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  • Martin Sosnoff

Treasuries Negative Yield Curve Proves I’m A Dumb Bunny

I’ve no smarts to fathom the sizable negative yield curve in U.S Treasuries. Ten-year paper ticks at a 3.65% yield, while 2- year paper yields 4.45%.


The bond crowd accepts such disparity as representing coming change in Federal Reserve Board policy emphasis. They reason the Fed is pretty much through with half and quarter pointers. Ten-year paper simply reflects the peak in rates is close at hand. If off base, add 100 basis points.


I sit with a sizable tranche of 2-year Treasuries. My loss on paper is sizable. Maybe, savvy players would take their loss and move onto fresh opportunities. But, I am like my mother, who sat for years and years with her tired blue chips(this sobriquet no longer exists). She never sold them. I found, after her demise, in her steamer trunk, mildewed stock certificates in Royal Dutch Petroleum, U.S. Steel, and General Motors.


Mother believed that you didn’t have a loss in a bad stock just so long as you didn’t sell it out. For her, the concept of opportunity cost losses didn’t exist. Pop took his losses as personal insults. General Motors was nothing less than a son-of-a-bitch.


Today, I find what I own comparable with mom’s dogs of the Dow. I own General Motors, which I haven’t held for over 60 years of investing. Same goes for Exxon Mobil. My belief is disparity between tech houses and value paper is too wide. I dug a hole, however, and whispered that I am holding onto Apple and Microsoft because I can build earnings models for them. Can’t do the same for Amazon, Alphabet, and Meta Platforms.


My biggest contrary play is airline paper. American, United, and Delta-buoyant stocks of late. American had issued a convertible debenture with a 6.5% coupon now selling at $125 but it’s short dated.


Alphabet and Meta Platforms, notable for bullish calls by analysts. But, nobody has either built or revealed a detailed earnings model covering the next couple of years or even next quarter. Analysts who make seat-of-pants projections end up with nothing more than shiny pants,

The reciprocal of Meta is U.S. Steel, which sells around 5 times present earnings power with much free cash flow. Nobody cares because X carts a long history of extreme exposure to business conditions and shows losses in recessions.


When I checked quarterly 13f reports of high intensity players, excepting Carl Icahn, nobody held any oil paper and spare in industrials, some financials. Many portfolios sat top-heavy in tech houses, over 50% of assets. These lists matched the 1972 Morgan Guaranty Trust portfolio of tired growthies like Sears and Eastman Kodak. I worked a couple of years for the Rosenwald family, founders of Sears. They didn’t understand the huge premium on their stock. My job was to give em a broader based portfolio. We sold tons of Sears.


Paper loss in Treasuries brings home that it’s time to stop fearing poor economic macro numbers. What’s to do? The S&P 500, over 4000 reflects expectations of rising corporate earnings and near 20 times forward 12-month earnings power, thereby discounting an elongated earnings cycle.


How overweight or underweight major market sectors like technology, financials, and industrials? Technology sits over 25% of the market so its weighting is crucial to performance. I am underweighted in tech, financials, healthcare, and consumer paper. Don’t own Coca-Cola, Eli Lilly, Morgan Guaranty Trust or Procter & Gamble. Let somebody else own em.


Gimme controversial stuff like General Motors, Exxon Mobil, Delta Airlines, and Alibaba. The energy sector has dwindled down to 5% of market weighting. I remember energy at 15% so, I’m triple overweighted in Exxon Mobil, Occidental Petroleum. Then, throw in Energy Transfer Partners, the MLP yielding 7%. My weighting in technology is under half the index, just Microsoft and Apple.


Looking at evolving weight changes by sector past 30 years, in 1990 technology and financials were tiny, both around 5% each. Today, nearly 40% of the market. Looking back, utilities, materials and telecommunications carried major weightings. Today, nobody cares.


When talking about the market in 1970, you were talking about GM, U.S. Steel, American Telephone, Exxon Mobil and DuPont. Today, Meta Platforms, Amazon and Alphabet take up more space.


Capital goods cycles in basic industries, like steel, automobiles, oils, and copper postwar, created our business cycles, but no longer. Management in starched white collars then were the players, not T-shirted honchos in their thirties.


In the sixties, I shared in the excitement in jet aircraft, semiconductors, and the Syntex Pill. Of late, I bought General Motors, which I never ever held over 61 years in the business. Turned my back on Exxon and U.S. Steel too. They then shrank in market weighting over decades. The following table updates sector weightings. It shows even more dramatic evolvement, particularly in energy, technology and financials.


S & P 500 Sector Concentration

Weight


Technology 25.99%

Energy 5.14%

Financials 11.23%

Industrials 12.83%

Real Estate 2.87%

Utilities 3.17%

Telecommunications 2.67%

Healthcare 13.94%

Consumer Discretionary 13.50%

Consumer Staples 5.98%

Not Classified 0.63%

Basic Materials 2.06%



Technology dominates what is a five sector market, including financials, industrials, healthcare, and consumer discretionary. Decades ago, energy, utilities, basic materials and telecommunications were dominant and easily analyzable. The market’s core now is super volatile and harder to get your hands around capitalizations in the trillions. Slide rulers now obsolete. Money management is full of surprises and more concept based.


My biggest luxury is putting 15% of assets in airlines. Namely, Delta, American, and United Airlines . Gimme a snappy economy and earnings can take off.


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