Mike Wilson Worries Bears Aren’t Bearish Enough
Morgan Stanley's Mike Wilson can scarcely remember a time when he's had as much interaction with clients during the first week of a year as he did in 2023.
"Normally, investors start the year with a set view and portfolio and have even less use than normal for equity strategists," he wrote Monday, employing the delightfully deadpan cadence that often pervades his notes and television cameos.
This year, he said, market participants are "less confident" in the outlook coming out of a vexing 2022
Here are my thoughts on my personal positioning for 2023:
Dividends and income from rental properties cover most, but not all of my living expenses (no rehabs or expensive indulgences planned for 2023). I will attempt to time a liquidation of some shares (probably a small, under the radar tech holding that has done extremely well compared to tech, in general- ie down only 5.5% vs. 30% for QQQ where I have a lot of “key man” risk that I want to minimize) to make sure I’m good through 2023. Will hold everything else, but might move some more individual holdings into SPY. I did, however, move my 89 year old parents from CD’s to USTs (2-3 yr maturities) this past December and into last week.
Let the rollercoaster roll.
What does Marko think?
” reeling from three months of price action which, at times, seemed disconnected entirely from any sort of fundamentals.”
No different than a casino in Las Vegas or Macao!
I’m curious what discount rate Wilson is using. If I use rF 2.75% and ERP 5.00%, with the SP500’s aggregate capital structure, I get a WACC about 7%.
Feels like the point here is that if S&P earnings come in close to 200, the ERP expansion will drive the index to 3,000ish give or take a couple hundred points, and 3,500 is too sunny.
My biggest concern is a slog for 6 quarters, whether it meets the definition of recession or not. My own guess is inflation goes down quickly. With a heinous narrow house majority, I cannot imagine much help from fiscal policy, in fact I fear a drag there. Monetary policy could help in that situation as long as inflation unwinds. But it is going to have to do all of the work in either direction of stimulus or further tightening.
I’m starting to find myself in the more bearish camp after previously agreeing with the general consensus that the Fed would pivot hard at the first sign of recession. Now I expect the Fed to hold for longer and letting things get worse than what markets are anticipating. It’d take a serious break in the markets for the Fed to slam the emergency brake by slashing rates and I don’t see anything on the order of the great financial crisis or pandemic that would force their hand (I know, famous last words).
I’m in tech and what concerns me is that small cap and privately held tech are just starting to experience serious pain. We’ve all heard about layoffs happening all across the tech landscape, but there is also major retrenchment in spending across the board. My spending is your revenue in the B2B tech world as everywhere else, and as everyone pulls back or goes bust, it could turn into a vicious cycle. Many of these companies were already operating at a major loss and are going to be at risk of running out of runway as everyone pulls back on spending.
There will be some quality names that will be prime acquisition targets, but there are so many redundant and unnecessary tech tools that were kept afloat by never-ending VC money. Those faucets have turned off, and that’s a big part of why I think the FAAMG cohort will come out smelling like roses again while small cap tech continues to struggle. The FAAMG group gets to cut costs and pick up some bargains with limited downside due to their ample cashflows. They also have the upside if the Fed starts cutting rates. That’s where I feel safest heading into the new year.
I’m not a FAAMG guy, but I’m with you in style, DJ.
I hit the reset button over the past two months by selling off losses and buying into expected, winning positions in small-cap tech for 2023.
FAAMG grew headcount so hugely in the last couple of years (+57% at GOOG, etc) that the 1% layoffs announced so far are barely a scratch on the necessary cost-cutting. Compare to CRM’s announced 10% cut.
Walt, you set a good table! You do a great job of delivering and managing this site. This comment is directed to you, and all of our colleagues in the Heisenberg community!
Thank you most kindly to all who share here their earnest desires to grow wealth and well-being. We all benefit when you express your perceptions and convictions. It’s a great pleasure to interact with Walt, and everyone in this community that seeks to chart a path to greater market understanding and discovery. Anyone of us can throw darts and pick stocks. But to have a broader view of the implied risks in certain market conditions and be able to make reasonably intelligent decisions about where and how to invest is an acquired skill.
Of course, time is a teacher. And my broker has some good resources. But in parallel, I know that I have expanded my perspective here, and I am a better investor for it. Thanks very much to Walt, and to all of you here, for taking the time to share your thoughts and ideas in the Heisenberg Report.
Good luck, happy new year, and cheers to Walt, and to all members of our community!