Carnage Bubbles Below Market Headlines

October 22, 2018

New York (Oct 22)  Start with gold which I’ve never owned over a lifetime. But, I do keep the ABX symbol, Barrick Gold, on my Bloomberg monitor and its chart adumbrates pure misery. It peaked mid-2016 around $23.50, now trading at $12.50 with daily volatility some days near 8%.

Gold is supposed to be a crisis play you go to when blood flows in the streets and you crave safety for a clear day. Barrick yields just 1%, so cost of carry relative to two-year Treasuries nearing 3% is substantive. So much for gold bugs.

Everyone talks about surging oil futures. Hundred-dollar oil, anyone? I dunno, but contrapuntal trajectories for prime oil service stocks like Schlumberger and Halliburton are scary. Maybe they anticipated faster recovery for deep water drilling. Nobody cares. Price-earnings multiples still stretch too high for me.

The chart on Schlumberger is scary. It peaked near $120, mid-2014. The downward slope traces a classic head and shoulders formation (bearish), now ticking at $60 after hitting $80 earlier this year.

Halliburton even shows a more dysfunctional trajectory with a 52-week high near $58 and a low around $36, presently at $40 for almost a 30% decline. Forward valuation looks over 20 times earnings. Unless you see oil futures sustainable near $80 a barrel, Halliburton is a no-no, too.

Even more polite paper, AT&T hasn’t escaped the shrapnel spray. She peaked over $39, earlier in 2018, now at $32. Onset 2017, Ma Bell ticked over $42. Polite investing didn’t work. The market wanted Amazon which doubled while AT&T suffered. This orphan yields over 6% but nobody cares. I care. A sizable holding for me, better than Treasuries or BB bond paper. If the Justice Department wins its appeal I’m dead in the water. We’ll see.

There’s something to be said for big cap investing in Apple, but not Exxon Mobil. At $82, it has recovered from the $72 low. Its yield of 3.6% leaves me cold, hardly competitive, with 10-year Treasuries at 3.2%. In the good ol’ days for oil, 2014, Exxon peaked over $104. So, term it a stale play, 20% off its high in a hysterical environment for energy plays.

Then, there’s General Motors which sadly I own, perhaps too cheap to bang out. (Nobody’s perfect.) As I write this piece, a news report on down car sales in China schmeissed the stock 4%. GM’s peaked near $47, so we’re talking a hit here of 30%. Going back five years, GM’s trendline is $35, a fallow investment with a yield of 4.7%. In 2011 the stock spiked near $40. So much for investing in cyclicals. Absent perfect timing, you’ll probably be disappointed.

Disasters in cyclicals cover more industries than I follow, particularly in the materials like steel, copper and aluminum. The range in U.S. Steel this year is $24 to $47, presently ticking near $29. The long-term chart mimics Schlumberger’s demise. With a declining head and shoulders pattern, U.S. Steel peaked over $60 in 2010. (What were the bulls smoking?)

U.S. Steel bottomed under $10 early 2016. Helluva bull run even from its $20 price point early last year. But, who’s good enough to capture only the good part of any cycle? Nobody’s that good. Otherwise, there’d be more money managers buying $50 million condos in the sky. Warren Buffett’s numbers excelled over five decades or so but he’s had down years and underperformance even over a five-year time span. What Warren found was your entry point for a stock can define long term performance.

Consider his enormous concentration in bank stocks, particularly Wells Fargo, now a gross underperformer. Hardly above its 12-month low of $50, down from the high of $66. Wells bottomed at $10 in 2009 during the financial meltdown. Did Buffett miss all the pettifoggery by management misusing its clientele with dubious charges and fees?

General Electric, now overcovered at least by the press, was overlooked as a negative classic reallocation of assets play begun by Jack Welch who decades ago played gin rummy with his divisions. Welch leveraged General Electric’s prime credit rating for sizable acquisitions, particularly in the financial services sector. Later, he was imitated by American International Group, Citigroup and Michael Armstrong at AT&T who moved into cable television five years too late.

GE’s bull run unfolded in 2009 below $10, surging into the thirties a couple of years ago. But, everyone missed the precarious sustainability of its cyclical earnings power. Pretty much, it has withered down to the traumatized low set in 2009.

American International Group, like General Electric, is another classical reallocation of assets story that sucked in major players but hasn’t worked. Everyone underestimated the sustainability of low interest rates that impacted investment income. There was overcapacity in fire and casualty lines and the auto sector. AIG peaked at $65 past 12 months, presently $54, no higher than its price point back in 2011.

The stock had based out at $10 in 2009 after receiving over a $100 billion infusion from the U.S. Treasury. Management, particularly its maximum leader, Hank Greenberg, had been revered by The Street. But, AIG guaranteed a trillion in credit default swap paper for a couple of points. There was no internal oversight.

It’s understandable how everyone missed the AIG disaster. Their London office was the problem, and they obviously had free reins to operate. Whenever I get taken, I try to understand the issues, whether face up on the table and readily analyzable. I remember parsing the late MCI’s income statement and concluding it was too pretty, too close to AT&T’s financials. So I passed on MCI. God Bless!

What can the armchair investor do? If you’re reacting to daily financial headlines, you’re too late, both up and down. Buying the biggest and best companies is no solution. They wax overpriced and overrated. Before a company’s financial reports are recast downward, by its auditors, there’s room for hiding big mistakes for years.

You gotta like the management, viability of their business and then deal with valuation. This is ongoing for a stock market operator. Starting with Apple and working your way down the list. If you can’t do this, try to make the right macro calls. Hopefully, and find yourself outside the consensus.

Maybe, forget about picking stocks altogether. No big cap vs. small cap, growth vs. value choices. Buy the S&P 500 or Nasdaq 100 indexes just so long as inflation and interest rates seem orderly and containable. Today, nothing wrong with two-year Treasuries, either, just so long as they show a real rate of return which is finally happening.

Consider Alcoa, an old Dow name, but a study in vulnerability to President Trump’s tariff face-offs with China and Canada. Alcoa, nearly cut in half from its $62 high this year, retraced all gains since 2014.

Your entry price points are everything, if right. Then, you’ll hear the hills alive with the sound of music.


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