On The Big Board, Life Is Unfair, Too

The market hangs onto its rep as The Great Humbler. Forget that and you’re dead. If you find yourself within consensus thinking, you’re half dead so run for the hills!

On the Big Board, Jesus’s preaching that “The last shall be first,” carries no weight. Disparity in performance among the top 100 names in the S&P 500 Index is breathtaking, even depressing. Same goes in sector performance. You can shoot to the moon on some tech name while utilities, materials and pharmaceuticals float face down in the water.

Same goes for the economy. Wages as share of GDP declined from 69% in 1982 to as low as 60% some 30 years later. Nobody planned this but it did take place. Primacy in the world changed as the Chinese transformed themselves from their primitive economic setting to a super competitive world player. Accenting research and higher education did the trick.

Consider, the Chinese carry trillions of dollars in our Treasury notes, largely, trade surplus earnings. Theirs is a silent reciprocity our politicians don’t know about or choose to remain silent on. Our financial press stays silent, ignorant.

Anyone who believes our 10-year Treasuries sputter down to a zero yield, first should factor in such a prospective liquidation. Heady employment stats kicked up 10-year Treasuries by 5% to a 2.07% yield overnight. Economists and Street pundits missed badly looking for cautious job numbers. FRB members should keep scratching their heads, hands in pockets.

It didn’t take me 50 years to learn that entry points into the market and for specific stocks are more than half the battle for investment survival. Never been truer than in the past 12 months as the amplitude of a stock’s movement can range as high as 50% or more. This is true for big-cap paper like Facebook and even for a homeless waif like Chesapeake Energy, ticking at $1.81 with a 52-week high of $5.60. Gimme a break!

I wannabe Warren Buffett, but I’m not. Never held a stock for 50 years like Coca-Cola, American Express, even Wells Fargo which I despise for taking advantage of their clientele. Economic cycles do intervene and the market does get schmeissed in half as in 2008-2009, and earlier in 1982 when Paul Volcker blasted interest rates up to 15%.

Courage! Courage to go against the grain, too, as in the Cuban missile crisis and later, wading back into the market after the 2000 tech bubble, both Wall Street overreactions. Throw in Black Monday, when Street traders wouldn’t pick up their phones and make markets in stocks they normally traded for eighths and quarters all day long.

Face the facts. Owning the wrong stocks or a bad acting sector of the market can get you marked down by 50% with no discernible recovery in sight. My first rule is never buy stocks on a big “up” day in the market. Daily variance even for heavily traded paper can range as much as 5%. The following day, winners normally ease off.

Be prepared to average down in stocks you believe are doggy for specious reasons. I did this with Facebook and Alibaba with good results. AT&T and Microsoft, too. But I exited Boeing which for me had a $500 price tag written all over it. The 737 upset, I still view as a lingering negative.

There is a class of stocks that seem acceptable but they’re death warmed over. General Electric was the best example of a tired blue chip that fell apart. There is a bunch of stocks that have delivered nothing over a five-year period. I’m thinking of American International Group, Exxon Mobil, Wells Fargo, even General Motors.

Schlumberger, for example, is a total wreck with a downward trajectory from $120 five years ago. Maybe, today it’s basing out at $39, yielding over 5%. Schlumberger had been a socially acceptable growth stock, management radiating confidence at its earnings conferences.

Same goes for Halliburton which doesn’t have Schlumberger’s dividend paying capacity. This oil service piece of paper shows an expert’s ski sloping trajectory down from a five-year high over $70 to $22. How costly it is to be in the wrong stock, wrong sector over five years which is long enough to judge any management’s value added. Cisco Systems, UnitedHealth Group, Walmart and Walt Disney kept pace with management dynamics, the pivotal factor.

Even Buffett’s Coca-Cola rests just 25% above its 2014 price point. The five-year chart for the S&P 500 Index shows a gain of over 45%. If your asset value in stocks is below this gain you are losing ground. As an aside, high flyers like Amazon, Facebook and Alphabet were five-year doubles, which surprised me. Before looking at their charts, I woulda expected at least triples considering the magnitude of their accomplishments. They ain’t U.S. Steel, Alcoa or Ford Motor who went through all the motions of actively running their businesses but sank into the cellar. Nobody cares. Bad macros, bad micros. Cellar fishing is a tough game best left to the Carl Icahn’s of the world.

Ask yourself what the probability is of inventorying dead paper or overpaying for growth. Rather than stock picking, buy indices like the S&P 500, Nasdaq 100 and a high-yield bond ETF. If I weren’t in the trenches, it’s how I’d play the game.

Scrolling down the list of the top 100 names in the S&P 500 Index, Exxon Mobil just makes it into the top 10, but no industrials until you get to Boeing in 27th place. Then, there’s Honeywell and Union Pacific further down the list. Technology, healthcare and financials do populate the top 50 names. Walmart and Walt Disney stand high on the list.

I’ve 40% of my market assets in five stocks:  Facebook, Alibaba, Citigroup, AT&T and Microsoft. Ironically, AT&T is no longer for widows and orphans. It’s a leveraged media play which the Street regards as a wasting asset because its competitors flex their muscles for more market share. Excepting Microsoft, the other names are sufficiently controversial to make you richer if you’re right.

Last thing you wanna be is a pie-chart investor, owning a little bit of everything the world offers, but rarely delivers on. If I’m right that the market is fully valued, high-yield bonds potentially could return nearly 10% next 12 months. This could be the highest rate of return on the pie chart.

Sosnoff and / or his managed accounts own: Facebook, Chesapeake Energy, Wells Fargo preferreds, Alibaba, AT&T, Microsoft, Amazon, Ford Motor bonds and Citigroup.

Source: Forbes.com

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