In his song "Cowboy," Kid Rock lays out a plan of action when he begins his new life on the West Coast after moving from Detroit. One of his bullets is "start an escort service for all the right reasons." It's a funny line, and I am still not exactly sure what it means, but I would apply it to 2022's brutal stock market performance.
The U.S. stock market is falling for all the right reasons.
I used the present tense there, as I am writing this column pre-market and equity futures are down sharply as of this writing. This is a "quad witch" options/futures expiration day as it's the third Friday of the final month of the quarter, so watch out for weird gyrations in individual stock prices on this very Friday. If you are a trader, you can use that. If you are a long-term investor, you should ignore the hell out of it, because...
As I said, the U.S. stock market is falling for all the right reasons.
As recently as March 15, 2022, the Fed Funds target rate was 0%-0.25%. Today, it stands at 4.25%-4.50%. If you think that a 425-basis point increase is not contractionary, I would advise you to finance something (a house, car, or other big-ticket item) on credit and calculate your monthly payments now vs. what they would have been in early March. Easy math.
The yield curve is more inverted than it has been in 40 years. So, for this, go to the always excellent St Louis FRED database and fire up this graph https://fred.stlouisfed.org/series/T10Y2Y with the time settings set to "max." OK, then open up a lemonade stand, and try -- as opposed to our last example where you were the buyer, not the seller of credit -- to fund your stand at 4.50% every day, while selling long-term lemonade contracts at an annual interest rate of 3.5% (roughly the yield on the 10-year UST today.) Again, the math is easy...and bad for the bulls.
So, that's what you have to understand. The macro rules the micro. Interest rates (short-term ones) are as high as they have been since 2007 and the direction of longer-term interest rates https://fred.stlouisfed.org/series/DGS10 (again, set the duration to "max") is upward for the first time since the '90s, or even early '80s, depending on your definition of the duration of yield back-up required to be defined as a sustainable change of direction.
So, those are all the right reasons why U.S. equities are just not attractive as an asset class. I still like energy, and have not sold a single energy share for myself or my clients in 2022. That is owing to idiosyncratic supply-demand factors, which are evident in wartime conditions. These conditions produce cash flow bonanzas for oil companies, as evidenced by Exxon's (XOM) recent update of its share repurchase authorization to $50 billion.
Otherwise? I have been slashing and burning non-energy equity exposures like there is no tomorrow. And beating the hell out of the markets by doing so.
So, that's my unique position as an asset manager for people. I inherit accounts. When I sign up a new client, I get to see what they were in ... and create something in the mold of my model portfolios, like my HOAX (all-energy) DEATH (all-short garbage stocks) PREFS (all fixed-rate fixed-income securities) or WYLD (all floating-rate preferreds.)
It's an ego-tester for sure. I have the power to completely remake a portfolio that in some cases (this is true of my largest account) was built up over 50 years. With great power -- my individual clients have busted their asses for years to build the capital for their accounts, and I never forget that -- comes great responsibility.
I may not manage as much as Larry Fink's BlackRock (BLK) in aggregate. On a micro level, though, if I am managing your entire life saving, I am not going to risk it by listening to corrupt grifters at Wall Street banks (yes, I worked with them for more than a decade; I know of what I speak) , shysters who pump stocks of companies with clearly worsening fundamentals (see my column from Thursday for examples) and, the worst of the worst, the shameless stock-promoters who spout clichés on television.
It's what I do. I am thankful to Real Money to have this corner of the internet every Thursday and Friday to explain why I do what I do. Be very careful with your equity holdings here.
