I was always attracted to frugal operators like Larry Tisch who busily bought up super-tankers then scrapped by Exxon and other oil majors. Larry was standing on the deck of a 200-meter leviathan. “You mean you get all this for a million bucks?” he asked. Maybe, big oil is headed to its scrap value, fully discounting reserves in the ground. The SEC needs to step in here on full disclosure.
What would Alexander Hamilton think of today’s electronic trading or the Federal Reserve Board’s buying low-rated corporate bonds? Even Renaissance Technologies, the computer-driven asset house managing $75 billion couldn’t handle the market’s intraday volatility in the spring of 2020. They were down 20%, dozens of their mathematicians nonplussed.
Ironically, a repeat of Black Monday could happen because of panic selling rather than overspeculation. Lest we forget, in the 2008 – ‘09 meltdown, Lehman Brothers, Bear, Stearns, Drexel Burnham, even Merrill Lynch stood overleveraged in unsalable real estate and junk bonds during the period of interest rates running up to 8%. The cost of carry for leveraged assets exceeded their yield, a killer situation.
I worry about unintended consequences of sucking in a new generation of buyers for mutual funds, ETFs and indexed paper. Trillions in equities are held passively and someday may approach the equivalent of GDP.
Chuck Schwab’s near-zero commissions rate structure turned Charles Schwab into one gigantic play on interest rates. They do arbitrage client-credit balances, paying out much less than they earn on reinvestment. Schwab, in short, is a money-market fund parading as a full-fledged brokerage house. When I sniff a steeper-yield curve coming, Schwab becomes playable.
I’m awed by the immensity of the financial world these days. BlackRock and others control trillions in exchange-traded funds and mutual funds. This awesome boodle has doubled in size past five years. Late fifties, when I subwayed down to Wall Street, it was a small village with a heavy-glass ceiling. Women solely populated the typists’ pool. Female analysts were rare, deemed too emotional to manage money. A Wasp-conclave presided, quietly, in place. They traded in Treasuries and AAA debentures, mainly, not in equities. Partners didn’t arrive at work until 10:00 a.m., after the market’s opening bell. They were well-tailored anachronisms.
A few years later, Mickey Siebert, a standout-female operator, fought for and won a seat on the New York Stock Exchange. The Street, finally, was turning into a meritocracy. When Bell Laboratories’ invention of the semiconductor was licensed to all-comers, technology took off as a burgeoning sector in the S&P 500 Index. Now it’s over a 25% weighting, up from 3% in 1960.
Late fifties, money managers like Jerry Tsai and Leon Levy of Oppenheimer stepped into the empty spotlight. George Soros was running a $20 million hedge fund which was considered a lot of money then. The public had no idea that hedge funds existed or how they operated.
Brokerage commissions, early sixties, stood outrageously high, accepted as the norm. A round-lot at $50 carried a $50 commission, 1% of principle. A decade later, the SEC instituted negotiated rates which drove out of business boutique-research houses. Wilbur Ross was the research director at one house and our paths crossed. Nobody understood how low commissions would transform the Street and broaden public participation.
Elsewhere, grandiosity is expressed in 90-story condominiums and office buildings now troubled by rent softening and rising vacancies. Fortunately, the cost-of-carry is lower in this cycle than in 1973 – ’74, a bloody downcycle. You coulda bought half of Park Avenue for a song in 1973. I was considered a nut job for buying an apartment in the Dakota for $87,500. Wilbur Ross was president of this venerable edifice.
Consider, The World Trade Center, a case of political grandiosity, was the brainchild of Nelson Rockefeller. The 9/11 tragedy need not have happened in the Big Apple. The buildings never should have seen daylight. Rockefeller prevailed on the board of the Port Authority of New York and New Jersey to sop-up their excess capital in this project. It remained under-occupied, depressing downtown office rents for a decade.
New York’s Metropolitan Transit Authority utilized the New York subway system as their private piggy bank. Bloated salaries proliferated amid neglected maintenance. It could cost New York tens of billions to set things right. In my time, subway fare was a nickel, stations cleaned at night and no more than a five-minute wait for the “C” train. When fares got boosted to a dime, early fifties, everyone screamed but paid up.
September 2019, Black Power’s grandiosity surfaced. A three-times oversized equestrian statue got space in Times Square. The horseman wasn’t George Washington, Ulysses Grant, even General Sherman. The rider, a young black man sitting erect, even regally, was dressed casually in torn jeans with a hoodie. No slick riding boots, rather work boots in the stirrups. His hair was after Jean-Michel Basquiat, spiked and bandanna wrapped.
The sculptor, Kehinde Wiley, said his piece was dedicated to Arthur Ashe, and headed for Arthur’s Richmond, Virginia birthplace. Why did Mayor de Blasio approve such a piece for Times Square viewing? Well, the mayor’s wife is black. Net, net, I saw this as a politically-insidious Black Power play rather than a fitting memorial for Arthur Ashe, a handsome, ever-elegant, neatly coifed and soft-spoken tennis champion victimized by a tainted-blood transfusion that gave him AIDS.
I’m against revisionist history. Let Ivy League professors pursue that bent in 700-page books with 100 pages of footnotes. In the performing arts, revisionists have loudly taken over. You dare not give viewing time to Al Jolson in blackface. My Fair Lady now ends with Liza slamming the door behind her, rejecting Professor Higgins who treated her as a servant. Let Higgins get his own slippers. All this is holier than thou nonsense.
Depiction of the Deep South in Gone with the Wind is no longer acceptable for viewing. Even The Most Happy Fella, which I’d like to revive, needs lots of touching up. Women can no longer be put in a meat-market situation. Tony, that male chauvinist, dared to trick Rosabella with a young man’s photograph. What’s to do? Change Shakespeare’s Shylock into a Waspy banker in grey flannels? Do we sanitize Othello into a more-felicitous husband, not the jealous brute who snuffs his adoring wife?
The ultimate grandiosity is the Big Board selling near 20 times normalized earnings. Market historians like me would pontificate “not for long without an earnings story.” Half my capital resides in junk bonds yielding 5.5%, the reciprocal of grandiosity. Even AT&T can be a big winner in a low-interest rate setting, yielding over 6.5%. Analysts stick lukewarm to neutral. AT&T is no longer a long-lines telephone story but an entertainment conglomerate that’s tough to construe in a definitive-earnings construct.
Now is not the time to live dangerously, grandly. Before 9/11, my old, old friend, Sam Zell, warned me never live or work in a landmark building. Too dangerous. The grave dancer knew what he was talking about. John Lennon was gunned down by a nebbish, a wannabe, at the entrance of the Dakota, coming home from a studio rehearsal in Times Square. Big-city newspapers, once great franchises before the internet, now are owned as hobby horses by operators like Jeff Bezos. Even Sam bought a Chicago chain. Nobody’s exempt.
Corporate grandiosity no longer gets expressed in fleets of jet aircraft, the erection of the General Motors building and in flashy art collections. We’re down to hard-bone executive compensation: Huge stock grants, outsized bonus allotments and stock options. Tesla and Boeing are my prime examples of excess, but, in previous cycles such largesse took place in the energy sector as well as technology and the Street’s financial houses.
Grandiosity in stocks on the Big Board covers ponies tracking over $1,000 a share. We’re talking Amazon, Alphabet, Berkshire Hathaway and Tesla. In the old days, everyone split their stock down to $50 to attract new buyers. A $1,000 stock now is the ultimate finger gesture. “Sorry, fellas. We don’t need you any longer.” Subconsciously, this has led me to focus more on my ragamuffins.
There are ironies herein. Amazon and Tesla don’t submit themselves to conventional-security analysis. Everyone’s shooting in the dark. I’ve added to Alibaba and Microsoft which are analyzable. My moon shots remain – Halliburton and Freeport-McMoRan, washed out months ago under $5, now ticking over $10. They’ll see $20 sooner or later.
Sosnoff and / or his managed accounts own: Amazon, Alphabet, Alibaba, Microsoft, Halliburton and Freeport-McMoRan.