I’m involved but terrified of Facebook, Alibaba and Amazon. It’s like making love to a crocodile. Chances of being severely bitten are at least 50/50.
Sotheby’s and Christie’s didn't lay eggs at their May evening auctions, but consignees like me were asked to lower reserves to closely match bids. The kick was out of the booze. No Russian oligarchs surfacing, replaced by a couple of operators from Japan and China.
I contrasted this setting with a couple of years ago when multiple bidders in $150,000 increments vied for Gerhard Richter's Abstraktes Bild. Painted in 1993, it exceeded the high estimate of $18 million. Sandy Calder's mobile doubled the high estimate of $4.5 million.
For Rothko’s Orange, Red and Yellow, also multiple telephone bids up to $45 million, and then a trio fought up to $77.5 million with some applause. The high estimate was $45 million. In 1954 I couldn't muster $1,200 for a Rothko canvas in his inaugural show at Betty Parsons.
Andy Warhol’s Campbell's Soup Can made $6.5 million. This 20” x 16" piece offended my bourgeois sensitivities - one helluva expensive can of chili beef. Andy notably said "Art is anything you can get away with."
For anyone rabidly bullish on the course of the stock market, refer yourself to a chart on oil futures. Print it out and ponder its symbolism. Everyone remembers oil soaring above $100 a barrel just a year past, and then it plumbed the depths of $30. Who knew? Nobody knew.
The oil chart slopes gently, upward, going out to 2020, rising to $52, and doesn’t reach $56 until 2023. Normally, futures in outward years trade lower than spot prices, but oil, even after rallying to mid-forties is a depressed commodity. So is steel, aluminum and copper, near $2 a pound, again. Iron ore holds in gross oversupply. Not sure where matzoh farfel ticks in Brooklyn.
The oil futures market is a mix of feisty traders and huge hedging entities, oil producers and major airlines, who press to lock in costs and realizations at least one year or more out. Nobody ever gets his timing right for very long. The chart is a most sober document. Nowhere do you see $100 oil.
Talk of the commodity supercycle ended in 2012 after producers of coal, iron ore, copper and natural gas leveraged themselves and made foolish acquisitions that later bankrupted several acquirers and put once proud operators like Chesapeake Energy into recapitalizing itself to survive by making debt-equity swaps.
The geopolitics of oil rest so Machiavellian that nobody is comfortable projecting OPEC production, or what the Russians, Saudis and Iranians can or will pump out years to come. Easier to forecast FRB policy emphasis, unemployment stats, retail sales or even the variance of the S&P 500 vs. NASDAQ 100 Index. (NASDAQ 100 has fallen nearly 600 basis points year-to-date, thanks mainly to Apple's demise.)
If the oil chart truly captures the future, expect a mild reflationary setting, at best. True for the art market, as well. Too much supply for most all commodities in a worldwide setting of slow GDP advancement, maybe 1.5% here, far less in Euroland and Latin America. Blame spineless politicians and wimpy central banks.
Should gold bugs cleanup in this dull setting? No way. Even with low cost of carry where's the crisis this metal needs to feed off? The energy sector, 9% of the S&P 500 Index, is ahead of itself if oil peaks at $60 some 5 years ahead.
With no clear sighting of a steeper yield curve, financials could remain becalmed. Biotechnology faces its comeuppance. No pricing leverage here, either. Energy, commodities, financials and most of healthcare, I’ve just X’d out one third of the market’s weighting.
I see Amazon and Facebook edging up to replace Apple, even Alphabet, shoving aside ExxonMobil at the top of the S&P 500 listing. Microsoft, late in cloud computing, just holds in the top 10. I’m queasy because Amazon’s a dark model, the earnings trajectory even quarter by quarter, tough to model. Management periodically feeds out details at their discretion.
In my slow growth economic scenario, operators with great franchises - Amazon, Facebook, even Alibaba and Alphabet get the play until they wax way overpriced, and their volatility turns off investors. They’re dangerous commodities, playthings of algorithmic operators.
Strangely, most hedge fund managers eschewed these growthies, preferring one-off plays like Valeant Pharmaceuticals, American International Group, even Sotheby's and Zoetis. They didn't play aggressively in the energy sector, either. Banks? No interest but few were early in Internet properties, one big error of omission.
By eliminating broad sectors of the market and just equal weighted in technology, my portfolio took on a barbell shape with a bunch of boring properties at one end. These are 4% and 5% yielders like AT&T and Verizon Communications as well as preferred stocks.
A foursome of Internet purveyors Facebook, Alibaba, Amazon and Alphabet cluster on the other end of the barbell along with rank energy paper like Plains All American Pipeline, Chesapeake and Enterprise Products Partners. If oil goes to $60 a barrel by 2018, find me grazing in Kentucky bluegrass. I'm not sophisticated, so no gold, shorting the dollar or long oil futures. Can't call the turn in Apple, either.
Biggest worry is not Internet fundamentals but whether the spread between GAAP and non-GAAP earnings get worrisome attention. The impact on the technology index would be brutal. Right now, nobody cares. If earnings disappoint, everyone will care.
Money managers and analysts will look sheepish, turn contrite and then sorry. A few will say “I told you so” and capitalize tech houses on GAAP numbers discarding non-GAAP. For some, the variance currently runs close to 50%, with software houses like Salesforce.com at 100% plus annualized dilution from options running at 5% of its capitalization.
Apple, as yet, barely holds on as number one. Its secret weapon isn’t accounting legerdemain, just a low valuation.
Please watch my recent interview on Tastytrade.com
Sosnoff and/or Atalanta Sosnoff Capital’s clients own: Facebook, Alibaba, Amazon, Chesapeake Energy, Apple, Alphabet, ExxonMobil, Microsoft, American International Group, AT&T, Verizon Communications, Plains All American Pipeline and Enterprise Products Partners.
