Pro Perspectives 1/4/23

January 4, 2023

On this day a year ago the stock market posted the all-time high.

If you recall, coming into 2022, the Fed, staring down the barrel of 7% inflation, told us that they would tame inflation, and land close to their target of 2% by the end of 2022.  And, they told us that they would do so while producing a 4% growth economy (well above trend) at 3.5% unemployment (near record levels) — all while keeping the Fed Funds rate under 1%.

What did they do?  They took rates above 4%, crushed growth (induced a technical recession) and didn’t get near their inflation target.

As I said in my Pro Perspectives note last year this time, a new year can often come with regime change in markets.

We had the extreme of regime change.

Not only did we go from an easing to a tightening cycle, for global monetary policy.  But we went from a long-era of low inflation, and ultra-easy money, to a high inflation, and inflation fighting policy.

We went from a fed that was a fervent defender of financial market stability, and promoter of economic prosperity, to a Fed that explicitly attacked jobs and demand, and went to great lengths to talk down the stock market (in effort to tighten financial conditions).

With that about face, for anyone looking to earn investment returns, much less preserve buying power against inflation, there were few places to hide.  Not only did stocks do poorly, but bonds did worse — an outcome with few historical reference points in down stock markets and higher uncertainty environments.

The good news:  The rate-of-change in monetary policy tightening will slow dramatically this year (and could possibly be a zero rate-of-change, which would be a positive surprise for markets).  The rate-of-change in the fiscal policy madness will be zero, with a split Congress (= gridlock).  The latter takes pressure off of the Fed.

Remember, the Fed was ready to pause on rates at 2.25% back in July.  That was before the Biden White House and democrat-controlled Congress decided to greenlight another $1 trillion-plus spending binge.  The Fed won’t get sideswiped with any more ofthese surprises, with a split Congress.

On a related note, remember, going back to 1950, there has never been a 12-month period, following a midterm election, in which stocks were down. And the average one-year return following the eighteen midterm elections of the past seventy years was 15% (about double the long-term average return of the S&P 500).

Keep in mind, markets have priced in a lot of negative expectations (from the rate path, to earnings erosion, to recession).  That sets up for positive surprises.  Stocks like positive surprises.

What is among the best performing asset coming out of a bear market in stocks?  Small cap value stocks.  That’s precisely what we hold in our Billionaire’s Portfolio (with the extra kicker of a catalyst, often from the direct influence of a billionaire investor).  We significantly outperformed broader markets in 2022, and are positioned to have an explosive bounce in 2023 (perhaps similar to what we saw in 2016, where we bounced 40 percentage points from the low point of the broader market correction — outpacing the S&P by 2 to 1).

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The Script For Stocks Continues To Look Like Another 2016

March 7, 5:00 pm EST

Stocks continue to back off after completing a full recovery of the December declines.

Here’s another look at the chart we observed on Monday, where you can see the big technical area of resistance (three prior highs) — and today we close back on the 200-day moving average (the purple line).

As we discussed on Monday, the failure of this level shouldn’t be too surprising, as a reasonable technical area to take some profits.

As stocks slide back, the media is quick to turn the attention back toward fears of global economic slowdown.  What’s the big difference between now and December?  The Fed has moved from telegraphing rate hikes to ‘neutral’ and sitting/watching.  The PBOC (central bank in China) has done more to stimulate their economy (to incentivize bank lending) and this morning, the ECB has come in with more easy money policies.  Both the Fed and ECB were pre-emptive shots.

Like 2016, the response from central banks has been aggressive and coordinated to ward off slowdown and/or a stock market destabilization.  That recipe worked well in 2016.  I suspect it will work well this year.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Silicon Valley Is About To Dump Overvalued IPOs On The Investing Public

March 6, 5:00 pm EST

Yesterday we talked about the big IPO agenda for the year.

We have some big Silicon Valley “disrupters” set to go public this year, including Lyft, Uber, WeWork and Airbnb.

Remember, these companies emerged from a post-Great Recession world, where pension funds and sovereign wealth funds were flooding money into Silicon Valley, following the money and regulatory favor from the U.S. government.  Of the $800 billion fiscal stimulus response to the financial crisis, the Obama administration doled out $100 billion worth of funding and grants for “the discovery, development and implementation of various technologies.”  The money followed it, and the private market valuations soared.

Were they based on reality or hype and too much money chasing the dream of the next Facebook?

Let’s take a look today at how the big “disrupters” of the past two years have fared, after much anticipated IPOs.

Dropbox:  Dropbox was priced at $21 per share.  It started trading at over $28.  Today it trades at $22.

Spotify:  Priced at $165.90 per share.  It started trading at $164.  It currently trades at $146.

Snap: Priced at $17 per share.  It started trading at $22.  Today it trades at $9.90.

Nothing good for the average investor that picked up these shares when these stocks went public.

Who has gotten rich? The founders.

The founder of Dropbox is worth $2.3 billion.  His company lost half a billion dollars last year on $1.4 billion in revenue.  Revenue growth is slowing to a near mortal 25% growth rate – and losses are widening dramatically.

Spotify’s founder is now also worth about $2.3 billion.  Revenue growth is slowing too to unexciting levels, and the company is still losing money.

What about Snap?  The Snap founder is worth over $2 billion.  Snap lost $1.2 billion last year, on $1.1 billion in revenue. Revenue growth has gone from 600%, to 100%, to 43% last year.

The hyper-growth valuations are unlikely to get hyper-growth.  I suspect we might see the same with the roster of IPOs this year.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Tech IPOs May Be Coming Late To The Party

March 5, 5:00 pm EST

There’s a lot of excitement about the building IPO docket for the year.  Let’s take a look of the lay of the land …

There is said to be more than 220 companies planning to go public in 2019.

On Friday, Lyft filed an S1 with the SEC (a prospectus like document) in preparation for an IPO.  This will be the first Silicon Valley darling to go public this year.

Lyft is the second largest ride-sharing company — owns about a third of the U.S. market, with Uber owning the rest.  Uber is expected to go public this year.  The other big ones coming:  Airbnb, WeWork and Palantir.

We’ve clearly had a boom cycle in Silicon Valley over the past decade.  But are these IPOs coming late the party?

Remember, we have an administration in Washington that has tightened the regulatory screws on the dominant publicly-traded tech giants (Facebook, Amazon, Google).  The regulatory tailwinds (or lack thereof) that they enjoyed along the path of their disruptive growth, have now turned into headwinds.  And the stocks have all been hit, as a result.

Keep in mind, the private market valuations were pumped-up in these IPO candidates when public equity markets were offering little optimism about future returns.  With that, pension money was flowing into the coffers of Silicon Valley private equity firms.  And private equity fund managers were throwing money at things — and companies have been burning through that money, ramping staff, buying fancy offices and inundating us with blitz advertising campaigns.

Safe to say there has been an overhyping of the term “disrupters.”  In many cases, we’re looking at startups trying to underprice and outspend (with our pension money) in a traditional business, without having the hurdle of making money (maybe ever).  Not surprisingly, there have been market share wins.

But public companies tend to be held to a standard: profitability.  We’ll see how they do with the shifting market environment (i.e. late cycle Silicon Valley).

Lyft will be an early indicator.  Its last private investment valued the company at $15.1 billion.  For that, in their filing, they revealed a company doing a little over $2 billion in revenue, while losing almost a billion dollars last year.  Revenue growth has been slowing, losses have been widening as the private equity investors attempt to cash out in the public markets.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Newsflash: Apple Is Dirt Cheap

January 3, 5:00 pm EST

As we’ve discussed, the dysfunctional stock market has put pressure on Trump to stand down and make a deal with China.

And Apple’s CEO, Tim Cook, turned up that pressure yesterday.  In a letter to investors, he warned that Apple, the biggest and most powerful company in the world, would have lower revenue in the quarter that just ended.  The blame was placed on economic deceleration in China —due to the trade dispute.

Now, it’s clear that Cook wanted to draw attention to the impact of the trade dispute.  And the media was happy to run with that story today.

But the slowdown at Apple last quarter also had a lot to do with “fewer iPhone upgrades than anticipated.”  This was tossed into the context of slower economic activity in China, which makes it look like a macro issue.  But Apple also has a micro issue.  They seem to have exhausted the compelling innovation that has historically gotten iPhone users excited about buying the latest and greatest phone.  The older models are still pretty great.  No reason to upgrade.

So, Apple has used a violent market and slowdown in China, perhaps, in an attempt to divert attention away from the slowing device business.

The good news: Even if they don’t develop the next world-changing device, they have a services business (Apple pay, Apple Music, iCloud Drive, AppleCare and the iTunes App store) that is producing almost as much revenue as Facebook.

And the stock is incredibly cheap.  On trailing twelve months, the stock trades at 12 times earnings. But if we back out the nearly $240 billion of cash Apple is sitting on, the business at Apple is being valued at $437 billion.  That’s about 7 times trailing twelve month earnings.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Monopoly Is Being Priced-Out Of The Tech Giants

November 19, 5:00 pm EST

The tech giants continued to get hammered today.  We’ve talked about the prospects for an unraveling of the tech giants for much of the past year.

Despite the clear warning shots that were fired by regulators/lawmakers (and the President) along the way, these stocks kept going up — until they didn’t.

As I said back on September 4th, when Amazon crossed the trillion-dollar valuation threshold, “at 161 times earnings, the market seems to be betting on the Amazon monopoly being left to corner all of the world’s industries. That’s a bad bet. Much like China undercut the compeition on price and cornered the world’s export market, Amazon has undercut the retail industry on price, and cornered the world’s retail business. That tipping point (on retail) has well passed. And as sales growth accelerates for Amazon, so does the speed at which competition is being destroyed. But Amazon is now moving aggressively into almost every industry. This company has to be/will be broken up.”

A day later, Facebook and Twitter executives visited Capitol Hill for a Congressional grilling.  Here’s an excerpt from my note that day:  “If you listened to Zuckerberg‘s Congressional testimony in April, and today’s grilling of Jack Dorsey (Twitter) and Sheryl Sandberg (Facebook), it’s clear that they have created monsters that they can’t manage. These tech giants have gotten too big, too powerful and too dangerous to the economy (and society).”

Here we are, a little more than two months later, and the sentiment on tech has dramatically changed.  Amazon topped the day it reached the trillion-dollar valuation and has lost a quarter of a trillion dollars in value since (down 26%).  Facebook is down 39% since the record highs in July.

So it appears that we are finally seeing the “monopoly scenario” priced out of the tech giants.  And with that, we should see money moving back into those stocks that have been left for dead in industries like media, retail, shipping (to name a few).  This is the Dow/Nasdaq convergence we’ve been looking for for much of this year — and we’re getting it.  At one point this summer the Nasdaq was up close to 15% on the year, while the Dow was flat.  Now both are up just over 1% year-to-date.  I suspect that Dow outperformance will continue.

We have G20 tomorrow, where the world will be watching for some movement on the U.S./China trade negotiations.  Any hint at a deal should get this Dow trade moving aggressively higher.

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The Case For S&P 4,000

October 15, 5:00 pm EST

On Friday we talked about the opportunity presented by this recent dip in the broad stock market.

We’re beginning to see more clearly today the rotation out of tech and into value.  That is translating into a continued slide in the Nasdaq, while the Dow is rising.

Now, even though this looks like a re-pricing of the high-flying tech stocks, as we often see the “baby gets thrown out with the bathwater.”  In this case, because the big tech giants have been so widely held, when they crack, everything has cracked.  That’s an opportunity to buy broader stocks on sale. And stocks are indeed cheap.

Take a look at historic valuations (P/E on the S&P 500) …

 

From a valuation perspective, Wall Street is estimating stocks on next year’s estimated earnings to be as cheap as we’ve seen only two times in the past 26 years.

You can see where stocks were valued on the S&P going into 2012.  Stocks finished up 16% that year.  The other year was 1995 (a P/E of 14.89). Stocks finished that year up 37.6%.

Still, many have continued to harp on valuation, always pointing to the long run average P/E on stocks, which is around 16.  That’s a long history.  If we look back at the past twenty years, the average valuation is MUCH, MUCH higher. It’s 23 times earnings!

If we take Wall Street’s estimate on S&P 500 earnings of $176 and multiply it by 23, we get and S&P at 4,048.  That’s 47% higher than Friday’s close.

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Cracks In Big Tech Stocks Finally Showing

October 9, 5:00 pm EST

There are always plenty of risks surrounding markets.  Still, stocks tend to be pretty good at “climbing the wall of worry.”

But we’ve now had some swings since the beginning of the month.  Have stocks hit the wall at the recent record highs?  Have the growing geopolitical risks begun to finally outweigh the fundamental strength in the economy and the stock market?

Not likely.  More likely, these risks have served as a catalyst for a correction.  In this case, a correction in tech stocks.

And it has been driven by one of the highest flyers:  Amazon.

At the highs of last month, Amazon had jumped 112% in a little less than 12 months.  That’s over $500 billion in market cap gains for Amazon since September of last year.  Just that increase in valuation alone is bigger than all but four stocks in the world.

So, as we’ve been discussing in this daily note for quite some time, the regulatory screws have been tightening on big tech.  And Amazon is in the crosshairs.  Meanwhile, it has been priced as if the developing monopoly would go unchecked.  As I’ve said, “not a good bet.”

Now that “monopoly premium” seems to finally be deflating.

After crossing the trillion-dollar valuation threshold (which was the dead top in the stock), Amazon has now had an official 10% correction.  
This big trendline in Amazon will be key to watch.

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Trillion-Dollar Amazon May Have Signaled The Top In Euphoria

September 17, 5:00 pm EST

The market is typically pretty good at pricing in what is known.  And it has been pretty clear that Trump has seen trade imbalances as a key piece of his structural reform plan.  And the strategy on correcting those imbalances has been to fight trade barriers with trade barriers.

While it has created plenty of fodder for political and economic debates, the markets seem to like it.

As we’ve discussed, any movement on trade, from a U.S. perspective, is success.  He has said as much with this statement on China:

Given the position of U.S. stocks (at or near record highs) relative to global trading partner stock markets (largely, negative on the year), the market seems to be fairly comfortably betting that movement will occur, given the position of strength from which Trump is negotiating (i.e. the biggest and most powerful economy behind him).

Now, this is the effort to level the playing field internationally. We’ve also talked about the ‘domestic’ leveling of the playing field on the Trump agenda.  And that has everything to do with the tech giants.  And it has most to do with Amazon.

With that, we’ve talked about the case for breaking up Amazon.  As I’ve said

“At 161 times earnings, the market seems to be betting on the Amazon monopoly being left to corner all of the world’s industries.  That’s a bad bet. Much like China undercut the competition on price and cornered the world’s export market, Amazon has undercut the retail industry on price, and cornered the world’s retail business.  That tipping point (on retail) has well passed.  And as sales growth accelerates for Amazon, so does the speed at which competition is being destroyed.  But Amazon is now moving aggressively into almost every industry.  This company has to be/will be broken up.”

Amazon was a big loser on the day today. Why?  Break-up speculation.

A Citibank internet analyst today called for the split of Amazon’s ecommerce and cloud computing business (AWS).  But the analyst recommended the company split itself to avoid regulators doing it for them.  That sounds like a recommendation for a pre-emptive strike in an effort to maintain the euphoric investor sentiment in the stock.

When we look back, the trillion-dollar valuation threshold in Amazon may have been curse.  On September 4th, it hit a trillion dollars. And that has been the dead top.   

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Why Stocks Can Go Much Higher

August 21, 5:00 pm EST

With the S&P 500 finally returning to new record highs today, fully recovering the price correction this year, let’s take a look back at the correction, and where stocks can go from here.

As I said in my January 30 note “experience tells us that markets don’t go in a straight line. And with that, we should expect to have dips along the way for this bull market. Since 1946, the S&P 500 has had a 10% decline about once a year on average. A correction here would be healthy and would set the table for hotter earnings and hotter economic growth (coming down the pike) to ultimately drive the remainder of stock returns for the year.”

Fast forward eight months, and we’ve now had a 12% correction.  And we’ve since had back-to-back quarters of 20%+ earnings growth, with an economy that is finally growing at better than 3% four-quarter average annualized growth.

Meanwhile, stocks remain cheap.  The 10-year yield is still under 3%.  And historically, when rates are low (sub 3% is still VERY low), stocks tend to trade north of 20 times earnings.  The forward P/E on stocks at the moment is just 17.  If we apply a 20x multiple to $170 in forward S&O 500 earnings, we get 3,400 in the S&P.  That’s 19% higher.

With that in mind, let’s also revisit my chart on the long term growth rate of the S&P 500.

 

In the orange line, you can see what the S&P 500 looks like growing at 8% annualized (the long-run average growth rate) from the pre-crisis peak in 2007. This is where stocks should have gone, absent the near global economic apocalypse. And you can see the actual path for stocks in the blue line.

Bottom line: Despite the nice run we’ve had in stocks, off the bottom in 2009, we still have a big gap to make up (the difference between the blue line and the orange line). This is the lost decade for stocks.

This argues for another 28% higher in stocks to fill that gap.

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