- Martin Sosnoff
The Market Is A Dumb Bunny
2-Year Treasuries 1980 To Present
Current 4.1% yield on 2-year Treasuries hasn’t been higher in 20 years. Bulge in 1983 – ‘84 reflects the FRB tightening by Paul Volcker who drove up rates to 15%. By 1994 this paper settled down into the 4% range, its 30-year trendline. Owning Treasuries today seems like a gift from the market, not the Federal Reserve Board.
Calling the market a dumb bunny not descriptive enough to capture twists and turns among its major sectors. For example, technology and financials, some 40% of the S&P 500 Index act like death warmed over. Meanwhile, the energy sector celebrates OPEC’s production cutback of 2 million barrels, daily, on a 10-million-barrel base.
Radical performance disparity between individual stocks on any given day’s trading catches my eye because it may be indicative of sector rotation by serious investors, as well as day traders scalping quarters and halves here and there.
Past Wednesday morning, when OPEC announced its production cutback, Exxon Mobil, a bouyant stock these past months bounced while Boeing sloughed off. Financials, zippy in the 2-day rally past week, eased inclusive of JPMorgan Chase, Citigroup and Goldman Sachs. General Motors flopped 3% while Tesla traded over 3% on deal mania over Twitter. Schlumberger rallied over 6% on the OPEC news.
In summary: Strong plays in energy drove the market. Banks got sold after their 2-day rally as did tech houses like Netflix, Meta Platforms and the airlines. The market seemed desperate to catch onto a new theme to play, but its belief seems short-lived if not ephemeral.
Long-term market cycles are made up by short-term cycles. The market is saying technology paper is too expensive, the financials need to rest after their rally. After all, you can make a good case for banks net-interest margins to stagnate rather than widen even on a cycle of rising interest rates. Other major profit centers for banks still look shaky, namely, wealth management, underwriting, trading and investments.
If you believe as I do that it’s even money the country succumbs to a recession forward 12 months, there’s no case for recovery in heartland industries like steel, copper and aluminum. Automobile paper like Ford Motor and General Motors' still too iffy on production glitches from parts shortages.
The western world now faces OPEC’s crass economic warfare for which we have no easy redress. We’ve already cut back the strategic oil reserves to a bare minimum. There are no buttons to push that can hype production, overnight. Our domestic oil producers will do what’s good for themselves based on their long-term analysis of worldwide supply and demand for crude oil.
I was surprised when I brought up Exxon’s price chart. From its low in 2020 at $30, the stock has tripled. Tech meanwhile was dotted with disasters like Meta, Amazon and Netflix. After its triple, Exxon still yields an above average 3.5% and sells at 10 times prospective earnings. It’s ripe for repeatable dividend enhancement.
While not profoundly bearish, I expect to remain light in equities until the world’s economic and political tensions seem ready to subside. Certainly not in sight for 2022. Energy has to do all the work for me aside from an overweight in Boeing which I cottoned onto early sixties when the first 707 flew. My sense today is Boeing is at the bottom of the learning curve for troublesome recent years’ aircraft construction and design. I can’t prove all this. Cautious management doesn’t shed details on production problems, short or long range. Boeing is my one luxury, a 5% position.
All told, I’m 40% long with 30 percentage points of it resting in energy. MLPs have come in, but yields seem well covered. Enterprise Products Partners gets my money under $25, with a well-covered payout near 7%.
Where are the rose gardens blooming? If you told me energy would emerge as a rapidly pulsing sector, I woulda told you to get lost. As for Treasuries? I passed them by during 60 years of trading as inferior yields. My local bank in Palm Beach just notified me that my 3% home mortgage rate will double on its upcoming renewal.
Not a word of explanation from such white-shirted operatives. Remember there are more banks than bankers in the world. I’ll pay down my debt. May their net interest margins stay flat ‘til the end of time.