“Without art, visual, verbal and musical, our world would have remained a jungle.” Bernard Berenson writing in Italian Painters of the Renaissance. I’d substitute economic growth for art because you don’t get one without the other.
One example suffices: In 1982 Jean Michel Basquiat was painting nonstop in the basement of Annina Nosei’s gallery on West Broadway. I was tipped by Mary Boone whose gallery sat next door, that I should give a look.
My response was “Why are you bothering me with this graffiti scribbler? All I want is your help in building a collection of the neoexpressionists – Kiefer, Baselitz, Polke, Penck and Immendorff.
Just last week, a 1982 Basquiat canvas made over $100 million at Sotheby’s, bought by a Chinese operator. The year 1982 in retrospect was the painter’s best work. Months before his 28th birthday, Basquiat overdosed on heroin. Fallen between the tracks, Mary Boone quipped: “We shoulda tried to save him.”
Consider, low interest rates remain the granddaddy of all leading and coincident indicators for equities and for art. My favorite yardstick is a 10% compounding schema which doubles in under 7 years. If you construe something less don’t play in the game or fold your hand.
Ponder what turning my nose up for Basquiat’s work cost me. At $2,500, apiece, in 1982 I carried wherewithal to buy at least 10 Basquiats. If held for 35 years, we’re talking about $1 billion thrown out the window. I would not need to worry about Apple’s next quarter, OPEC policy or the Federal Reserve Board which today can’t find its ass with both hands.
Let them look for inflation under every rock. Every commodity starting with oil and working down through copper, steel, iron ore and aluminum if not in freefall shows no signs of even feeble recovery in prices or demand. Trump’s policies were supposed to put 10-year Treasuries up to 3% by yearend. Today we’re ticking at 2.2%. Even Goldman Sachs revised downward their interest rate forecast. High yield bonds stay on track to deliver at least 10% this year if nothing changes. (My forecast.)
Bruno Bischofberger, the savvy Swiss dealer, bought Basquiat’s work aggressively, and incidentally built an awesomely beautiful collection of contemporary glassworks. In art as well as NASDAQ, one success normally leads to many more. You do have to be involved, like Bernard Berenson. If BB didn’t have an emotional reaction to the canvas in front of him, he’d pass it by. How discipline yourself or at least try to learn something about valuation, and what kind of player you are? Not by what you think, but what you do.
First, satisfy yourself that the price-earnings ratio of the market makes some sense. The macro comparison is the historic yield of 10-year and 30-year Treasury bonds. Going back to 1930, you’d find that when bonds yielded between 2% and 4%, the market sold at 17 to 18 times earnings.
Actually, the peak multiple for the market is expressed when Treasuries yield between 3% and 4%, not lower. If 30-year paper is yielding 2% it suggests the market is probably in the throes of deep recession with depressed earnings prevailing in the financial, industrial and energy sectors.
If you believe as I do that the country faces low probability of escalating inflation and the Federal Reserve Board would be insane to tighten interest rates, the conclusion is the market’s playable. Then, get off your horse and inspect the ground. Where to put your money to work, which sectors to overweight and which to x-out.
Now, forget about energy, basic industrials, pharma, retailing and consumer nondurables like Coca-Cola and even PepsiCo. I’ve just excluded at least half the market’s capitalization. I wanna own technology and double weight prime Internet houses like Amazon, Facebook, Alphabet and Alibaba.
Consider: Alibaba just “surprised” analysts at its 2-day conference and the stock popped over 10%. Alibaba’s not even in the S&P 500 Index, but sports a market capitalization approximating $350 billion. (Somebody tell me why BABA is not in the S&P 500?)
To hell with the S&P 500 Index as a measurement tool! Rate yourself against NASDAQ 100, a concentrated index, mainly tech houses. Year-to-date this index has advanced over 20% with the S&P 500 gain at 8.7%. If nothing else, NASDAQ will uncover what you’ve missed. Absent any intensity for all this, buy an index fund and go back to sleep.
Yearend, 1972, growth stocks peaked at 2.7 times the market’s valuation. Each succeeding market cycle witnessed declining relative prices for growthies until the late nineties. Then, the market pegged traditional growth paper like Wal-Mart, Coca-Cola and Microsoft at 1.5 times the market.
When NASDAQ took off for its fling to 5,000 in 1998 – ‘99, money managers sold faltering growth stocks like Merck. At the bottom, in 2001, when Alan Greenspan dropped the fed funds rate by 50 basis points, NASDAQ rallied 15% while drug stocks declined. Today, Pfizer Pharmaceuticals which perennially bumps up pricing on old drugs at least 10% per annum is a false growthie. So is Coca-Cola.
Beneficiaries of exponential computer power no longer are the black box assemblers, but rather packagers of entertainment, information and telecommunications who leverage technology. Namely, Comcast, Time Warner, Alphabet, Apple, Netflix, Facebook and Alibaba. I’d include AT&T in this list with its pending deal for Time Warner.
Despite trillions in market valuation for growth stocks, analysis is a fuzzy business. Growth stocks are independent, masculine entities purveying impeccably packaged products most of us thirst to consume. Apple, for example. The passive investor gets rich only if he comprehends hidden agendas to satisfy Wall Street’s need for 15% earnings momentum. The market pays for high unit growth as well as pricing power, not just price leverage as in cornflakes.
Cisco Systems rose to number one in the S&P 500 with a market capitalization of $500 billion before correcting to $350 billion in 2000, now $215 billion. Knowing when to get off your bus is a critical variable when playing with volatile paper. Analysts and fund managers forever get entangled in the euphoric rationalization of valuation. Cisco sold near 100 times projected earnings in 2000.
I don’t pay more than 2 times the growth rate for anything. You make the most money buying stocks at 1 times their growth rate so you gotta be early or buy when there’s panic in the streets. Nobody talks about courage, but it’s the outstanding personality trait. Wisdom comes second.
The music isn’t about to stop for Internet plays. Consider Alibaba, a Chinese operator not part of the S&P 500, is proving another Secretariat, uncatchable, stout-hearted.
I call my growth portfolio American Beauty Roses. Actually, these gorgeous long-stemmed beauties are grown in Ecuador and flown in daily to the flower market in New York and elsewhere. They take your breath away just like a great growth stock.
The deepest ruby reds are named Black Magic.
Sosnoff owns: Alibaba, Alphabet, Apple, Facebook, Microsoft, Time Warner and AT&T.