thepupil

Yes I meant to say price weighted, which was half my point as to why it’s idiotic

I would encourage you to pay no attention to a cap weighted arbitrary collection of 30 companies. Let's look at the generally accepted US stock benchmark: the Russell 3000 Russell 3000 Sales / Share: 2013-2019 686.10 720.06 707.51 719.81 779.70 840.00 889.80 Below are the top 100 3 year average growth. the median for the entire 3000 company data (errors=0%) set is 7.4%. the average of the top 100 is 9.9%. for the trailing 12 months, the median of the whole 3000 is 5.1, average of top 100 is 8%. You will likely point out that some of these may be M&A driven and not organic; that would be a reasonable counter. I would not extrapolate a conclusion about the market by looking at 7 companies that happen to be part of a shitty and archaic index weighted in a way that only made sense before calculators and computers were widespread. Sales 3 Yr Average Growth AAPL US Equity 6.7% MSFT US Equity 11.4% AMZN US Equity 29.6% FB US Equity 46.2% BRK/B US Equity 2.5% GOOG US Equity 22.2% GOOGL US Equity 22.2% JPM US Equity 10.6% JNJ US Equity 4.5% V US Equity 15.2% PG US Equity 1.2% INTC US Equity 6.7% MA US Equity 16.2% T US Equity 3.5% XOM US Equity 6.9% BAC US Equity 6.7% UNH US Equity 9.4% HD US Equity 6.9% VZ US Equity -0.1% DIS US Equity 8.0% MRK US Equity 2.3% KO US Equity -8.1% PFE US Equity -0.7% CVX US Equity 10.8% CSCO US Equity 1.8% PEP US Equity 0.8% CMCSA US Equity 10.6% WFC US Equity 3.3% ADBE US Equity 24.0% C US Equity 7.5% BA US Equity -5.4% WMT US Equity 2.2% MDT US Equity 2.0% MCD US Equity -5.0% ABT US Equity 15.8% CRM US Equity 25.8% BMY US Equity 10.9% NFLX US Equity 31.7% NVDA US Equity 33.0% PYPL US Equity 18.7% COST US Equity 8.8% AMGN US Equity 3.1% ACN US Equity 7.5% TMO US Equity 12.9% PM US Equity 3.5% NEE US Equity 6.2% HON US Equity 2.7% UNP US Equity 3.0% UTX US Equity 10.5% ABBV US Equity 12.8% NKE US Equity 6.5% IBM US Equity -1.2% AVGO US Equity 19.9% TXN US Equity 2.8% LLY US Equity 7.2% LIN US Equity 0.0% ORCL US Equity 2.2% LMT US Equity 8.2% SBUX US Equity 7.6% AMT US Equity 16.0% QCOM US Equity 1.1% GE US Equity -6.7% DHR US Equity 11.4% XTSLA US Equity 0.0% MO US Equity 1.4% LOW US Equity 6.5% CVS US Equity 8.4% MMM US Equity 2.2% FIS US Equity 9.7% AXP US Equity 8.2% GILD US Equity -12.1% TSLA US Equity 74.5% UPS US Equity 7.2% BKNG US Equity 16.4% MDLZ US Equity -4.2% ADP US Equity 6.7% GS US Equity 13.0% USB US Equity 6.8% CHTR US Equity 81.9% BDX US Equity 12.4% CME US Equity 9.2% CI US Equity 8.9% TJX US Equity 8.0% ANTM US Equity 7.2% TFC US Equity 7.9% SYK US Equity 9.5% CAT US Equity 6.8% SPGI US Equity 5.6% SO US Equity 10.5% INTU US Equity 13.1% DUK US Equity 3.1% D US Equity 4.6% CB US Equity 23.2% FISV US Equity 3.5% COP US Equity 9.4% ZTS US Equity 7.0% PNC US Equity 9.6% ISRG US Equity 18.3% RTN US Equity 5.1% CCI US Equity 14.2% loomberg description of the metric: Calculated as three-year arithmetic average growth of Sales/Revenue/Turnover (IS010, SALES_REV_TURN). For interim periods, the comparative period is the same interim period three periods earlier. Unit: Actual.API: current value available, historical values available

Agreed, whenever i use margin (and often when I don’t) I hedge wipeout with OTM puts, often recovering the premium via call sales on exit and/or capital return, or just paying the premium. Unhedged margin no matter how right you may be eventually is crazy to me.

I used to use more margin than I do. Instead I borrowed a lot of money at a blended 3.5% for 5 years - 10 years. 80% LTV 1st mortgage at 3.125% (10 year fixed period, 30 year amort, floating thereafter, cannot go higher than 8.125%, cannot go up by more than 2% / year) 80-98% LTV 2nd mortgage at 5.25% (5 year balloon, 15 year amortization) because the proceeds of the 2nd lien were used to buy stocks, this is "investment interest" and the bulk of the 1st mortgage is also tax deductible. in order to take the investment interest deduction, you have to classify all your realized gains/interest/dividend as short term so it may not make sense every year to do so, but in some years the after tax cost of that debt will be very low. so in other words, I'm partying like its 2005 with my 98% combined LTV with a 2nd lien balloon! what a time to be alive.

Sales per share (2012-2019) 1,064.46 1,095.34 1,137.23 1,106.83 1,129.54 1,213.80 1,315.80 1,374.03 Diluted Earnigns from continuing Ops per share 99.09 106.20 112.08 108.84 108.97 122.57 150.85 150.09 I agree with you that sales and earnings growth has recently turned weak. I agree with you we are late cycle. I just think that it's hard to make the case that stocks are very expensive. You can justify owning stocks if they just can have 0% real growth. (2-3% nominal) over the next decade or so. Indeed, Bridgewater (generally recently turned bearish) says stocks are discounting about 0% real earnings growth. I have money to put to work and struggle to not put in risk assets. That whole financial repression thing works! I do think the lack of a lower risk alternative higher yielding alternative (bonds) and lower absolute valuations today should play a role in one's thinking when you're comparing to 1999. Also, the world is not only US large cap stocks. From 1999 to 2004, the EM index returned 15.4% / annum while the MSCI USA did -1.1%. The US REIT index made 20.4% / annum. Now I don't think either REITs or EM will do that in the next 5 years, I'm just saying that if you think US stocks are super expensive and awful, there are other investable asset classes. If we are indeed in an "everything bubble" that won't matter, though.

the multipl.com numbers are inflation adjusted. Here are nominal earnings per share for the S&P 500 from 1999 to 2004, they drew down by about 16% and grew by about 5% / year 1999-2004. the SPX started this period at 29x (1230 price on 50/share of earnings, 3.4% earnings yield). It troughed at around 800 (about 19x trough earnings in the low 40's per share), price drawdown from 99 of 35%. the actual peak to trough drawdown was higher because SPX peaked at ~1500 in March 2000. 50.17 54.62 42.99 46.00 54.08 65.45 if we were sitting here in 1999 with the SPX at 29x earnigns, we might have been inclined to put a portion of out money in bonds. The 10 year real yield based on core CPI in 1999 was 4.6% (6.4% nominal 10 yr on 12/31/1999). So the S&P was at 29x and the you could make CPI+4% pre-tax risk free. today the SPX trades for 19x 2020 eanrings and 21.5x 2019 earnings. the equity risk premium is much higher today than it was in 1999. The 10 year real yield today is -30 bps. If we are indeed in early 1999 and earnings might decline by say 20% and then recover some 4,5,6 years later, should I own cash or bonds instead? It's not clear to me given my time horizon. Just providing the unrelenting TINA perspective here. Go read some Jeremy Siegel and quit worrying :D

He lives in Chevy Chase Village, about 1.5 miles from my house. You want me to go check on him? His wife is quite involved in the community; she has had to resolve many an important dispute. https://www.washingtonpost.com/local/no-excessive-barking-a-chevy-chase-dog-park-divides-the-rich-and-powerful/2019/08/27/0b9fd242-c4e5-11e9-9986-1fb3e4397be4_story.html My dog and I are going to miss that park.

I agree with you in that it's a good metric and agree that it is helpful to contextualize valuations. I would temper anyone using it as "bullish" evidence with that it is covered by earnings, but only barely. I would temper anyone using it as "bearish" with the other stuff I've posted about a lack of leverage in the S&P 500 and that large corporations are not taking an undue amount of leverage to buy back stock. I've posted a bunch of that stuff in the "wilshire 5000 market cap to GDP thread. CSX's debt to EBITDA has been between 2.0 and 2.6 for the last decade. It is at the higher end of the range. Should we be bearish because CSX is now 2.6x levered? In my view, considering they just raised 10 year and 30 year money at t+97 and t+145 (2.4% and 3.4%, pretax), we should be okay with them raising that money. https://www.bamsec.com/filing/119312519236655?cik=277948 https://www.gurufocus.com/term/debt2ebitda/NAS:CSX/Debt-to-EBITDA/CSX-Corp

https://www.yardeni.com/pub/buybackdiv.pdf Buybacks + dividends are just below 100% of operating earnings for S&P 500, which is about the most it’s been excepting brief period in 2015/16 and in the crisis when earnings collapsed. Cash yield is about the same as earnings yield; stocks aren’t in bottom quartile valuation; corporations are just paying out more than normal.

https://www.gurufocus.com/global-market-valuation.php?country=JPN Also, what’s your data source? I think JApan Market cap to GDP got to over 300% according to the link.

Yes but if you are comparing Japan to US market cap to GDP that normalizes sales / margins between the countries. Given the differences in culture and company composition, this would be very mistaken, in my opinion. Why does the US have higher market cap to GDP than Japan bubble time but somewhere between 1/4 and 1/6 the PE ratio? Huge difference in earnings an margins. I think US corporates are over earning but to make the comparison between US and Japan is to say they are overearning to an extreme degree. I think the comparison has little relevance or analytical merit.

Large cap Japan was at 120x CAPE ratio and while market was at 70-80x PE; to compare the US stock market of today to 1989 Japan is to believe that company earnings will decline by some 60-75% via an extreme combo of margin compression/ sales decline to get to similar valuations as then. http://siblisresearch.com/data/japan-shiller-pe-cape/

I manage my parents accounts and they own both. I consolidate the look through Apple owned by Berkshire and the directly held apple as one position in order to guesstimate total AAPL exposure, even though in theory Berkshire could sell AAPL any time. Because both Berkshire and Apple have gone up (Apple moreso) this has led to trimming of the consolidated position, primarily via direct sales of apple. I have never personally liked Apple; have been completely wrong on it. I am personally a levered holder of Berkshire. I'd prefer Berkshire take some gains on the Apple and use after tax proceeds to buy back stock (along with excess cash, you could do $120 billion tender or something). But I assume that won't happen.

I also really liked this book. I read somewhere, however, that the accuracy is somewhat debatable and that it's possible to have been "tampered" with by the family that found the diary. I recall someone sayign it has several anachronisms in it. Of course, I can't find where I read that now. I really really liked the book though. Even if you told me it was 30% made up I wouldn't care. And since I can't actually find the article making those claims it could be 100% real after all.

I’ve been trimming my family’s apple and google, but does the fact that these have re-rated to a low to mid 20’s PE really signal the end is near? I’m not trying to be Pollyanna, but these just all seem like weak arguments to me. I’ll probably end up looking like Bill Miller or PZena pre GFC in all these posts and everyone calling for a big cyclical downturn will be right, but I think it’s actually hard to find real excess that is material portions of the indices. The one thing that I really agree with is that leveraged loans and junk bonds and their borrowers (some small caps but mostly private equity companies) look awful and downright bubbly. As part of my job I see the nitty gritty in these (detailed breakdowns of add backs and pro-formas, the contrived consultant due diligence reports, the lack of covvies etc). I think that the losers will be: institutions and retail investors who are investing in direct lending, mezz debt, CLO mezz tranches, business development companies, etc. Winners will be adept distressed debt investors and well positioned corporates. But as I mentioned earlier, the excesses in stucured credit are likely to hurt small portions of people’s institutional portfolio’s. If a pension throws 5 or 10% of their HY allocation into CLO BB’s for some spread pickup, I don’t think it’s going to be a huge issue when that unwinds. JApanese banks love them some CLO AAA but the 40 points of credit enhancement will insulate them just fine. Otherwise the banks don’t seem to be wearing all that risk; systemic risk from excesses in private / junk credit seems low to me Long CLO tangent aside, I’d also point out that EM and Devloped International stocks trade for 12-14x earnings and their currencies have all underperformed. I am not super bulled up; just Not buying these bearish arguments...unless the dems win, then its guns gold and canned food of course :)

https://www.pionline.com/article/20190204/PRINT/190209967/fixed-income-still-prized-in-asset-mix-of-corporate-funds here's an article re the trend toward immunization and increase in fixed income; basically pensions have been taking equity profits, front loading contributions, and de-risking for the past few years. some more info https://us.milliman.com/insight/2019-Corporate-Pension-Funding-Study

tax rates don't affect EBITDA, so I don't think tax reform really distorts net debt to EBITDA https://www.investors.com/etfs-and-funds/sectors/sp500-ge-not-alone-25-companies-owe-trillion-pension-payments/ Largest 25 pension obligations collectively owe $1 trillion, and have a funding gap of $150 billion ($1 trillion of liabilities against $850 billion of assets) Those 25 have a market cap of $3.5 trillion and $238 billion of EBIT, and $390 billion of EBITDA. Most of these, their funding gap would add maybe half a turn or less to their leverage ratios. GE the data is wrong because they have negative EBITDA so it messes up the calculation. For the companies that have the largest funding gaps as expressed in EBITDA, 4/4 of the top ones are defense contractors (Lockheed, Raytheon, Northrup, and Boeing). Many defense contractors utilize cost plus contracts that INCLUDE the cost of the pension benefits. The federal government is responsible for some portion of those folks pensions. Lockheed has the biggest funding gap, adding 1.3 turns to its leverage. I recognize that the funding gap can really blow it if rates go down and stocks go down since that increases the liability and decreases the assets, but given the trend toward immunization, the very long term nature of funding a pension, and the low absolute numbers here as a percentage of these companies earnings power, I see very little risk in terms of corporate pensions. Fear not the corporate pension "problem". Let's say you think EBITDA is bullshit, so I'll use $240 billion of EBIT. I'll stress that down to $180 billion for fun. I'll increase the obligation by 20% and decrease the assets by 10%. then these collectively could get to 100% funded with just over 2 years of EBIT. And of course they don't have to do it like that. Lockheed Martin -1.330194232 Raytheon -1.161483702 Northrop Grumman -1.091703057 Boeing -1.085029431 DuPont -1.015721604 Delta Air Lines -0.745312682 United Parcel Service -0.660816813 General Motors -0.634868058 Ford Motor -0.538615238 Exelon -0.405309555 Exxon Mobil -0.328415521 Caterpillar -0.316484311 Pfizer -0.250183959 United Technologies -0.227562352 3M -0.218516389 Johnson & Johnson -0.181629476 Merck -0.117022936 AT&T -0.067857536 Verizon -0.04536176 Citigroup -0.03108909 Honeywell 0.166219154 General Electric 1.852617649 International Business Machines -0.521864315

RuleNumberOne, which companies/sectors/etc. do you think are severely overvalued and/or overearning? Cigarbutt, appreciate the feedback; I’ll have a look at the papers.

I’m also sort of confused as to why the “debt bubble” = don’t own stocks. If corporate debt is a bubble, the biggest beneficiaries of that bubble popping could be healthy corporate borrowers, who could presumably buy back that bubble era debt at good prices or pay very low rates on that bubble era debt for in some cases 30 or more years until maturity. Imagine the dollar prices of debt that these low spread long duration borrowers could get to if you’re right about inflation/ rates really picking up (at least that’s what I think you’re getting at) Do you think there will be a deflationary depression when the bubble pops, therefore you cant own stocks? then why are you harping on inflation?

Why? If inflation goes to say 3% and rates back up 100 bps, then the investment grade bonds which comprise the bulk of corporate debt might sell off by...wait for it...7 or 8 points, and they yield 2.8%. So that "poof" may be more like a -4 or -5% total return. What kind of inflation are you talking about? 10%?

I see little credit risk in the entirety of the S&P 500. I'm not talking just the top 10, not talking about my holdings, I'm talking all of it. In the S&P 500 ex financials (439 companies), 263 have 5 yr CDS spreads below 56 basis points, and a further 138 ar between 56-106 bps, so 400 / 439 have credit spreads below 106 bps. There are like 3 companies above 200 bps: Apache, Occidental and L Brands. Now we are on COBF so we don't believe in perfect market efficiency and that low credit spreads is necessarily evidence of low credit risk, so let's take a look at some fundamentals. 247 of those companies are less than 2x levered using trailing EBITDA. Only 80 are above 4x. the median is 1.7x levered. Even at higher borrowing rates, these companies will be fine. Listed below are the scary companies that are over 5x levered and that's just using bloomberg dumb data, not adjusted or anything. I see a bunch of well covered real estate companies and some onese that actually carry a fair bit of leverage (TDG for example). I'm not trying to completely dismiss the macro risk. But the data is the data. I see a bunch of very healthy credits in publicly traded corporate america; i see a bunch of highly levered private equity portcos where the lenders are CLO's and private debt funds that themselves aren't levered and comprise a small portfion of various institutional investors portfolios. Perhaps the risk of LBO, CLO, etc. will bleed into the economy there'll be a recession and stocks go down. But don't look to big publcily traded corporate america to start experiencing credit events. fear not the all time high corporate debt ratios if you hold broad indices. if you hold individual stocks you can avoid that too. I happen to have a large position in the 4th most levered company on this list. I think it has virtually no net corporate debt. Equifax Inc Newell Brands Inc Edison International Vornado Realty Trust Alliance Data Systems Corp CarMax Inc Williams Cos Inc/The Zimmer Biomet Holdings Inc SL Green Realty Corp Campbell Soup Co General Electric Co Digital Realty Trust Inc Hologic Inc Harley-Davidson Inc Apartment Investment & Management Co Dominion Energy Inc TransDigm Group Inc Western Digital Corp Kimco Realty Corp Healthpeak Properties Inc Boston Properties Inc Molson Coors Beverage Co Welltower Inc Noble Energy Inc Dollar Tree Inc SBA Communications Corp NiSource Inc Essex Property Trust Inc Ventas Inc American Airlines Group Inc Entergy Corp Alexandria Real Estate Equities Inc Conagra Brands Inc Extra Space Storage Inc AES Corp/VA CMS Energy Corp Federal Realty Investment Trust Duke Energy Corp Simon Property Group Inc PPL Corp Realty Income Corp Constellation Brands Inc Kinder Morgan Inc/DE Sempra Energy Eversource Energy Duke Realty Corp MGM Resorts International Microchip Technology Inc Equity Residential Prologis Inc TechnipFMC PLC

Which companies in the S&P 500 are overlevered? What percent of the market cap and earnings power do they comprise? Banks are in the best shape they’ve been. Publicly traded corporate America is not overlevered, in my opinion. Debt has been well termed out. Rates are super low, interest coverage is high. Show me otherwise. PE/LBO’s are another story, but not big companies https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/buybacks-have-exceded-free-cash-flow-for-the-first-time-since-the-financial-cris/msg377459/#msg377459

Well I certainly won't argue with that! I'm arguing with the idea that anyone that invest in scale in hedge funds really expects to outperform the market. The goals of institutional investors investing in hedge funds is not to beat the market. Here's some more modern stuff from the folks at Yale. They outright say that they have a slightly lower return expectation for "absolute return strategies" than equities. And I'd say their estimate for absolute return strategis of 4.8% real is high and builds in a lot of "manager selection alpha" (perhaps justified by their long term record). https://static1.squarespace.com/static/55db7b87e4b0dca22fba2438/t/5c8b09008165f55d4bec1a36/1552615684090/2018+Yale+Endowment.pdf In July 1990, Yale became the first institutional investor to define absolute return strategies as a distinct asset class, beginning with a target allocation of 15.0%. Designed to provide significant diversification to the Endowment, absolute return investments are expected to generate high long-term real returns by exploiting market inefficiencies. The portfolio is invested in two broad categories: event-driven strategies and value-driven strategies. Event-driven strategies rely on a specific corporate event, such as a merger, spin-off, or bankruptcy restructuring, to achieve a target price. Value-driven strategies involve hedged positions in assets or securities with prices that diverge from their underlying economic value. Today, the absolute return portfolio is targeted to be 26.0% of the Endowment, above the average educational institution’s allocation of 21.7% to such strategies. Absolute return strategies are expected to generate a real return of 4.8% with risk of 8.6%. The Barclays 9 to 12 Month Treasury Index serves as the portfolio benchmark. Unlike traditional marketable securities, absolute return investments have historically provided returns largely independent of overall market moves. Over the past twenty years, the portfolio exceeded expectations, returning 8.3% per year with low correlation to domestic stock and bond markets. Equity owners reasonably expect to receive returns superior to those produced by less risky assets such as bonds and cash. The predominant asset class in most U.S. institutional portfolios, domestic equity represents a large, liquid, and heavily researched market. While the average educational institution invests 20.4% of assets in domestic equities, Yale’s target allocation to this asset class is only 3.0%. The domestic equity portfolio has an expected real return of 6.0% with a standard deviation of 18.0%. The Wilshire 5000 Index serves as the portfolio benchmark. Despite recognizing that the U.S. equity market is highly efficient, Yale elects to pursue active management strategies, aspiring to outperform the market index by a few percentage points, net of fees, annually. Because superior stock selection provides the most consistent and reliable opportunity for generating attractive returns, the University favors managers with exceptional bottom-up, fundamental research capabilities. Managers searching for out-of-favor securities often find stocks that are cheap in relation to fundamental measures such as asset value, future earnings, or cash flow. Yale’s domestic equity portfolio has posted returns of 11.8% per year over the past twenty years.

I don't agree. I have a copy of Pioneering Portfolio Management here, published in 2000, in the heyday of hedge fund alpha and before the huge growth in assets and number of funds that preceded the ultimate decline of industry alpha. this quote is in the context of a seemingly normal 4% cash rate, so cash +6-8% The dream sold to institutional investors to invest in hedge funds was never "beat the market". It was "keep up with the market, make more than bonds with little duration risk, and make a significant premium to the cash rate"; get a diversifying return stream (not the duration of bonds or beta of stocks) without sacrificing too much return. I say a dream, because alpha/premium to cash/bonds has declined significantly because too many people read Pioneering Portfolio Management in 2000 and wanted to be like Yale. I share everyone's negative view of the industry as a whole, but I think it's important to understand what most of them are trying to actually do. Few hedge funds try to beat the stock market in a given short term time frame. all try to add value realtive to whatever they consider their sandbox. in aggregate value add is probably close to 0 before fees and negative thereafter.

Here's the annual return of the HFRI Fund Weighted Composite Index versus the S&P 500 with an "estimated alpha" assuming the HFRI runs on average 30% net (so if market =10% and the HFRI does 3%, that's 0% alpha, no value add relative to market exposure). Again this is just a simplified spitball analysis. My point is that this is not news. Alpha has been near zero since 2012. Hedge Funds have not outperformed a strong up market on an absolute basis since 1999 when they made 31% to the S&P's 21%.