My last column of 2017 has to be reserved for predictions for 2018. One should never forget that markets are forward-looking discounting mechanisms. As a very wise man likes to say, "the most important play is the next play." That man is Mike Krzyzewski, basketball coach at my alma mater, Duke University. As a nod to the number of players on the floor, Coach K likes to group things in fives. So here are my five "Next Plays" for 2018:
1. Energy stocks are wildly undervalued. I just cannot believe the market is missing the incremental profitability oil exploration and production companies (E&Ps) will see as a result of $60/barrel oil. After the group's bloodletting in 2015-2016, there are relatively few weak players, and not a single public E&P I know of that can't make profits at $50/barrel. So, the move from $50/bbl to $60/bbl on WTI crude is pure profit for oil E&Ps. As I advised in my Real Money column Thursday, stick with the E&Ps if you own them and it is certainly not too late to buy them.
2. Get ready for the onset of FAANG fatigue. 2018 will be the year that the market once again learns the value of anti-correlation. With valuations at post-Lehman crash highs. I believe we will return to a stock picker's market. So, all the money pouring into ETFs that is then re-poured into the biggest stocks (which get even bigger as a result) will be more broadly dispersed. It's hard to see a crash in any of the tech mega-caps (Netflix (NFLX) is the most likely of the five to get hit, in my opinion), but I'm expecting a pause in FAANG mania in 2018.
3. Bonds will remain attractive. I am certain there will pundits heralding a bond bust in 2018, with a return to yields above 3% on the 10-year U.S. Treasury note. Once again, those pundits will be mistaken. Until the Fed begins to unwind its over-$4 trillion hoard of Treasuries and mortgage-backed securities, there will be no return to historical yields on the 10-year. The Fed has stopped buying, but it hasn't started selling, and that limbo will prove lucrative for those savvy enough to hold corporate bonds, which are priced versus the 10-year note yield benchmark.
4. Healthcare looks to be the riskiest sector in 2018. The problem here is the risk of government interference and the great uncertainty with U.S. healthcare policy. The Tax Cuts and Jobs Act eliminates the individual mandate to purchase health insurance starting in 2019 and could pave the way for a grand bargain on Healthcare policy. President Trump has been predicting such a bargain in recent days, and the passage of TCJA has given him a bargaining chip of epic proportions. Healthcare stocks will suffer under uncertainty until such an accord is reached.
5. Tesla (TSLA) is going to suffer an annus horribilis. This week's KeyBanc downgrade on lower-than-expected fourth-quarter production of the Model 3 was a sign that TSLA's cash burn is intensifying. With $1.8 billion of publicly traded debt outstanding, quarterly cash burn figures now "matter" for Tesla investors, as opposed to the unicorns and fairytales that are worshipped by certain die-hard TSLA longs.
Also, I have been following General Motors (GM) in some way, shape or form for 25 years and I have never seen senior management energized in the way Mary Barra and her team are in their drive for autonomous vehicles (AV.) Part of the unicorn/fairytale scenario on TSLA is that the company somehow has a lead in AV technology owing to its very rudimentary Autopilot functionality. Nothing could be further from the truth, and 2018 is the year the equity market learns the hard truth about Tesla.
