April Fool's!
The first time the S&P 500 closed above 4,000 was on April 1, 2021. Fast forward nearly two years, and the S&P is struggling to hold 3900 as of this writing, in the early afternoon of a Quadruple Witching Friday for the markets.
So, what happened? Well, interest rates rose. But not before the train kept chugging along. On April 9, 2021 the S&P 500 hit 4100 for the first time, on the 29th of that same month, it hit 4,200 for the first time, chugging and choo-chooing along until the first touching of 4,700 on Nov. 8, 2021.
But today it's different. To have a high-teens negative return on an broad-based equity portfolio (which the S&P 500 is, by definition) in under 18 months is just staggeringly bad. So, most U.S equity portfolio managers dutifully returned their fees as the market crashed in 2022 and put investors' funds in cash. Hah ha! That never happens.
No, we are in the midst of the John Kennedy Toole market, as I have noted in prior columns. His most famous work was "A Confederacy of Dunces." I spend so little time checking financial websites, other than for quotes, and almost never watch financial television. But it just staggering that these talking heads could be so wrong for so long. So, why are they still talking?
Because things are going to change .... Yeah, right ... but ... why? That question is never answered, at least coherently, by the so-called experts. Interest rates have come down dramatically this week following the collapse of Silicon Valley Bank, and while that occasionally puts a bid under Big Tech names, it has been no sort of panacea for broken U.S equity portfolios.
This is a grin-and-bear-it, block-and-tackle market. At my firm, Excelsior Capital Partners, we have a hard and fast rule that if we one a security, it had better damn well pay us for the privilege of doing so. Those interest and dividend payments are allowing the ExCap model portfolios that I regularly propagate via this column and elsewhere to decimate their benchmarks.
What is so puzzling to me, though, is the idea that there is some kind of temporary nature to the sorts of returns being produced by HOAX and ExCap's other portfolios. Quite the opposite. These are permanent returns that can easily be measured and quantified, as I did in my last column about a security we have been aggressively buying this week, ZIONP (ZIONP) , floating-rate preferreds issued by Zions Bank.
But, the narrative goes, this is all just a bad dream, and Cathie Wood has been, for reasons unclear to me, drawing massive inflows over the past week -- will wake up from it soon. No, she won't.
This is the new normal. You are looking at it. Ever since then-Fed Chair Ben Bernanke launched the first quantitative easing in November 2008, the U.S economy has been addicted to a steady stream of government interference. That time was pretty brutal, but the QE forever stimulus -- QE3 in November 2012 was especially unnecessary -- is just extraordinarily inflationary.
So, the chickens are now roosting. Higher inflation means higher interest rates, and higher interest rates mean everything becomes more expensive, at least in the short term. In the intermediate-term that contractionary policy is supposed to brake the economy so suddenly, that prices start to contract.
But Powell, Yellen and Co. are just extraordinarily bad at their jobs, in my opinion. They ignited the very inflation fire that they are incapable of extinguishing. So, at ExCap, we invest solely in public (not government) securities. The problem is that those public-company-issued securities are priced vs. benchmarks that are manipulated by the clowns in D.C. So, at some level, you have to trust your management teams.
Why do I trust the teams that run the companies in which we invest? Because I had some brief, televised conversation once on TV with them and then drop those CEOs' names for the next 10 years as if they were personal friends? No! It is because they produce returns on the capital that we graciously allow them to use.
Look at Zions' return on tangible equity (which is a tougher hurdle than many analysts use); I know why I am riding or dying with Scott Anderson and Zions. No, I don't refer to him by his first name (Elon?) even though I have never met him, and, honestly, given a line-up of CEO photos I would be challenged to pick him out. It's about returns on capital, not hero-worship.
That has been the lesson of the capital markets for the past two years, but I am not convinced that the majority -- or even a sizable minority -- have learned that. When they do, I will begin dipping ExCap's figurative toes into non-energy equities. I am not seeing that now.
Buy ZIONP. Collect the 8% inflation-protected return. And wake me when the equities markets start to make sense. We are being richly rewarded via dividends and interest payments for napping. It sure beats losing money.
