Christmas Eve Market Musings
December 24, 2015
I am working on multiple write-ups at once – WMB investment review, 2016 macro outlook, and an investment letter – so my thoughts are relatively scattered and are starting to morph together. But I am in a ‘prognosticative’/reflective mood right now, so I want to get my thoughts down on paper while they’re fresh…
2015 – As Bad As 2008?
This week I had breakfast with a close friend who is a highly regarded power & utilities analyst from a large bulge bracket in NYC. He said it was the worst year of his career and that the sentiment among his ‘customers’ is almost as bad as 2008. Almost everyone is underperforming their bench, and anyone flat is quietly keeping it to themselves. He said, anecdotally, average underperformance is ~3-5% for plain vanillas; but he also has ED hedge funds that are going out of business due to bad Energy bets. Sentiment is just terrible, and nobody really knows, even with the benefit of hindsight, what they would have done differently. There was nowhere to hide with favorite ‘hide-outs’ such as WMT down 20%+.
(More notes from this breakfast can be found under 12/22 Scratch Notes.)
Are Your Numbers Going Up?
I recall a highly regarded member of the ‘Financial Twitter’ community making an out-of-consensus call in late 2014/early 2015 for the rise of ‘inhuman volatility’. Not only was it a scary good call, but he put his money where his mouth was with an even scarier good trade, going short almost anything and everything (at least from what I could glean from his tweets) in mid-2015.
This ‘inhuman volatility’ is precisely what is driving the horrific sentiment among active managers. Nothing is working, save for a few large-cap tech stocks; and I believe it boils down to one of the guiding principles of the above-cited investor – direction of numbers. Very simply, the market is rewarding companies that are growing earnings and beating estimates – businesses that are inflecting upwards – and punishing those who are not…not to mention those in a business model transition.
Below-average global growth, record high corporate margins, and a maturing business cycle are a toxic combination to earnings growth; and when the market is paying above-average multiples, the margin for error is slim.
The good news is that stock prices – with the average S&P 500 stock down 15% or more – now reflect this toxic elixir. But…
…Is It Enough?
Is this churning beneath the surface of a market held up by ‘FANG’ a sign of an oncoming bear market? Or is it a pause within a long-term bull market akin to 2011?
I believe a good portion of market participants suffer from PTSD from the 2008 GFC, and thus are on the lookout for the next ‘crisis’ around every credit spread widening corner. As such, current sentiment appears to be that the equity market churning and credit market tightening seen this year is a sign of oncoming economic and market weakness.
Perhaps this sentiment is correct – I’m not sure. But as Cullen Roche often says, the US economy was knocked flat on its back in 2008; and with such a weak recovery, we are probably only back to one knee. So, the next recession will likely be quite shallow.
- The industrial economy is much weaker than the service economy due to the strong USD, EM weakness, and depressed Energy capex
- USD-driven manufacturing trade weakness likely a ‘dip’ that should be bought (Buy PH?)
- EM weakness likely prolonged due to China infrastructure bubble unwinding (Avoid CAT)
- Anything tied to Energy capex is in a virtual depression…but very interesting LT opportunity, given where US oil falls on the global cost spectrum
- US truck market has rolled over due to below average fleet age, and above-replacement demand investment (CMI potentially quite interesting – but heavily affected by EM, so watch closely)
- Corporate capex investment likely to be heavily focused on IT, as the world transitions to the ‘Internet of Things’ and 5G, and the Internet-driven efficiency push continues
- We may not be in ‘your grandfather’s’ industrialized economy – Big Tech could be the GEs and Railroads of the early 20th century. Need to spend more time here…
- Pockets of Consumer Discretionary potentially quite interesting on a ‘mid-cycle’ basis, as long as margins are sustainable.
- Media is traditionally ‘cyclical’ due to ad exposure; but A) if we are at mid to late cycle now, and B) the next recession will see limited downside, Media could be more resilient than current multiples suggest. FOXA is a slam dunk ZERO brainer; and DISCK is mighty interesting as well at 12X 2016 earnings, and Malone basically calling his shot.
1) Does FANG continue to outperform ‘Old Economy’ stocks as organic growth remains scarce?
[I don’t think FANG does specifically, but rather Big Tech does due to secular tailwind of becoming the ‘New Industrials’]
2a) Does Carl Icahn take HTZ private? $20? $30?
2b) If not, is HTZ not a BUY until it loses HF hotel status?
3) Is QCOM one of the top performing stocks in the SPX?
4a) Does Media consolidation finally begin in earnest?
4b) How can you not be in DISCK regardless…but especially if it picks up?
4c) How big of a role does FOXA play in consolidation? Do they go after smaller players, or a big bite of TWX?
5a) NKE the stock is DONE. FINISHED.
5b) If a consumer stock like this can trade at a horse-choking multiple on elevated margins, why is MSFT – a ‘New Industrial’ – not trading at 30 times $3 ‘core’ EPS?
6a) I thought MSFT was interesting in the low $40’s, but was told repeatedly that ‘trade’ was done, and ORCL was the next place to be…
6b) That didn’t work. But will it start to work soon?
7) Feels like Visa is due for a trip south soon
8) Do the Dolans make any interesting moves?
9a) When does the market FINALLY begin to question the LT sustainability of current iPhone economics?
9b) Do we get a shot at AAPL below $85?
10a) Is BAML correct in saying the probability is high for a private-sector friendly Fannie & Freddie restructuring pre-election?
10b) If so, FNMAS is a HECKUVA buy at almost $3 right now…
11a) Does XOM make its long-awaited move ahead of a 2017 oil market rebalancing?
11b) Do they go small (CHK, HES, CLR, DVN), medium (OXY, APC), or large (BP)?
12) Does MDLZ do an RMT with PEP and trade up to the $80 range Berstein (?) posited?
13) Does ‘New TEVA’ make a run for MYL?
14) Industrials sentiment is rock bottom; numbers going down; backdrop awful…do activists start to get involved in this area in a bigger way? Perhaps they’re more involved than I realize…
15) What is the next hedge fund hotel – the next ‘specialty pharma’ play, if you will?
16a) In what range does CHTR trade? $150 first, then $225? Straight to $300? Or stuck in the $170 to $190 range?
16b) Can’t figure out what catalyst would crack the CHTR hedge fund hotel, given it held up like a rock in this year’s hedge fund hotel slaughterfest…
16c) Push into mobile, perhaps?
17a) Likely Energy continues to dominate the 52-week low list; but who will surprise us outside of Energy?
17b) Would guess NKE lures in dip buyers on its way to this list…
17c) More Staples names? 3G bid floor removed?
17d) Or are Industrials a really weak sector that is sleep-walking its way to value trap land?
18) What the heck happens with DISH post-Broadcast Auction?
19a) Feels an awful lot like 2011 to me. Once the bell rang on 2012 banks started to rip, while 2011 all-star MCD hit a brick wall.
19b) Talking my book, but quality midstream names are the ‘2012 bank trade’, IMO
19c) ETE trades over $25…
20) Does Brent Crude break $30 or $60 first? Or neither, remaining in this range?
21) Does natural gas hit $4?
22) What the heck is going on with LNG the stock? Massive opportunity, or hedge fund hotel destined for $20?
23) What in the world does one do with Banks? Why do they not trade like Utilities? Interest rates are not going up materially…so what will drive them?
MERRY CHRISTMAS & HAPPY NEW YEAR!