Making Hay Monday – November 17th, 2025

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David Hay

Editor

Haymaker

Making Hay Monday

The Waterline is Falling

“In short, speculation has become the new national pastime with the official stamp of approval from the powers that be. And, just like sports betting, the evidence of speculative fervor in the markets has become ubiquitous.” -Jesse Felder, 10/17/25

“The biggest issue we are now having is not a compute glut, but it’s a power [shortage] and it’s sort of the ability to get the builds done fast enough close to power. So, if you can’t do that, you may actually have a bunch of chips sitting in inventory that I can’t plug in. In fact, that is my problem today, right? It’s not a supply issue of chips. It’s actually the fact that I don’t have warm shells to plug into.“ -Satya Nadella, Microsoft Chairman/CEO

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Last week, we laid out the growing structural stress in global funding markets. This week, we follow the thread to the household-name equities that still look stable but may be floating on a fast-draining reservoir of liquidity.

The classic problem with late-cycle investing is that it’s not always the obvious speculative names that sink you. It can also be the slow-turning, high-quality behemoths that have quietly built up the most valuation risk under the illusion of safety. This happens because the stocks that appear boring, predictable, and cash-rich often get hit the hardest when funding costs shift and liquidity thins.

A key reason for that seemingly counterintuitive outcome is that during times of extreme market stress, those who are being forced to close out their positions due to excessive leverage often have little choice but to sell their higher quality holdings. The riskier, less liquid positions often nearly vaporize during market air pockets. In other words, it becomes a matter of what they can sell, not what they want to sell. These involuntary liquidation events have repeatedly occurred over the last 25 years, even during “flash crashes” such as this spring’s tariff tantrum.

Take Costco (COST), for example. A best-in-class operator and cult favorite among both shoppers and shareholders, the Seattle-based wholesaler generates high returns on capital without financial engineering. But strip away the love and look at the multiple at 46x trailing earnings. That’s more expensive than 93% of the S&P 500, and higher than its pre-pandemic peak. And, we all know Costco is not a startup or a monopoly; it sells rotisserie chickens and 36-packs of paper towels. It’s been a commendably steady grower over the past decade yet the top-line has increased at around 9% per year while the bottom line has compounded at 13%. Those are solid but certainly not spectacular numbers.

In what liquidity regime does a retailer trade with a richer P/E than almost all of the Magnificent Seven? Even Nvidia, the ultimate AI winner, trades at a somewhat lower multiple despite that it has generated an astounding compound annual earnings growth rate of 50% over the past decade. (Admittedly, this will be a very tough act to follow, but that’s a story for another day.)

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Let’s now pivot to Caterpillar (CAT), which is the kind of cyclical giant that usually sees its multiple contract before its earnings do. Yet today, CAT trades at over 25 times forward earnings, a significant premium to its 10-year average, despite rising rates, flattening order books, and the dollar weighing on international revenue. The company itself expects a slowdown in dealer inventory restocking next quarter, but the market is still pricing it like we’re early-cycle.

Further, we’ve often noted, stocks displaying a high degree of earnings volatility, such as CAT, are better valued on a price-to-sales basis. This is because revenues are much less volatile than profits. Accordingly, the price-to-sales (P/S) ratio is generally a much better valuation measure than the more commonly used P/E ratio. As you can see below, CAT’s P/S ratio is exceedingly extended…