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mattee2264

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  1. 2022 oil price gains now erased as markets start to worry about zero COVID policy in China with cases starting to rise. The adage is oil stocks are for trading not holding but I think supply tightness will still dominate so continuing to hold
  2. Black Friday sales record breaking but a lot of people I have spoken to have taken advantage of the sales to do their Christmas shopping early and by definition Black Friday sales are lower margin than usual sales. And apparently lot of the sales done on a buy now pay later arrangement. Does seem like an eye of the storm type scenario where it seems that the worst has passed (inflation has peaked, bulk of the rate increases behind us, COVID in the rear window, US economy technically out of recession) but we are actually probably still halfway through the bear market with the story to shift in 2023 to falling earnings and how much damage will be done until the Fed is prepared to aggressively ease to bail out markets the way they always do eventually)
  3. S+P 500 back above 4,000. Suggests renewed confidence in a soft landing. Inflation falling off allowing the Fed to pause and eventually pivot and no meaningful fall in corporate earnings.
  4. Mike Wilson a Morgan Stanley strategist has a nice "fire and ice" metaphor. Even if markets are correct and inflation has peaked and the Fed is near the end of its rate hiking cycle a 2023 global recession and falling earnings could mean we still haven't seen the bottom.
  5. Earnings are the second leg down. So if earnings can hold up pretty well over the next few quarters then markets will probably go sideways as rates continue to climb.
  6. To me it seems a lazy argument that interest rates will stay low because everybody wants them to be. Of course cheap money is addictive and like any addiction there will be withdrawal symptoms and tantrums. The Fed clearly doesn't want them to be low anymore because it is now worried about inflation rather than deflation. There will be variations in interest rates depending on the cycle but the days of zero interest rates are probably over and people who arranged their affairs on the assumption that interest rates will stay low forever will have to adjust to the new reality and take their losses with good grace.
  7. I think it goes to show that it is a news driven speculative market still. People are trading Fed announcements and earnings releases and not really focusing on long term fundamentals. This kind of behaviour makes me feel we aren't anywhere near a bottom.
  8. The truth lies probably in the middle. Inflation is PARTLY transitory and we are most likely past the peak. It will probably drop down to mid single digits reasonably quickly as the economy slows down and supply chain issues ease and price level effects drop out of the index and companies find it increasingly harder to raise prices going forward. But the Fed will be unwilling to claim victory and risk easing until inflation expectations are anchored back to the inflation target (although would not surprise me if the inflation target was moved up to 3-4% within the next few years if inflation does prove stickier than expected). They've already told us that the plan was to frontload the rate increases so it shouldn't be long before we slow to a 50 bps pace of increase (which is not a pivot!) and a more cautious approach might also be justified if there are market stresses from bond market declines such as those experienced in the UK (I don't think the Fed really cares about what happens to the stock market so much) but so far in the USA at least there do not seem to be major issues. And I do not see a return to ZIRP or unlimited QE because the inflation genie is out of the bottle and the neutral rate is probably back around 3-4% and that new normal is going to have an impact on valuations especially for growth stocks and we are probably only partway through that valuation adjustment process as it takes time to adjust to a new reality And even if the economy does go into recession it will be difficult for the Fed to cut aggressively because it needs the recession to help bring inflation back towards target and all indications are that for the USA at least it will be a fairly mild recession so inflation will remain the main focus. And if it does so happen to be a severe recession then the fall in earnings will more than offset any benefits from the Fed pausing/pivoting in response. So I agree that either way you look at it we are probably only about halfway through the bear market and still have a little way further down to go before we bottom. At least for the index and the growth darlings in particular.
  9. Yeah the Fed also said it would front load rate increases so just because it goes to 50bps doesn't mean that over the next year or so rates can go significantly higher. Also be careful what you wish for. If the Fed does pause or pivot then the benefit from lower rates will be offset by much lower earnings. The Fed started easing in 2001 and 2007 and the market didn't bottom until a year or two after that. And this time round with inflation uncomfortably high a lot more difficult for the Fed to aggressively slash to zero like it did in the last few bear markets.
  10. The funny thing is that if you look historically (e.g. dot com bubble and GFC) bear markets generally bottom a year or two after the Fed STARTS easing. But this bear market rally seems in part to be triggered by belief that the Fed will follow the suit of other central banks e.g. Canada, Australia and start slowing the pace of rate increases and a pause or even a pivot is much closer. Maybe this time things are different because market participants are much more conditioned to respond to market liquidity rather than fundamentals and more willing than historically to look through recessions. But I suspect that earnings are going to determine the remainder of the bear market and while a recession will allow the Fed to take the foot off the gas it won't be able to ease to the same extent it did in previous recessions because of the stagflationary backdrop and that is a major negative for markets.
  11. It is a bit of a re-run of the Nifty Fifty. Some of the FAANG stocks have been proven not to quite be as good businesses as everyone thought them to be. Others are still great businesses but mature and unlikely to grow anywhere near as fast as they did (especially during the pandemic which was a total bonanza for them) and rising interest rates is much more painful for them because they are priced as growth stocks. I'm a little leery with META. It is bad enough that social media is far more fickle and faddish than search with Tik Tok a formidable competitor they can't simply buy out like the other challengers. But then you also have all this futuristic metaverse crap. Netflix the programming isn't great and there is a lot more competition. Tesla is bound for a fall. It is the poster child of the pandemic bubble. Google looks solid with its moat still intact but of course advertising is cyclical and its mature Apple and Microsoft still look like cream of the crop. But of course fabulous businesses though they may be their high PE ratios make them vulnerable to sentiment i.e. the PE investors are prepared to pay for a great business. So PE compression is likely still a tailwind and they are mature businesses and Apple has already exploited the opportunity in services and Microsoft in cloud so those revenue streams are more mature and unlikely to allow for as fast growth going forward and even with great companies slowing growth gets punished harshly by markets. But yeah I think that how low markets go does depend to a large degree on what happens to the market leaders given that the market is still very concentrated with over 20% of the value of the S&P 500 represented by the tech giants.
  12. Mostly reflects a narrowing trade deficit caused by strong dollar and consumers cutting back on imports. That is pretty low quality growth because exports will obviously suffer if the ROW goes deeper into recession or substitutes away from US goods and if consumers are cutting back on imports it won't be long before they start cutting back on services (which tend to be produced domestically).
  13. I think the risk to the bear thesis (at least for now) is that Q3 earnings hold up better than expected. Most companies in the S&P 500 index have pricing power so at least for a while can pass on price increases which increases nominal earnings. Consumers for a while can stretch to bear the price increases especially with unemployment still low Some companies are benefiting from higher interest rates e.g. financials
  14. Other point about bonds is you are getting 4% on Treasuries which compares to a 2% dividend yield on Treasuries. Usually you require a risk premium of 3%-5%. So you are requiring 6-8% earnings growth. You are also requiring no further PE multiple compression. Difficult to imagine 6-8% earnings growth when there are so many headwinds and financial engineering (big driver of EPS growth over this cycle has become a lot more expensive) and Big Tech (another big driver) are mature and have saturated their markets so will find it hard to grow much faster than world GDP growth (which is unlikely to be that impressive). Also difficult not to imagine further PE multiple compression when we currently still have above average multiples (17-18x) on peak earnings (beginning of the year forward S&P 500 earnings estimate of $230).
  15. I also thought of TIPS as insurance against inflation but since inflation broke loose my TIP fund has lost half its value which is pretty messed up! Especially as the equivalent UK government bond fund without the inflation protection has lost only a quarter of its value. Must be something to do with the very long duration of inflation protected government bonds in the UK. Probably worth holding on to (or even rebalance) as might do well if the Fed eventually is forced to pivot but certainly aren't doing much for me as an inflation hedge! Re TINA yes bonds were in a bubble because central banks were inflating their prices by being completely price-insensitive buyers. They were over-owned because central banks had disproportionate stakes they are trying to unwind. Difficult to see how far this process will go and whether private buyers will be willing to replace central banks without requiring much higher yields. But if you believe that central banks can bring inflation back towards target and we will eventually return to a low inflation low growth world then a 2% real return is pretty attractive especially as getting inflation back to that level could involve a lot of pain for stocks and if you hold to maturity it doesn't matter what bond prices do in the interim and you can reinvest that 4% coupon at lower bond prices. I think in general markets seem reasonably sanguine about the impact of rising interest rates and quantitative tightening because of the implicit assumption that a pivot is coming. But it is quite clear that lower interest rates and QE have been a massive driver in supporting stock price increases over this cycle and now this process is in reverse there could be a lot more downside to come especially as we are only getting started with QT.
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