May. 11 2011
To Hell With Brent Crude, Buy Stalwarts And Some Sirius
Crude below $100 is a big boost
Just in case you missed it, last week before oil broke, I said: “The price of oil is the deciding factor.” (See, “Where To Load Up, Where To Go Lightly In Russell Growth, S&P 500.”)
I was talking the stock market, but obviously I could have included gold, silver, copper and thrown in corn, as well. I like oil under a C-note a barrel. It’s good for our health. Hopefully, any bounce is chopped liver.
Think of all the guys in work boots driving to job sites maybe an hour away from home, probably in light pickup trucks. Gas sucks up serious money for them.
Chevy Cruze is here
Months ago, petrol was a buck lower and pricey at that. Is it any wonder demand is booming for General Motors’ and Ford’s small car beauties, the Cruze and Focus, even for compact SUVs.
I’ve convinced myself that the mini commodity impulsion was touched off by the Navy Seals’ Osama rub-out, not mildly disappointing employment numbers. First, the world’s operators behind unmarked doors had to reason that the geopolitical terrorist premium built into spot oil quotes could top out. The Saudi’s celebrated in the streets on the news of Osama’s comeuppance. Maybe, their spigots turn on readily for Uncle Sam, no longer Uncle Sucker.
The timing of Glencore’s public offering impeccably coincides with the maximum circumference of the commodity bubble. Glencore’s EBITDA from trading hit $2.4 billion last year, maybe more in 2011. The company is the outgrowth of Marc Rich’s commodity trading operation which moved its domicile to Switzerland after his conviction for tax evasion in the U.S. On his last days in office, President Clinton pardoned Rich and some of us still scratch our heads over this covert act.
Glencore is a baby Rio Tinto which produces copper, coal, zinc and alumina. Going public has its pluses and minuses, but management thirsts for deals and needs a public currency. High powered traders normally prefer anonymity. Even Mike Milken’s traders operated behind unmarked doors. Once you entered, the office looked and sounded like Istanbul’s plein air bazaar. Deal proliferation now moves into high gear for everyone with currency and globs of free cash flow. This run could last a couple of years, bullish for stock prices.
The public finally is putting more of its sterile cash assets and bond money to work in the stock market, too. MetLife’s variable annuities just ramped up 40 percent in its March quarter. Unless the economy stalls out, not my call, the end to the bull run is nowhere in sight.
Oil under $100 a barrel strangles inflation in its crib. Because the workplace remains a harsh setting for prospective new hires, wage inflation is nothing to worry about, and that’s what the Federal Reserve Board looks at. The bond market still is no competition for equities, probably this year and next.
My read on the mini crash in commodities is it forms the reciprocal to stock prices. This has to be right unless commodities traders are better big picture forecasters than the FRB, Wall Street’s money managers and all the academic economists put into one train running between Pennsylvania Station and Washington, D.C. Nobody’s perfect.
Economists turned hesitant but Detroit is moving more cars. Retail sales hang in, monthly, and capital spending shows good leading indicators. Banks with flat to down revenue lines are beginning to relax lending criteria. Tax receipts are turning around meaningfully for the Federal government, states and municipalities. Even the muni market turns a touch firmer.
Only housing activity remains totally depressed with year-over-year declines in home prices and new home starts under half their normal pace. On a macro basis, however, the construction sector of GDP is so depressed from its peak of 7 percent to the present 2 percent that it’s hard to see any further impact on total GDP going forward.
Housing still in the dumper
I don’t discount the depression in pre-owned home prices impacting consumer sentiment, but the wealth effect from the stock market’s recovery has largely restored private wealth to nearly its pre-crash level. The public finally understands that negative real interest rates going out to 5-year maturities only helps the Treasury carry the country’s debt load at everyday low interest rates.
My junk bond portfolio, mainly single B and BB paper is up over 5 percent year to date and yields over 6 percent to its worst call pricing. High yield bonds remain a candidate for this year’s best sector performer.
More than ever, if precious metals prices have peaked, the public needs the stock market for a reasonable return on investable assets. The S&P 500 Index yields under 2 percent. There are only a handful of major corporations with safe yields of 4 to 5 percent, but, American Telephone, Verizon, Merck, Eli Lilly and Bristol Myers don’t get my money. Pfizer is my play on financial engineering and does yield 4 percent.
My focus is on properties with enormous free cash flow employed for stock buybacks, acquisitions and rising dividend payout ratios. Good fundamentals is a prerequisite. In this category I put Direct TV, HMOs like Wellpoint and United Healthcare, certainly IBM, Johnson & Johnson, even Intel but not Cisco and Dell.
Then there are the “fortress” cases, Apple and Google. Google actually gets marked down for deal proliferation in the internet sector, looking a touch profligate. Apple rakes in money and within 2 years its boodle reaches $100 billion, approximately $100 a share on a $350 stock today.
Analysts, some sheepishly, subtract cash from Apple’s stock price, thereby reducing its price-earning ratio to approximately 10 times 2012 earning power. Considering cash earns peanuts today, this is specious ciphering. But, at some point something has to give-deals, dividends or stock buybacks. Hey, Guys! I’m waiting. Throw us a bone, kind sirs. It helps when you do it out of strength, not weakness as in Microsoft.
To recap my points on evolving stock market sector weightings, oil service stocks, Schlumberger and Halliburton still get my money along with pure production operators like Apache. It’s too late to sell banks, but they are not this year’s winners. MetLife showed good quarterly numbers, yet the market seems impatient with its plodding management. Unlike Hartford, it didn’t see the wolf at the door in the financial panic days. MetLife sold out its Stuyvesant Town property at the top.
I’m sticking with a technology overweighting and increasing healthcare. New faces embrace United Healthcare, St. Jude, Johnson & Johnson and more Pfizer and Wellpoint. The only overweighting remaining in the materials sector is coal, namely Peabody Energy. My ragamuffin favorite dollar play, Sirius XM Radio, now ticks at two bucks and change. There’s serious free cash flow building here over the next few years. Detroit sells more cars and possibly subscription rate increases are approved.
The market is tiring of stocks selling for hundreds of dollars as in Google, Apple and Berkshire Hathaway. Citigroup’s reverse stock split is boardroom stupidity warmed over.
Sirius XM Radio can trade over a hundred million shares daily. When I came into the business, around 1960, the Big Board traded 4 million shares in an active session. Wall Street was a very small pond, and I liked it better then.
Martin Sosnoff
mts@atalantasosnoff.com
May 11, 2011
Martin T. Sosnoff is chairman and founder of Atalanta Sosnoff Capital, a private investment management company with more than $11 billion in assets under management. Sosnoff has published two books about his experiences on Wall Street, Humble on Wall Street and Silent Investor, Silent Loser. He was a columnist for many years at Forbes magazine and for three years at the New York Post. Sosnoff owns personally and Atalanta Sosnoff Capital owns for clients the following stocks cited in this commentary: GM, Ford, MetLife, Pfizer, Direct TV, Wellpoint, United Healthcare, IBM, Johnson & Johnson, Apple, Google, Schlumberger, Halliburton, Apache, Peabody Energy, St. Jude and Sirius XM Radio.