Fluffy Valuation Dogs The Big Board

Nobody cares to deal with the pricey market selling pretty near 20 times earnings power for the New Year. Assume the S&P 500 Index earns around $160 a share, its pre-Covid-19 level which we see normalized by mid-2021. Bulls do pound the table:  $200 a share in earnings with the market selling at 20 times this number.

A year ago, I characterized the Big Board as a ballroom in shadows, the dance appeared over. I excepted tech houses which later fulfilled their promise past year. Shoe’s on the other foot, now. Facebook, Amazon
, Microsoft
, Apple
and Alphabet churn near new high ground.

Dish the concept of “Dogs of the Dow.” Big capitalization industrials, chemicals and pharma seem trendless – no stories. Let someone else own the Exxon Mobil
s of the world. No good stories attached herein. Actually, the phrase “Dogs of the Dow” is obsolete. This index more ‘n’ more is enriched with growth stocks. With additions like Tesla
to the S&P 500 such indices fight to stay relevant. Merck
and Pfizer
are dead in the water.

Anyone who can’t sniff speculation in the air should fall back to sleep or give JPMorgan Chase
and its ilk their assets to manage. They don’t bury clients, but you won’t go to the moon, either.

The schema of the 60/40 investment construct looks sober, but it depends on your sector weightings in stocks and whether you relied on Treasuries and AAA corporates in the investment pie chart. To make serious money in fixed income paper you needed to play high-yield BB debentures. Unless you overweighted technology stocks you probably underperformed.

The Nasdaq
100 Index far outstripped the S&P 500, latest 12 months. Wealth managers rarely talk about Nasdaq. It’s proved too volatile past 20 years, a roller coaster trajectory. You can’t marry Nasdaq, but past five years, the technology sector of the S&P 500 was the place to be overweighted. Tech must be 25% of this index, nowadays.

I’m staying tech overweighted but the 200% to 300% gains past five years probably are history. Rest of market has much catching up to accomplish. Consider Tesla is five times the market capitalization of Exxon Mobil which dates back to John D. Rockefeller at the end of the 19th century. Classically, John D. pulled off a classic roll-up strategy, buying competitive oil refineries and then raising prices. Rockefeller was the impetus for the Sherman Antitrust Act while Teddy Roosevelt was lauded as its trust buster.

Although Exxon Mobil did bounce from its abysmal March low of $31, it started 2020 at $70. The market rose 70% from its March low, but Exxon did just half that. Pfizer delivered zilch in 2020, while Merck trades 10% below its yearend $19 price point. So much for polite paper! Microsoft rose 50% past year and the S&P 500, point-to-point gained 16% year-over-year.

If you were S&P 500 indexed you left mucho dinero on the table. Maybe, as an armchair investor this is excusable. Why seek rank volatility unless you appreciate all the variables in a specific stock’s earnings outlook? Mark down that Nasdaq rose 40% in 2020. Consider, the Street a year ago was wildly bullish on earnings for banks. Net interest margins and loans were supposed to elevate handedly – but interest rates stuck in the mud. Citigroup
, which rallied 50% off its March low still ticks far below year earlier high of $80. Goldman Sachs
sold down to book value but just rallied 30%. Nothing has changed except rising expectations on investment-banking activity, trading profits and wealth-management fee buoyancy. Why not?

The basic investment concept for 2020 proved truly simplistic. Look-over-the-valley and play stocks based on their earnings recovery potential in 2021. Overweight technology and the financials and you’ll capture more than the market’s recovery gains. The look-over-the-valley concept is now old hat for investment grade stocks, but not for my ragamuffins.

Lemme call attention to past year’s fiesta in $5 paper. General Electric
and Macy’s
doubled but Halliburton
quadrupled and Freeport-McMoRan
now ticks over $26, its March low at five bucks. Freeport has taken out all previous highs over the past five years and intraday pops 10%. Comparable trajectories for U.S. Steel and Alcoa
which I passed up. (I’m not void of discipline.) No airlines, no Ford Motor
, either. When I pulled up the chart on Macy’s I saw it ticked five years ago in the forties, then considered a savvy retailer.

Rank speculation has much further to go in a normalized-economic setting. Essaying the proper earnings multiplier for the market in the new year has no meaning. Polite investment performance ain’t coming back into fashion so soon. You can’t solely own the S&P 500. I’m way overweighted in financials like Citigroup and Goldman Sachs. MLPs with solid yields over 7% get my money. Not that I think oil prices are headed much higher, but because yields of 7% or more are rarities. Enterprise Products Partners
, Williams Companies and Magellan Midstream Partners
weigh in.

When forecasting the market, I feel like a B-rated tennis player: Weak ground strokes, no cannonball service and legs turned wobbly, not covering enough count space.

For me to be smugly bullish, I’d have to believe in $60 to $70 oil, dormant interest rates and near zero inflation. A weak dollar appeals to me, too, translating into a trade surplus. Corporate earnings may surprise on the upside, hitting over $180 for the S&P 500. Anything’s possible, but I’m agnostic. After all, I thought Alibaba
was chopped liver with its Ant Financial attaining a $500 billion market capitalization, minimum, three years out.

Visceral feel is 2021 won’t match the great 1961 Bordeaux vintage for Château Latour which I’m still drinking. Anticipated maturity is 2050. Bouquet of walnuts, cassis and cedar inundates the nose. Wine wordage is not exactly Wall Street palaver. Pundits, economists and market letter writers don’t carry awesome cachet like certified wine masters, who prove their impeccable noses, vintage after vintage. There are thousands of certified financial analysts (I’ve a low number) but certified wine masters are counted in dozens.

Nobody’s perfect. The wine crowd underestimated the 1982 Bordeaux vintage. It took ‘em a couple of years to catch on to its quality.

Sosnoff and/or his managed accounts own Facebook, Amazon, Microsoft, JPMorgan Chase, Citigroup, Goldman Sachs, General Electric, Macy’s, Halliburton, Freeport-McMoRan, U.S. Steel debentures, Ford Motor bonds, Enterprise Products Partners, Williams Companies, Magellan Midstream Partners and Alibaba.

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