When the obvious strikes, you need a plan for the obvious. Today the obvious, a polished new Fed Chief named Jerome Powell, went to Capitol Hill and answered pretty much every question in a thoughtful and logical way, and stocks went down, and if we weren't at such high levels where the percentages are tiny, you would think something monumental might have occurred.
So therefore, should we conclude that Powell's first appearance where he talked about how a stronger economy might lead to more aggressive fed fund tightenings, was a bomb?
However, it was a solid excuse to make some sales after a remarkable run and the notion that we always have to have an event precipitate a selloff comes into play in stark fashion. Powell speaks, stock market goes lower? Interesting narrative. But too simplistic.
What's really going on?
First, we have a lot of tension in the stock market right now about a key level for the ten year treasury: 3%. When the ten year, which all bonds in this country are priced off of, gets to around 3%, the VIX spikes and stocks sell off.
When the ten year goes toward 2.8% the VIX declines and stocks go higher.
I would normally not even bother to mention the VIX but you know I think that this bogus asset class called volatility has a powerful and accelerating impact on the actual stock market, too powerful and today when the VIX went higher off the move in the thirty year, stocks rolled over.
But you know what? After listening to Warren Buffett yesterday I want to inject some common sense light into the darkness of this session.
When the economy gets hot, as it has, a responsible Fed Chairman like Jay Powell has to talk about raising rates because he doesn't want inflationary pressure in the system and if he can calm down prices he has to do so.
That's just what Fed chiefs do.
There is a perception among way too many investors that this 2.8 to 3% ying yang is really really important, binary even and 3% provokes fear and a reason to sell while a 2.8% rate promotes calm and gives you a reason to buy.
This dichotomy, sadly, is soporific because as Buffett reminds us, stocks are just so much more valuable than bonds even north of a 3% yield, that you shouldn't be taking the measure of equities at every tick. Own don't trade.
Buffett's a big thinker and that means he takes a long term view of the competition to his stock portfolio. If equities offer a better long-term value than bonds he buys stocks. If bonds offer a better value, something he clearly stated is not the case right now or in the foreseeable future, he would change his mind and put more money in bonds than stocks.
Hmm, more common sense.
But when money managers and the media discuss markets on a daily basis we tend to be in horse race mode.
Here's something about me you might now know: I used to dig the ponies. Cut my teeth at Suffolk Downs, helping to pay my way through Harvard Law. I loved the way the horses came out of the gate. I went gaga at the first turn. I thrilled if my horse bided his time, waiting out the rabbits. The next turn, what can I say, back and forth and back and forth, final and homestretch? Just exhilarating.
It's kind of like the three-rate hike horse versus the four-rate hike horse that was the subject of so much debate because of the obviously strengthening labor market.
But you know what? When we go to the horses we call it gambling. We are simply looking at past performances, checking tracks, looking at jockey records seeing how the thoroughbreds do well in mud, do well at different distances, and then reaching conclusions that can produce successful wagering. Minute differences in time, down to the wire, down to the nose, matter.
That's why, ladies and gentlemen, I believe the horse race commentary should be left at the track. If Powell thinks we need four hikes because the data is hot we will get them. If the data cools we get three. It may be a decent parlor game but Warren Buffett has told us that it's not much more than that and while he did speak a whole news cycle ago I think he's words ring true today.
Sure, we have thoroughbred stocks, and we have maiden claimers and stakes races. Again, though, as someone who wrote sports for a living, the racing commentary I so often hear does one thing and one thing only, make you feel like you have to bet on a new horse each time. Ten races a session.
I like to step back and say, wait, you know what, we will let the horse race play out and see what the gamblers give us. Unlike those, for example, who trade billions of dollars each day on VIX instruments that might as well be measured in furlongs before the 4 p.m. race concludes, I say, at last, we are getting a chance not to chase stocks. We are getting an opportunity to look at individual stocks that have come down -- and those that haven't -- and make judgments that the horse race mentality has created some new values that didn't exist before.
Now some days we see things that just plain knock stocks down as company managements decide they have to sacrifice short-term stock prices for long term gains. We have been watching as Broadcom (AVGO) , one of the premier semiconductor companies of our time, led by Hock Tan, who wants his stock price to ultimately go higher, try to buy the stock of Qualcomm (QCOM) , so far with mixed results. I think that the shareholders of Qualcomm are proving to be a more restive bunch than I thought before and might, at the right price, vote to turn the company over to Broadcom which could cause Tan's stock to soar.
Today Comcast (CMCSA) , the parent company of CNBC, and a holding of my charitable trust, took a similar path and decided to try to buy Sky, a largely UK based satellite company, that the Murdochs own 39% of and have been trying to buy the rest with a bid on the table as part of the much larger Disney (DIS) Fox (FOXA) transaction.
There are many permutations to all of these machinations but suffice it to say that Disney and Comcast want this asset and a bidding war will ensure.
For our purposes all we need to know is that Comcast's stock is worth less than it was yesterday because of something it might do in the next year that might or might now bring bigger rewards for shareholders. As far as my trust is concerned, Comcast has been a long-term winner so we're willing to embrace the short-term pain. Another favorite stock of mine, Disney, of course got clobbered, too. Comcast's move, no matter what, reduced the value of Disney's stock short-term given that there seemed to be a real good chance that Disney's will now have to pay up more if it wants to do the deal it sought before Comcast's offering. Everyone, it seems wants international assets and who can blame them, international, even in satellite, is still growing.
Long-termers don't despair. But there's no joy among shareholders of Disney or Comcast at least today.
Far more important? What did this selloff do to create new values, particularly in areas that had been so strong of late that they were too hazardous to chase.
I spend the whole day doing this exercise and I came up sorely wanting. The stocks that have vaulted so much higher, the multinational industrials, the financials, the techs, especially the cloud based techs and defense stocks, did not come down to levels that were attractive.
The drugs and the oils and the consumer packaged goods stocks, which have been out of favor and were lucky enough to be dragged higher by the most recent bounce from the bottom, fell harder and aren't any more attractive than they were yesterday or the day before or the day before that. They are too expensive given the risks.
In short, as much as I want to say that here was a consequential session that gave you some real bargains, I didn't see any.
You know when I learned to handicap the most important lesson I received, and I was taught by the best, was that some days there were simply no races worth betting on. There was not a single horse race that made sense to go to the window and plunk down some bucks on. The risk-rewards weren't good. There were no anomalies. So you just sat out there, and yes, in my youth, you enjoyed a good cigar.
It's been 40 years since I had a good stoogie, but I still know when to enjoy a day at the proverbial races and do nothing waiting for another day, another chance, a better opportunity.
Today was one of those days.