I had 29 one-on-one meetings with C-Suite executives at the LD Micro conference in LA this week, and in each one I mastered the art of affecting a faraway look and stating "the macro rules the micro." With the Russell 2000 having fallen 20% thus far in 2022, I believe that has been the default reaction for investors in emerging growth companies. What is striking to me now, however, is how the broader markets have completely twisted this.
As a truly depressing round of earnings reports from Big Tech companies like Meta Platforms (META) bring FinTV types to tears on air this week, the market, as it is doing Friday, will continue to pop on any possible hint of a slowdown in inflation. Friday's PCE deflator data (Personal Consumption Expenditures Price Index) did not provide that, and if you are buying stocks based on inflation running at 5.1% versus a 5.2% forecast (remember that the Fed's target is 2% and that that figure printed at 4.7% last month) you are doing so on the flimsiest of all premises.
There is a disconnect here that I have rarely seen in my 30 years of equity analysis. I jumped right out of undergrad to join the equity research department at Lehman after having studied concepts like financial disintermediation as an Economics major at Duke, but I am seeing evidence of financial disintermediation every day in watching the markets. The small-company CEOS at LD Micro are feeling that pain, but it is not their fault. Equity markets are broken now, and the feedback loop is just not working quickly enough.
We really have to look beyond Big Tech to find value in these markets. Fortunately, your loyal scribe has not been doing that all year, and in fact since the launch of my HOAX portfolio on December 23rd of 2021. Exxon Mobil (XOM) had an excellent quarter in case you missed it this morning, and increased its quarterly dividend rate from 88 cents to 91 cents. META has never paid a dividend. Not a lot of tears were shed this morning at my firm, Excelsior Capital Partners.
If you want to avoid the equity markets altogether, make sure you have a worldview on interest rates. If you think they will keep rising, get yourself some FLOAT, (which is entirely composed of floating-rate preferreds and is located behind the paywall at my site) and if you don't, buy some PREFS, one of my free-to-all model portfolios. PREFS has fallen 10% since inception on 5/26. So the preferreds in PREFS have seen haircuts to par in their market values, but PREFS continues to pay dividends at an annualized rate of 6.63% (before reinvestment) with an extremely solid cohort of issuers.
If the yield on the 10-year UST Note continues to fall below 4%, and we have seen the worst of the interest rate increases (that is not my core prediction, but I always allow for different modalities - no one is right every time) PREFS will perform quite well from its current level. Either way, it throws off ridiculous amounts of cash via quarterly dividend payments. Amazon (AMZN) has never paid a dividend.
Give yourself options. If you want to trade options themselves, I also do that, but that is risky and only suitable for a certain type of investor. But blindly following an incredibly wrong this year - with a few exceptions like Mike Wilson at Morgan Stanley (MS) and Michael Hartnett at BofA (BAC) - cohort of Wall Street analysts is a certain way to earn substandard returns. I walked away from that life 20 years ago...and I never look back. The macro may rule the micro, but actually knowing how to analyze a micro situation saves myself and my clients all sorts of tears.