Today’s setting of commodity depression and low interest rates along with a passive FRB is nothing to cry yourself to sleep over. But ISIS, Ebola and so far a dysfunctional Euroland make me pause. The market’s price-earnings ratio stays challengeable.
I’m taking down my projection of S&P 500 Index 2015 earnings from $130 a share to $120. Currency translation alone could cost 3% to 4%. Energy earnings shortfalls could drop 10% off this sector. Projections for a 4% gain in information technology spending may be too optimistic.
Disparity between fixed income paper and equities keeps widening in favor of bonds and preferred stocks. Listen up! The score year-to-date is high yield paper 10% vs. the S&P 500 Index minus zilch.
The lopsided game score probably remains in place at least a few more quarters - until there's a good case for FRB tightening. Currently, no case. No labor inflation, but commodity depression and the dollar daily gathering strength. Euroland sticks in a deep funk with no stomach for deficit financing infrastructure projects.
The rest of the world licks its chops at prospects of the dollar regaining its primacy against the euro, pound and yen as well as China’s yuan. Their goods land here more competitive with ours while exports get pressed with lower realizations on currency translation.
Our shale oil production is approaching a shut-in condition with WTI oil falling into the low eighties. Meanwhile, with oil denominated in dollars, the Saudis can withstand lower quotes and not cut production meaningfully. How does
The typical large capitalization growth stock, whether in technology, pharmaceuticals or energy, does more business abroad then domestically. Currency translation could bruise
The market at 1,800 reflects many of the deflationary trends facing American corporations.
The Ebola issue could impact airlines on their foreign routes and may soon hit hotel chains abroad. The entire travel and entertainment sector is at risk if domestic cases pop up out of nowhere. This is scary stuff that could translate into a black swan incident. So far, I don't see money managers discounting the spread of Ebola cases but it could happen. Before long, we may stick in our bedrooms, glued to our TV sets.
Last week’s correction in semiconductor houses like Micron Technology and Internet properties like Facebook and Alibaba, as well as oil service and rig operators reflects legitimate fear of more commodity deflation as well as the malaise of slower worldwide growth.
The International Monetary Fund just lopped off 0.2% from their world growth rate for 2015. Now at 3.8%, versus 4%, I see several more 0.2% lop offs coming. Economic forecasts log perennially behind the numbers, both up and down. Nobody ever catches inflection points.
Our roiling market is beginning to shift concentration away from properties too reliant on offshore markets. There's more interest in purer domestic plays like retailing, media and healthcare. Technology is suspect along with financial houses like Charles Schwab that need to see higher money market rates real soon to make analysts’ projections.
The correction in oil service names like Halliburton and Schlumberger, some 25% the past few months, while rig operators facing down time and lower utilization of new rigs have dropped 40% since early summer. Nobody escaped the carnage typified by Transocean.
There's money still hiding in major internationals like ExxonMobil, but I don't see sufficient dividend yield there. The market wants to see a prospective yield closer to 5%, but Exxon is nearer 3% and splits free cash flow between share buybacks and dividend bumps.
For me, a clearing yield approaching 5% affords some security in a deflationary setting, but we're talking mainly electric utilities and a handful of telecommunications properties like American Telephone and Verizon.
Kinder Morgan, nearing a 5% yield, is a great speculation on plans to roll up independent master limited partnerships in the oil and gas infrastructure sector, but near term prospects of shut-in domestic production could impact oil pipelines in the Midwest and Southwest in terms of throughput. The correction in MLP properties of late at the least reduces prospective take-out prices but leveraging up is dangerous if oil prices work even lower.
All this gets me to the other world of fixed income investing. Although almost all preferred stocks rest in financials like banks, brokers and insurance underwriters, there's some relatively safe properties like Allstate, Bank of America and Morgan Stanley unless you believe another financial meltdown is coming.
It's true, Bank of America's preferred sold down to 5 bucks early in 2009, but Citigroup's common stock based at $1. Currently, bank preferreds tick at their call price, $25 a share and yield 6.5%.
I don't buy preferred issues selling above their calls, because risk of a call in a low interest rate setting is high. Particularly, if borrowers can refinance 100 basis points lower. I carry sizable positions in Allstate, Morgan Stanley and Bank of America paper.
The rationale for high yield paper is I don't see a competitive return near term from the Big Board. The earnings yield, even with the market at 1,800, is still below my 6.5% return on preferreds, but it's getting closer after the correction.
Even after the 9% correction in the S&P 500 Index, on Tobin's Q ratio, stocks approximate 250% of replacement cost vs. the normalized 150%. Not that I'm turning my back on the market. There are too many stocks selling closer to 10 times earnings, particularly the entire banking sector, namely JPMorgan Chase, Citigroup and Bank of America.
Broad based financials like MetLife just corrected 10% on fears of declining interest rates or at the least no levitation. But, their underwriting book is solid and can yield a 10% earnings growth rate.
I've added to non-cyclical properties in healthcare like Medtronic and CVS Health selling near a market multiple with much free cash flow ahead. Domestic media properties like Comcast safeguard you from Euroland and Ebola. Unless you see a recession looming, rails like Union Pacific Railroad and Canadian Pacific Railway stand out.
Speculation isn't in the air.
Sosnoff owns personally and / or Atalanta Sosnoff Capital, LLC owns for clients the following investments cited in this commentary: Boeing, Apple, Merck, Halliburton, Citigroup, Micron Technology, Facebook, Charles Schwab, Schlumberger, Kinder Morgan, Allstate, Bank of America, Morgan Stanley, JPMorgan Chase, MetLife, Medtronic, CVS Health, Comcast, Union Pacific Railroad and Canadian Pacific Railway.
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