Happy New Year! Welcome to 2023!
We have been in a bear market for more than 1 year. For some stocks, it was even
longer. The S&P 500 hit its last all-time high of 4,760.18 on 12/26/21. On 10/2/22,
we had the last bottom of S&P 500 at 3,639.66- 23.5% decline in about 10 months!
NASDAQ suffered the most. On 11/14/21, NASDAQ hit a high of 16,057 and on
10/9/22, it was at 10,321-35.7% decline in about 13 months! My strategy is to start
“nibbling” (buying in small quantities) of quality stocks that fell sharply. Then keep
buying as it falls and then wait for another 5 years or so to reap the rewards. Also in
this market, we have to differentiate between a stock that seems like a good bargain
to other great bargains that are available. I do not believe that stocks like Apple and
Microsoft have come down enough to make them great bargains; and it is possible
that we will never see that with Apple or Microsoft. At times, we have to wait many
years to see good results. Boeing is a very good example. Most shrewd money
managers like Jim Cramer gave up on Boeing and sold their shares. Currently it is
at $190 with a 114% gain on our portfolio. Maybe in 2 to 3 years it will go back to
its all time high of $400. Netflix is a good example of a “great bargain”. Last time it
hit an all time high was on 10/24/21 at $690. On 4/24/22, it fell to $190 and many
wall street pundits said that they might even go insolvent. On 4/24/22, we made our
initial purchase and as of 12/31/22, we have a gain of 54%-in about 8 months.
During December 2022, we added more to our Tesla and Intel stocks; and we are
watching Meta/Facebook closely to add more in the future. Our new purchases
would show on the February 2023 scorecard. We bought 38 more shares of Tesla on
12/27/22 at a price of $109 per share. Now we have 50 shares of TSLA and if
TSLA falls below $80 per share, we will buy another 50 shares. “dollar cost
averaging”! As I have stated in previous newsletters, Musk is one of the most
intelligent humans on Earth but there is a difference between intelligence and
wisdom. Musk has a habit of shooting himself in the foot. As a wall street expert
stated, now with Twitter, he has a blowhorn to make erratic statements. With the
70% drop in the price of TSLA, Musk is no longer the richest man on Earth. TSLA
had the worst year in 2022! Musk way overpaid for Twitter and for what? So he can
get Trump to join Twitter? Not only TSLA investors were worried that Musk no
longer had the time to take care of TSLA after the purchase of Twitter, Musk had to
sell some of his TSLA stocks for that purchase bringing down the price of TSLA.
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Pride comes before a fall? Musk used a leveraged buyout strategy to buy Twitter
for $44 Billion; a third of it came from his bank borrowings! Let us hope that TSLA
will decline sharply in 2023, giving us a chance to lower our average cost. When
you adjust the price of TSLA for all the stock splits it had over the past few years,
TSLA was at $15.43 on 9/30/19 and $28.50 on 3/16/20. Imagine TSLA going down
to $15! Musk can go from the richest man to the poorest man! Many billionaires
have gone insolvent, many billionaires have ended in prison and many super
brilliant people have gone “crazy” in the end. Remember the Hunt Brothers who
cornered the silver market? Remember Leona Helmsley? Remember Howard
Hughes? I do not know if the name Tesla came from the name of the scientist
Nikola Tesla. Nikola Tesla was a Serbian-American inventor, electrical engineer,
mechanical engineer, and futurist best known for his contributions to the design of
the modern alternating current electricity supply system. Nikola Tesla got so crazy
that he had a love relationship with a pigeon. Tesla cars are being sold in many
countries but billions of humans use Twitter. Musk has talked about his asperger’s
syndrome and such people are known not to have compassion for other humans.
Soon after buying Twitter, Musk not only fired 50% of Twitter employees, he
stopped any of them from working from home. Also, he asked all his employees to
work very long hours. Per BBC World News, Musk put in “cots” at Twitter so his
employees could work 24/7! So many employees walked out that on one Thursday,
Twitter had to close till the following Monday. In more than 140 countries, for
“world news”, this was announced giving the impression that Musk is a monster
and one of the worst bosses of this century. On 12/8/22, per Bloomberg, Tesla is
considering margin loans to reduce its debt load. Interest paid on debt for one year
could exceed $1.2 Billion-more than Tesla’s 2021 earnings!
Now for our Intel purchase. From the chart for INTC(Intel), I can see that it made a
double bottom recently. It was $25.20 on 10/10/22 and $25.54 on 12/28/22. Now
we hold 50 shares of INTC at an average cost of $30.53. If INTC drop below $15, I
will buy another 50 shares for our portfolio. Semiconductors are the “steel” of this
century. Currently due to excess inventories, lower demand and so on, we have got
a wonderful opportunity to buy in to these stocks. The Semiconductor ETF, SMH
hit a low of $173 on 10/14/22. Previous high was at $301 on 11/8/21! My favorite is
AMD-which is on our portfolio. The best in the world is Taiwan Semiconductor
(TSM) but it is dangerous as most people expect China (PRC) to invade Taiwan
soon. TSM is down by 50% so it looks attractive.
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Where do we go from here?
David Alan Tepper (born September 11, 1957) is an American billionaire hedge
fund manager. He is the owner of the Carolina Panthers of the National Football
League (NFL) and Charlotte FC in Major League Soccer (MLS). Tepper is the
founder and president of Appaloosa Management, a global hedge fund based
in Miami Beach, Florida. He earned a bachelor's degree in economics from
the University of Pittsburgh in 1978, and an MBA from Carnegie Mellon
University in 1982. In 2013, he donated his largest gift of $67 million to Carnegie
Mellon, whose Tepper School of Business is named after him. For the 2012 tax
year, Institutional Investor's Alpha ranked Tepper's $2.2 billion paycheck as the
world's highest for a hedge fund manager.[2] He earned the third position
on Forbes ''The Highest-Earning Hedge Fund Managers 2018'' with an annual
earnings of $1.5 billion.[3] A 2010 profile in New York described him as the object
of "a certain amount of hero worship inside the industry," with one investor calling
him "a golden god."[4] Tepper revealed plans to eventually convert this hedge fund
into a family office (Wikipedia)
It is difficult to find a single “wall street guru” who does not “worship/respect”
David Tepper. On 12/22/22, per CNBC, David Tepper said that he did not anything
good on the long side in the stock market and he was considering getting in to
shorts. However, a note of caution, as Josh Brown (whom I respect) stated, when
David Tepper changes his mind and reverses his decision, he is not going to let
others know about it. On the opposite side, we have professor Siegel from Wharton
School of business. Jeremy James Siegel is the Russell E. Palmer Professor of
Finance at the Wharton School of the University of Pennsylvania in Philadelphia,
Pennsylvania. Siegel comments extensively on the economy and financial
markets.(Wikipedia) . Professor makes several valid arguments to be bullish.
Number one reason is that there are so many investors who are bearish right now
and taking a contrarian view, could be prudent at this point. However, as Siegel
wants done, if the Federal Reserve pivots that could lead to 2 big problems. First of
all, the Federal Reserve will lose more credibility; and also, before long we will
have a worse problem with inflation; and we will have a 1970s style economy
where the Feds kept pivoting prematurely and creating a huge inflation problem for
decades. Per Jim Cramer on 12/22/22, not only the US Federal Reserve Bank but
most central banks in the world, including Europe and Japan (surprising most
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people) are determined to keep raising rates and decrease their bloated balance
sheets.
As I have stated in the past, I am confused why the Federal Reserve is only
unloading $95 billion per quarter in the bond market to decrease their balance sheet.
While the Feds have been raising rates and unloading items from their balance
sheet, in the bond market, the yields have been going lower and bonds have been
going higher! Let us take a look at the ETF known as TLT ( iShares 20+ Year
Treasury Bond ETF (TLT)), From 11/7/22 to 12/7/22 (in one month), TLT rose by
17%! Unlike stocks, a 17% increase in bonds is extremely unusual. I am not the
only one who is frustrated and confused. At CNBC, they have a team of economists
whose job is to monitor the Federal Reserve Bank and all worldwide central banks
24 hours per day. This team is headed by Steve Leisman. On 12/14/22, extremely
frustrated Steve Leisman (on CNBC) stated, “ I am having an intellectual crisis. As
Feds are keen on increasing rates, bond market keeps lowering rates which does not
make sense and it is like the bond market is giving its middle finger to the Feds”!
There are few people who manage trillions of dollars in bonds and they believe that
the Feds will follow their lead and start lowering rates because inflation has gone
down by a little bit. Bond king and billionaire Jeffrey Gundlach states that the
probability of the Feds lowering rates in 2023 is 75%. That could be true; but we
will have volatile stock and bond markets for years to come. Fed Chair Jerome
Powell stated that he wants to be like Volker and kill inflation for the long term
than what Arthur Burns kept doing in the 1970s. Gundlach and Siegel believes that
Feds unloading $95 billion per quarter is too much and that is creating a liquidity
problem. I do not agree. If there is a liquidity problem, why did the bonds rise so
sharply bringing down the yield?
Decreasing the Federal Reserve balance sheet is also a national defense issue. In
2007/2008 when we came close to a financial market meltdown and when George
W worked with the Congress and the Federal Reserve and started a program to save
the economy, Putin approached China (PRC) and suggested that they both get
together and unload all their US Treasuries which would have led to a real
meltdown in our economy. Per US Federal Reserve, as of July 2022, foreign
governments held 7.5 Trillion USD in US Treasuries. Due to “printing of money”,
the US Federal Reserve balance sheet is at 8 to 9 trillion USD. China (PRC), which
owns an estimated $972 billion in U.S. Treasuries, is the number-two investor
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among foreign governments. China buys Treasuries to help depress the value of its
currency, the yuan. Russia owns only about 2 billion US treasuries as of December
2022. If the Feds see that the bond market is bringing down the yield, the Feds
should increase the rate of reducing their balance sheet and be prepared for the next
unexpected economic disaster. All prudent people believe that the Federal Reserve
and government stimulus checks saved us from a major depression in 2020 covid
crisis. The Federal Reserve had only an indirect impact on mortgage rates until
2008. Around this time, the Fed began buying Mortgage Backed Securities (MBS)s
directly in order to support the economy, help decrease mortgage interest rates and
add liquidity to the market. A few months ago, Fed Chair Powell stated that the
housing market was in a “bubble”. The US Federal Reserve and most central banks
around the world, with their “money printing” created this problem and a huge
worldwide homeless problem with 520,000 homeless in the US. If you live in San
Diego county, you are sure to see TV ads from “I buy SD.com”. Whatever house
you own, despite its condition, with no banks or mortgages they will buy your
house within 24 hours! Didn’t they learn a lesson from Zillow? Just like in 2007,
they assume they can keep adding to inventories as prices will continue to go
higher. This is another reason why the Feds should not pivot. As Powell stated
when these speculators get out of the market, he can lower rates so middle class
people can buy houses with mortgages and not with 100% cash. Per Josh Brown on
CNBC, the mortgage industry is already in a recession and home builder Lennar
reported that their cancellation rate increased from 12% to 24% from Q3 to Q4 in
2022. With the expected recession, this will only get worse.
Blackstone's real estate fund for wealthy prompts SEC queries-
The U.S. Securities and Exchange Commission (SEC) has reached out to
Blackstone Inc (BX.N) following an increase in investors pulling money from its
real estate fund, Bloomberg News reported on Friday, citing people familiar with
the matter. Earlier this month, the asset manager limited withdrawals from the
$68-billion Blackstone Real Estate Income Trust after receiving too
many redemption requests. The regulator is trying to understand the market
impact and circumstances of the events, according to the report, which added that
the inquiries aren't any indication that the firm is under investigation or committed
any wrongdoing. (Reuters, 12/16/22).
Divine Justice?
UN accuses Blackstone Group of contributing to global housing crisis. World’s
largest corporate residential landlords called out for their practices of inflating rents
and ‘aggressive evictions’. The UN’s housing advisor has accused private equity
firms and one of the world’s largest corporate residential landlords, Blackstone
Group, of exploiting tenants, “wreaking havoc” in communities and helping to fuel
a global housing crisis. In a stinging critique of the role of private equity in the
housing market UN rapporteur Leilani Farha and co-author Surya Deva,
chairperson of the UN Working Group, singled out Blackstone’s business practices
– which they claim include massively inflating rents and imposing an array of
heavy fees and charges for ordinary repairs – as having “devastating consequences”
for many tenants in countries around the world. In a series of letters to Blackstone
and government officials in Czech Republic, Denmark, Ireland, Spain, Sweden and
the US, Farha and Deva accused private equity and asset management firms
like Blackstone and its subsidiaries of undertaking “aggressive evictions” to protect
its rental income streams, shrinking the pool of affordable housing in some areas,
and effectively pushing low and middle-income tenants from their homes.
Blackstone has, in recent years, acquired hundreds of thousands of homes in the
US, Europe, Asia and Latin America, often through subsidiaries, making it one of
the largest and most powerful global players in the housing investment sector. Farha
said the commodification of real estate by private equity investors in recent years
had made housing for many people increasingly expensive and precarious:
“Landlords have become faceless corporations wreaking havoc with tenants’ right
to security and contributing to the global housing crisis.” However, the need to
maximize profits to repay investors typically led to a “constant escalation” of
housing costs for tenants, primarily by hiking rents – in some cases by 30-50% –
and ruthlessly pursuing eviction for non-payment. One corporation issued nearly a
third of its tenants with eviction notices, the letter says. The authors allege that a
Blackstone subsidiary in the US, Invitation Homes, imposes charges for minor
maintenance repairs and tasks such as removing insect infestations. She alleges that
it imposes late rental payments of $100, even if they are just one minute late, or due
to an error in Invitation Homes’ computer system. (The Guardian, 3/26/19).
A few months ago, the Governor of California promised to take measures to stop
Wall Street and other speculators from creating a worse homeless problem-as done
in Canada and New Zealand. Still nothing on that!
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Talking of “Divine Justice”, remember Valeant Pharmaceuticals? During the 2016
presidential election campaign, Trump and Hillary both stated that they would take
action against Valeant and other companies of that nature. They researched and
found companies that have not raised prices in a long time and where the demand is
inelastic and the CEO of Valeant went on a buying binge. Then they raised prices
100% to 1,000%! In many cases the scientists who discover these medicines would
sell those patent rights for a low amount (as low as $1). The stock price rose more
than 4,000%! Some of those drug prices never went down. More than 1
million Americans with diabetes have to ration lifesaving insulin because they can't
afford it, a new study shows (US News, 10/18/22) According to a new study,
released earlier this month from CharityRx, Even all poor people with diabetes in a
poor country like Mexico but that is not true in the richest country on Earth! 79% of
U.S. adults who have diabetes or care for someone who does say paying for insulin
has created financial difficulty.(Forbes,6/20/22). Prior to this scandal, billionaire
investor Bill Ackman used to be compared to Warren Buffet, Valeant deal was so
profitable, he and other billionaire investors gave in to their greed and forgot all
about diversification and put most of their funds in to Valeant. Then within a 6
month period, Valeant’s stock price fell almost ninety per cent, thanks to a toxic
combination of sketchy accounting, political blowback, and slowing growth. Bill
Ackman and other investors lost billions. The CEO and the brainchild of this cruel
business first lost a great deal when Valeant dropped from about $270 to about $27,
then he lost his job. Thereafter Goldman Sachs sold most of his assets as he could
not comply with a margin call. Finally, he got a heart attack. Sounds like “divine
justice”?
So, what to expect from the market? No one knows for sure. Who has a crystal
ball? The market analyst and astrologer for some of the best Wall Street firms for
40+ years, Merriman is expecting big unexpected surprises in 2023-both good and
bad. If the market crashes, then we could get opportunities to buy! This slow grind
to the bottom is not healthy….