What’s our market doing at 20 times earnings? It belongs at 15 times earnings while the Mideast simmers, ready to boil over. Actually, on the eve of world conflict financial markets do sell like there’s no tomorrow. Remember, our banks, foolheartedly guarantee home mortgages with mythical asset backing.
Stocks in 2001 sold down to 10 times earnings and their book value. The Cuban Missile Crisis is a more apt comparison. The Russians sent medium range missiles to Cuba, aimed at our East Coast cities, starting with the Big Apple. Stocks sold down to 10 times earnings and banks made new lows. The ticker tape, an electro mechanical contraption runs four or five hours late. Nobody could calculate how bad the damage or when it might end.
Historically, if you bought in panics your entry point was salubrious. Each generation of investors faces at least once or twice, such frontier horrors.
Today, the S&P 500 Index could easily regress to 15 times earnings. Think of all the trillions managed by our five leading banks. Talking here, tens of trillions in S&P 500 stocks, large capitalization like Microsoft and Amazon. Half a dozen properties still dominating the NASDAQ 100 Index.
I shudder over legions of passive wealthy investors, who believe their assets are properly managed. As most, legitimate properties sell at 20 times earnings or more, there is no place to hide if our world ignites.
Even the Federal Reserve Board, adjusting money market rates half-a-point at a time is a meaningless gesture. The FRB mostly creates panics rather than solves them. I’ll never forget seeing interest rates pushed to 15% and stocks falling to 10 times earnings while Paul Volcker battled the inflationary bias in the country. Currently, the UAW gets 7% wage hikes and nobody gives a damn.
I still own Microsoft and Amazon, 2 good acting growthies but I have an equal presence in Ford and General Motors. My belief is a soft landing still possible.
Face the facts! There is no Gilded Age around the corner. Iran would love to press our financial markets if it could do so. We have everything to lose, they nearly zilch.
What I find so incongruous is a stock like American International Group currently making new highs because they’ve hiked their personal and home insurance policy rates unmercifully. This is the same AIG that received a financial aid package of $100 billion to bail them out of their stupidity, guaranteeing mortgage paper held by our banks in the meltdown of 2009-’10. AIG guaranteed mortgage paper for a quarter point vigorously
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Bank of America’s preferred stock once sold down to $5 a share before Buffett bailed them out on his terms. Bank stocks, preferreds and common stocks remain inherently unstable. I’d consider banks at book value, not two times book.
What I hold against such a typical pie chart configuration is that it looks rational and conservative in it’s mix of equities and bonds. But such pie charts are potentially deadly instruments if you get your asset max cock-eyed. When stocks and bonds declined in tandem like they did a few years ago, Pie chart portfolios dropped 18%. Not from being over speculative, but a bad mix. Pie charts paint pretty pictures that lure innocent investors into a false sense of security that at the least leaves them overexposed to risk.
Being too conservative is equally harmful. Berkshire Hathaway underperformed for over 5 years in the S&P 500 Index from 2014 through 2019. It was particularly light in high tech stocks. The huge investment in Apple later made up for this lapse.
What’s good for the goose… I’m 50% long in equities. Own a bunch of 2-year Treasuries, too . Microsoft and Amazon are my big holdings along with MLP’s which currently yield 7%, no more than their operating cash flow. On bonds, I prefer a maximum duration of 5 years.
I remember when North Korea unleashed its infantry troops and swarmed down on South Korea. We had two infantry divisions stationed in Japan, but were badly outnumbered and unprepared.
Later, General MacArthur pressed Truman for go ahead to employ atomic bombs on China’s port cities. Truman wisely rejected this gambit. MacArthur was summoned home and terminated. So much for this revered figure I had learned early on to despise when I served in Korea.