remembers that the Dow Jones index dropped under 10,000 early in 2001. In markets, volatility often spells overvaluations. During the bank crisis of 2008–’09 the market was below 7,000. But by year end 2014, it reached 18,000. Crazy!


Nothing lasts forever to take you to the moon. The number of growth stocks that maintain their primacy for over five years is a shrinking lot. You can count 'em up with both hands. Xerox and Polaroid gave me a long ride, but finally I had to get off the bus or crash. Even Coca-Cola and Gillette lost their edge and sustained diminished price-earnings ratios.


LARGE CAP TECHNOLOGY PRICE TO EARNINGS

RELATIVE TO THE S&P 500


Undisciplined trading in stocks off Internet chatter is a loser’s game. You’re a second derivative? Like when your hometown sprays the trees with DDT to kill all the mosquitoes, the DDT also killed all the town’s cats. Then, you got overrun with rats. The cats were the second derivative of the DDT and If you can’t link DDT with cats and rats, don’t play in my game.


George Soros understands brokerage better than most of us. The consensus is always wrong, because it misses the printable variable in each phase of an unfolding market. Next, it congeals into a fresh consensus like the rats can flee the ship for safety on shore maybe.



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