July 19, 2023

Mixed Messages

The stock market says the economy is fine.  Or does it?

I joined Brian Sullivan and Carson Group Management’s Ryan Detrick on Last Call last night, Brian’s new show.

We talked about the economy and the stock market. The Dow Jones Industrials hit a new 52-week high yesterday. That’s a VALUE index, not a growth index.

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Let’s use that data point as a touchstone. Blue chips have outperformed growth stocks since the 2008 financial crisis. Sure, the Nasdaq surges here and there, separating on a handful of stocks (but it gaps down violently too, as it did just last year).

By the way, the Nasdaq is reweighting the Nasdaq 100, in case you missed it. They’re shaving 12% off AAPL, MSFT, NVDA, TSLA, META, AMZN and GOOG/L and sprinkling it down through the other 93 to try to reduce reliance on the few, which have accounted for 75% of the S&P 500’s gains this year (and through June 30 were effectively 100% of them).

Will it work?  Dunno.

But what do these stocks share with the DJIA?  Size. 

If models say de-weight fixed income, add to equities, it’s if anything a monetary decision, not an economic one. Models need something simple and easy to understand, to meet requirements.

What’s simple and easy? Size. And liquidity. The seven largest US money managers oversee $45 trillion and over 70% of it follows models.

Those so-called Magnificent Seven trade at 40x earnings. DJIA stocks trade at 12x. Who cares?  That’s not the way money chooses equities. Money picks products.

And those seven stocks trade 4.5 million times per day – not shares, trades – and $100 billion of combined daily dollar-volume.

Tim, are you saying fundamentals don’t matter? 

No. Quality – quantitative metrics on financial performance – is a characteristic. But showed a high-quality name with constrained size and liquidity, money chooses size.

How do we know? Look at the data.  The largest investment category with over 40% of all US equity assets is Passive Large Cap Blend. The top 25 holders of nearly every Russell 1000 stock are Passives or closet-indexers. Stock-pickers are often net sellers.

I’ve used this analogy before. On the cattle ranch of my youth, we aimed to take a UNIFORM set of steers to market.  Same size, same weight, same features, same color.  Why? Because the big buyers would pay the same price for all of them instead of cutting out the small one, or the spotted one amid the solids.

Also, we gave the market the product it wanted. Marbled beef with a big fat cap? We’ll grow Herefords.  Lean, grass-fed beef?  We’ll raise Anguses.

Public companies, you need to do the same thing. The market wants a product, not a story.  It wants size and liquidity.

The parties chasing earnings beats or misses are speculators with leveraged bets. Yet quarter after quarter, public companies machinate over minutia and go right on giving speculators the green light while ignoring the characteristics money buys.

Think about all our verbiage, and tables, and ruminations over call scripts. Why are we doing that if we know money buys products, not stories?

You don’t believe me? Do your homework. The data are there for all of us to read. 

Which brings us back to the economy.  What are the hallmarks of a prosperous, durable economy?  Leisure time.  Discretionary income.  Improving debt-to-savings ratios. In layman’s terms, if money goes farther, economies carry on endlessly.

Since 1913, says the Minneapolis Federal Reserve, inflation is up about 380%, or about 3.1% per year. From 1800-1913, prices in the Consumer Price Index equivalent data set DECLINED 55%. (1913 is the year the Federal Reserve was birthed.)

Which economy is better?  You’d say, “Well, the modern one!  We’re more prosperous.”

The last 20 years, using data from the St Louis Fed and generalizing it, total income in the United States has roughly doubled, along with federal government debt and consumer debt and credit.  So if debt and income rise at the same rate, is there growth?

Well, there’s no productivity. There’s too much month at the end of the money, as the old country song goes. People become dependent. Debts mount. Stress rises, ennui blooms (throwing in a literary term).

The US isn’t prospering. We’re making minimum payments, we have no leisure time, we’re buried in debt.

We should take a page from the 19th century and combine it with modern technology and we could solve our insolvency.

But the market is not a barometer for those unsustainable conditions.  It’s a barometer of the search for size. 

Passives need a uniform herd. Big and liquid. Stuff that looks the same.

Public companies are by and large fruitlessly trying to look different.  Unless you’ve got a major catalyst, there’s a 1% chance of alpha, outperformance.

Despairing? No, the opposite!  Being beta is awesome, achievable, rewarding. It’s a simple, focused, objective path to success, a roadmap for shepherding shareholder capital.

Give the market a clear PRODUCT.  Like Midcap Value (don’t be growth and value – that’s a split personality).

Issuing lengthy earnings releases is throwing money away and fanning arbitrage.

We can get you out of that doom loop! It requires a shift in thinking, a shift in practice. And it works.  If you want to know more, ask us.

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