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Paper Money Value Chart
Paul Volcker, former Chairman of the Federal Reserve. Photo credit: Michael Brochstein/SOPA Images/LightRocket via Getty Images.
Let’s make America great again, is like the hollow patter a market letter writer bangs out, projecting a 3,000 target on the S&P 500 Index. I see 2,500 for the index. Trump aside, I’ve financial history in my corner.
Past 50 years, the market rarely sold at 18 times earnings, where we now trade. On my earnings chart for the S&P 500, I’ve drawn a trendline through the price-earnings ratio of 15. The market can sell at 18 times earnings when long term Treasuries yield between 2% and 3%, but it never lasts for long.
You need a benign setting for wages, inflation and corporate profit margins, what persists today and what the country experienced pre-Trump’s Presidency. But, back of mind is the concept of necessary fallibility. Charts don’t isolate inflection points.
Nobody saw Black Monday coming, or the 9-11 tragedy. Neither the Cuban missile crisis face-off with Khrushchev or the ferocity of Paul Volcker’s resolve to rid the country of its inflationary expectations. He took interest rates up to 15%, while the market sold down to book value, yielding over 5%. By comparison, today’s tit-for-tat tariff sparring is a spit in the ocean.
The financial meltdown of 2008 - ‘09 also schmeissed the market in half - down to book value, yielding 5%. The extreme stupidity of banks like Citigroup and the insurance conglomerate, American International Group was unanticipated, and required over $500 billion in U.S. Treasury aid to keep them afloat.
Axiomatically, politics leads economics and the stock market, what’s going on today. The FRB, all of us, should study the Congressional Budget Office’s projections on the fiscal deficit looming a couple of years ahead. Based on the Trumpian led corporate income tax cut, Paper Money Value Chart
Meantime, the Fed, quarterly, publishes boringly bland projections for GDP momentum, inflation and interest rates. It telescopes modest interest rate bumps, enough to make you nod off to sleep. Stocks always do better after the Fed’s initial increase in money market rates, what we’ve just experienced.
As yet, financial markets and the FRB ignore the budget’s bad numbers to come. Economists call this attitude the naïve forecast, that nothing much changes. Same goes for Wall Street. Nobody seriously challenges the presently high price-earnings ratio of 18 times earnings for the S&P 500 Index. Let the good times roll - right?
As for the newly established cut in corporate tax rates, nobody cares to focus on pre-tax corporate earnings, As for the newly established cut in corporate tax rates Paper Money Value Chart
Most of the newly instilled corporate largesse is going for share buybacks which benefit management more than their shareholders. Cap ex increases still tied to capacity utilization numbers, low even with above trend GDP growth here.
The valuation structure of the market does take years to change. In the sixties, stocks sold at multiples averaging near 20 times earnings as interest rates snaked along at 4%. Inflation only became an issue when Lyndon Johnson escalated the Vietnam War. It took the market several years to wise up. When interest rates zipped up to 7%, valuation dove into low teens. The last hurrah for the market was 1972 (one decision stocks) that self-destructed in the 1973 – ‘74 recession. Price-earnings ratios fell into single digits, averaging near 10 for the next decade.
I remember the Fed panicking in 1984 (Arthur Burns) as the economy boomed. Treasuries yielded 13.5%. In the pre-Black Monday cycle, valuation didn’t snap back until rates backed down under 10%, 1985. Early in 1987, interest rates touched down at 7.2% and the market again sold at 20 times earnings. By summer of ‘88 rates rose to 9.5% and the market traded down to 10 times estimated 1989 results.
Anticipating change at the margin is part of the art of money management. How do you tell when a stock is a screaming buy or an outright kick out? Consider, Wall Street analysts normally wax optimistic. They just missed by a mile on quarterly results for not only Facebook and Nvidia on the downside, but Alphabet’s good numbers and the surge in Amazon’s revenues as well as Apple’s orderly momentum.
On macro investing, growth stocks left value paper in the dust this year. High yield bonds are earning their coupons while AAA corporates are dead paper because of narrowed yield spreads to Treasuries. NASDAQ 100 Index surges ahead 15% year-to-date, compared with zilch for value stocks and just 6% for the S&P 500 index. In short, anyone who sought to avoid risk with safe paper has struck out.
Aside from inertia in most forecasts, weighing how the herd seeks to avoid risk and the stigma of loss is crucial to stand alone investing. Analysis of quarterly 13F filings by independent money managers with a flair for risk taking revealed many who missed the boat, but at least demonstrated courage in taking outsized positions in a handful of stocks. (The Buffett syndrome.)
Conversely, banks fund trillions in risky credits and subprime loans, for maybe a point above the prime rate for the sake of growing their loan portfolios and net interest margin. They dropped over a trillion bucks in Latin America decades ago and mortgage backed paper blew up in their faces, 2008 – ‘09. Yield spreads between government bonds and corporate paper does narrow to 25 basis points, but for yield starved pension funds it’s enough to justify choosing corporates.
Never underestimate institutional insanity or myopia. When everyone is bearish on financial markets, assume everyone stands overexposed to gloom ‘n’ doom talk. The financial press dutifully publishes quarterly stats and economic indicators, but with scanty interpretive commentary. The press shows no scope in dealing with the country’s financial history.
My anti-consensus plays crave yield stocks like AT&T, MLPs like Enterprise Products Partners and Energy Transfer Equity. Along with General Motors they’re beginning to show contrapuntal energy as cheap value paper.
Outsized positions in Alibaba and Facebook stand pared. Alphabet is easier to rationalize on valuation. Biogen is my sole new pharma play on possibilities for their dementia drug. My high yield BB bond portfolio does its job, refusing to wilt.
Whadda I think the market’s worth? Well… 15 times earnings, but I could be early by a year or so. The bull market won’t last with the Trumpian budget deficit looming. Our maximum leader is wrong on the market crashing if he’s impeached. The Big Board would rejoice, ridding itself of this overly-greased loose cannon.
Sosnoff and / or his managed accounts own: Citigroup, Facebook, Nvidia, Alphabet, Amazon, AT&T, Enterprise Products Partners, Energy Transfer Equity, General Motors, Amazon Paper Money Value Chart
I’ve been running a bunch of money almost as long as Warren Buffett, but Warren’s made a bigger pile. I founded and was formerly CEO, CIO of Atalanta Sosnoff Capital, LLC, a private investment management company. Sold my Geico and American Express holdings prematurely, but s...
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