When Markets Slide How to Stop Blood Flow?

Structure not stock selection is what counts. I’ve sold down to a 25% long portfolio with the rest mainly in 10-year and 30-year Treasuries. I won’t own high yield corporates because I fear the business cycle leaves them much too vulnerable. 

Even more critical is the price-earnings multiplier for the market. We still are in the high teens while growth stocks sell at 1.5 to 2 times market’s valuation. That level of valuation should be reserved for when earnings growth runs in the mid-teens. Buying into a market at more than 15 times earnings can destroy you. 

Just go back to the early sixties and see. Nobody talked about overevaluation then. If you didn’t own Polaroid and Xerox you were considered “old hat.” Stocks like Merck, and American Home Products sold as if they walked on water, their products in long cycles of demand. 

These days,  there remains huge sectors of overvaluation. I’ve been surprised by the rocky performance of stocks like American Express, tied to travel and entertainment. 

Such stocks can decline 5% or more, daily. With top heavy balance sheets, this is shaky paper unless you believe Trump’s war with Iran is about to end on our terms. 

Looking over my Bloomberg display, many stocks shed 5% daily while the S&P 500 gives up 1 to 1.5 percent. There is no support for airlines and bank stocks stay shaky along with industrials like Caterpillar. 

Some of my recently owned paper with shaky fundamentals can give up 5% or more daily. Macy’s and Cleveland Cliffs are good examples as is Hawaiian Electric. A typical down day for growth stocks like Microsoft and Apple runs around 1.5% but more for stocks where fundamentals are unpredictable. 

This would cover much of technology, transportation and all past high flyers like Tesla, Netflix, Eli Lilly, Meta, Amazon, Goldman Sachs. Conversely, Boeing rose 9 points,nearly 5% on word of a big plane order, but gave it back. So individual stocks can still pop on good news, but Boeing had already corrected over 10% from its recent high 

I need to say it again. I own just 3 stocks: Boeing, Amazon and Goldman Sachs. The latter 2 are pure bull market plays. My only offense is I didn’t choose to be entirely naked. Selling out stocks like American Express, Apple and Eli LIlly was hard enough to do. 

The rest of my capital, 75%, stays in 10-year and 30-year Treasuries. I won’t buy junk bonds just so long as I believe it’s even money on recession around the corner. Nobody talks much on macros and the valuation of the market. The spike in energy paper starting with Exxon MObil won’t last and can’t carry the market. The sector is under 10% of the market’s valuation. 

I’ve been reading classics that I missed over the past 50 years. Thomas Mann’s Buddenbrooks novel traces the decline and fall of the wealthy business class in Germany who could never anticipate business cycles and deal with their consequences. My father couldn’t handle our Great Depression. So I grew up poor in the east Bronx but learned to handle business cycles. 

I wouldn’t even have given Buddenbrook operators a Gentleman’s C for execution. In the novel “Buddenbrook: The Decline of a Family,” we encounter businessmen's failures, many total wipeouts. Operators who never anticipated violent economic cycles suffered through them. There weren’t even enough rich uncles around for bail outs. Requests were met with storms of abuse, but no money flow. A sad, repeatable plight.