Babysitting grandchildren is lots of fun. But it took a lot longer than I’d expected.

Where I left off was:

–consensus expectations for 2023 appear to assume that 2022 losers will continue to lose and that 2022 winners will continue to win. This may turn out to be the case. The contra-argument is that at some point valuation starts to kick in. This can happen in one of two ways:

—-current market darlings may end up being priced for perfection, or for perfection +. That is, everything good that could plausibly happen for the company, and maybe also things that are next to impossible, are already factored into the price.

We’ve seen this movie before, with the stay-at-home stocks in 2021.

—-on the other end of the valuation spectrum, out of favor stocks can be beaten down to the point where they’re trading below tangible book value. That is, they could be bought and liquidated for considerably more than the stock price. In today’s world, companies can also have intangible assets–intellectual property, brand names, distribution networks…–that can have great value but which are not reflected on the balance sheet. One of my favorite examples is Microsoft, which went sideways/down for 14 years after the internet bubble of 1999-2000, but which exploded upward once skilled management was installed.

One caveat with this traditional “value” view is the dual share structure in many NASDAQ names (think” META) that can cement past-its-sell-by-date management in place.

–the consensus view is that the major indices, like S&P and NASDAQ, will exit 2023 at roughly the same value they enter the year. This has happened nine times in the past 75 years, so it is possible. I think it’s much more likely, though, that the indices will be either up or down by 10% or so. I also think that , given the pummeling stocks have had over the past year+, the +10% is more likely. It strikes me, though, that strategists feel that in the current uncertain climate if they’re too conservative, clients will soon forget; if they’re too aggressive, they risk losing their jobs.

–it seems to me the major “cosmic” issues we have to deal with as investors are, in descending order of importance:

—-the ultimate landing place for the 10-year Treasury, because the long bond yield will determine the PE for stocks

—-the extent of the excess inventories accumulated by companies during the pandemic and as yet not disposed of–we know from TGT and WMT that six months ago they had a ton of stuff no one wanted any more, and the two are cream of the crop in inventory control. writeoffs? weaker-than-expected 1Q23 earnings?

—-the robustness of Europe, in the face of the higher cost of energy and the area’s general messedup-edness. Two aspects: maybe a quarter of the S&P 500 earnings come from Europe; and strength there would likely cause bond managers to shift away from US Treasuries, weakening the dollar

—-shifting economic dynamics in Asia, as Xi continues to reestablish Mao-ish Communist Party control over that country given up during Deng’s “socialism with Chinese characteristics” rule.

more tomorrow (I hope)