SHDL
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Posts posted by SHDL
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55 minutes ago, TwoCitiesCapital said:
Our of curiosity, how are you measuring meaningful deterioration?
By "meaningful deterioration" I just meant a "big drop" in things like cash flows and income and employment.
Speaking of which, there are signs/leading indicators of weakness for sure as you and others have already discussed but personally I'm just having a hard time seeing how far that trend goes - or put differently I can't really tell if we are just cooling down a little coming out of this strange boom period or if things are about to get much worse.
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1 hour ago, mattee2264 said:
Buffett always hedges his opinions on market levels by saying it depends on interest rates and interest rates are like gravity on financial assets. But we don't really seem to be seeing that to a large degree.
30 year US treasuries have increased from 2% at the end of 2021 to almost 4% today and could well head higher than 5% as most of the so-called disinflation just reflects energy prices coming down because the US are draining their SPR.
The SPY peak was around 4800. That represents around 23x TTM earnings of $210 a share. To justify that you'd have to believe that those earnings were sustainable and interest rates would stay low and the 2% equity risk premium while below the historical average could be justified because of future growth potential or continued faith in the Fed put.
Currently the SPY has fallen only 15% to 4100. Even if you use 2021 earnings that is still almost 20x earnings. This seems consistent with the idea that markets are pricing in an immaculate disinflation which will allow a Fed pivot so that interest rates fall to a 2% level which can be used to justify 20+ PE ratios AND that there will be a V shaped recovery of earnings to 2021 levels or higher within the next year or two.
My own take is that stocks aren't down that much because real rates haven't really gone up that much. Nominal rates are up, yes, but inflation is up too so it is not clear if bonds are all that attractive vs equities. At least personally I look at these ~4% long term bond yields and say to myself okay great but I think inflation is going to be just about has high so my real return is going to be really low and so I just hold on to my stocks.
So I think for the market as a whole to go down meaningfully valuation alone won't do it - we need either the economy to deteriorate meaningfully or have the Fed jack up rates much much higher. Those things could happen of course but at the moment I'm not quite feeling it.
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30 minutes ago, Viking said:
Here in Canada, a reasonably large subset of the population carries lots of debt (mortgages and LOC) thanks to our housing bubble. Lots of people own multiple properties with big mortgages (that were already cash flow negative at historically low interest rates). Most of this debt is variable, especially if interest rates stay high for years (even 20% of those 5 year fixed mortgages come due every year).
The real estate bubble has also created a mental rental market: here in Vancouver it is not uncommon to pay C$1,500-$1,700/month for a one bedroom and $2,800-$3,000 for a two bedroom - if you can find one (crazy low vacancy rate). Landlords with mortgages are going to need big increases in rental rates given their mortgage costs are going through the roof.
The learning is you do not want to blow a housing bubble because it usually causes big problems for years when it corrects. The US learned its lesson in 2008-2010. China is in even worse shape than Canada.
The Bank of Canada is really boxed in. Their answer is to stop rate hikes. Even in the face of high inflation (Canada has lots of very large public sector unions) and a very tight labour market. Government spending looks like it is accelerating.
No idea how it plays out here. Super happy i have no debt.
Ouch that sounds like a disaster in the making... And IIRC you have rent control laws in place right?
Gonna call back that guy from Deutsche who wanted to sell me CDS on Canadian mortgage bonds
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2 hours ago, Viking said:
What the hell is going on?
I think part of it is that real rates are still kind of low. So for example you have a government with a lot of debt that now has to pay higher interest but, thanks to inflation, tax revenue has gone up automatically and so it has no difficulty paying.
Another thing is that US households mostly have their home mortgage rates locked in at low rates and so their financial situations aren't affected too much by these rate increases - and if anything they may have benefitted some (e.g., if you took out a 30 year mortgage at 2.x% at the right time and put the cash you saved into long term bonds at say 3%+ you got "free money").
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26 minutes ago, TwoCitiesCapital said:
What I would say is I do NOT believe 1.5% real yield on the 10-year is the right number.
I'm pretty sure that 1.5% number is just taken from the TIPS yield curve. I do agree that 2.x% inflation is perhaps a bit too sanguine but it is what the bond market is currently pricing in.
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Thanks to @fareastwarriors for the link.
The reasoning isn't so clear to me from the article but it sounds like the gist is that the yield curve inversion we're seeing now is largely driven by the "inversion" in inflation expectations (meaning short term inflation expectations are much higher than long term inflation expectations) and therefore it is not as strong an indicator of an upcoming recession as it normally is.
Anyhow I thought it was interesting that this was coming from the man who invented the indicator.
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44 minutes ago, TwoCitiesCapital said:
For those who want to argue the recession is already over, you have to answer why this would be the first recession that ended without the yield curve agreeing.
This may be of interest to you:
Just to be clear I don't have a strong view on this matter one way or the other.
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13 minutes ago, Castanza said:
Dealbreaker has been interesting as of late discussing his investment career.
Typo I'm sure but I had to laugh.
Came for investment ideas, staying for @dealraker's stories...
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1 minute ago, Spekulatius said:
There are extremely cheap smaller banks out there. Think price/tangible book of ~1 and 13%+ ROE or some screen like this, Buy a basket of those and I think it will do well over the next few years, unless the economy totally goes of the rails.
I should try that too.
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I just went with some old COBF favorites for the time being … BAC, SCHW, BRK, FFH. BAC for me is the pure play, SCHW I added for diversification (but have less confidence in), BRK/FFH are more than a play on interest rates but they’ve got a nice tailwind. I haven’t bought WFC and probably won’t until the asset cap is gone (or it gets much cheaper). Also CASH (Pathward Financial) is looking interesting but I haven’t really done any work on it yet.
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1 hour ago, Gregmal said:
Come on guys. With all the divergences out there, is the best idea this year really betting on whether YE FF is 4.25/4.5 or 5? I’m always open to ideas with toque but I am not even convinced there’s an effective yo-yo to play such a wager. I mean maybe the market grinds 10-15% lower…which if you know the options game, probably means you’re lucky to break even unless you time it absolutely perfectly. I would still wager shorting AAL bonds or buying far OTM puts on a 2025 refi crunch is the best higher rate shock/recession play out there. But splitting hairs on a thesis down to 50 bps on FF seems like you’re giving yourself too many ways to lose.
My portfolio is already 50% JOE and 49.9% MSGE and I really needed to think hard what to do with the remaining 0.1%.
Jokes aside, for me this is more of a long term bet on interest rates staying elevated while the economy does okay. Right now I get the sense that the macro outlook is either we get a nasty recession and the Fed cuts rates or inflation goes down and the Fed cuts rates - and at least on the surface it looks like bank valuations reflect this. So … what if the economy actually does okay and the Fed doesn’t cut rates? Not to mention that scenario is arguably closer to what the Fed ultimately wants to achieve. Anyway that’s the thesis for this half-assed macro bet of mine. Is it the best idea for 2023? Nah, I think there are better ones already mentioned on this thread (thanks guys). But it’s good enough for a slice of my portfolio.
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Right that is something to keep in mind. It may be part of the reason why some of these banks look superficially cheap.
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1 hour ago, Dinar said:
Be careful with banks, some may be insolvent due to collapse in bond prices
Yes, I always feel a bit nervous about them. Hopefully the Fed's stress tests are reliable enough and they won't do anything so reckless as to topple the money center banks but you never know for sure. SCHW is technically a bank with a somewhat different risk/return profile - I have some just as a diversifier.
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2 hours ago, changegonnacome said:
Best trade of 2023 is the - "you better believe exactly what Jerome Powell is saying trade". It's now my highest conviction idea.
There will be no cuts to Fed funds in Q4 2023 as is priced in......in fact the real direction of travel I think is that terminal rate expectations & reality are going to go marginally higher from here......thats your higher of the higher for longer story.....Powell then also needs to ensure that a pause isn't misinterpreted as a pivot.....not sure what the answer for him on this is smaller more spaced out hikes....10bps vs. 25bps! This market just loves to rally.....30 years of Pavlovian conditioning will do that I guess.
Need help COBF on how best to express this in the most levered way possible!!!?
I'm overweight some banks/insurers for this reason. But it's not like I'm looking to 2x in 12 months or anything.
If I had stronger conviction and had the time/energy to babysit my positions all day I would probably be trading FF and/or US treasury futures.
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1 hour ago, mattee2264 said:
But I think it is a bad look if they start cutting rates before inflation is back towards target and I also think that disinflation will run out of steam once we hit the mid single digits.
Right - which is why I'm not expecting them to cut rates, just keep them at 4% or so as they "watch carefully how the economy evolves."
Which btw is bullish for (some) financials.
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4 minutes ago, changegonnacome said:
Its possible for sure......betting on people do what is the most convenient and repent later is usually a pretty good bet - what I would say is if they move the goal post higher........dont expect equities, especially long duration ones, to have a good day in the office that day......as permanently higher inflation expectations would get imbedded into the long bond.......and by extension discount rates
Yes I am ready for that ... ready to buy the dip on that beautiful red day that is.
But then again I'm not holding my breath as I think the Fed will go out of its way to avoid disrupting the market in a big way...
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11 minutes ago, Gregmal said:
Ive got another theory and thats that anyone who isnt utilizing the stupid CPI measure to gauge inflation, wouldnt even be able to tell the difference between 2 and 4. Thats how irrelevant it is. In fact, you could go from 3% positive to 3% negative probably doing little else but switching from name brand to white label or keeping the heating 5 degrees cooler in the winter and AC 5 degrees warmer in the summer. These are all largely nonsensical measures that are used to fabricate policy. Is reported car price inflation simply based on enough people wanting a used car with 10,000 miles vs 14,000? Or an extra half bath in their home? You wouldnt know the difference...
Yes I think that would be a good way for them to move the goal post while maintaining credibility.
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1 hour ago, changegonnacome said:
Do you consider 3.75% inflation enough to worry about….if you think it’s no problemo….I can assure you the Fed doesn’t
I have a different take on this which is that once we're down to 4% or so, I think central bankers will move their goal posts and declare victory and stop tightening. As far as I know the 2% target was somewhat arbitrary to begin with (the reasoning was something like "ok so we want it to be positive and not too high and 2% seems like a good number because it looks reasonably attainable starting from zero") so I have a hard time believing they will try to wreck the economy just to get from 4 to 2.
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22 minutes ago, Castanza said:
haha very nice! Something tells me you're getting in at precisely the right time
The fact that JOE was on the other side of the table vs @Gregmal in this transaction makes me want to sell all my shares and go max short.
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57 minutes ago, TwoCitiesCapital said:
I agree in principal. Now find me any time, any country, where inflation was "stable" once exceeding 4-5%. I don't believe it has EVER happened. Certainly not in the U.S.
Realistically speaking, the historic precedent once inflation exceeds 4-5% IS these whipsaws higher and lower.
My vague recollection is that inflation was around 5% in post war Japan until it spiked in 73-4 due to the oil thing. But anyhow this was just meant as an example to illustrate my current thinking.
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30 minutes ago, Spekulatius said:
Inflation benefits some business, but hurts most. Yes capital light insurance, distributors or Visa, Mastercard like business benefit, but many service companies have issues for example.
Some shortages juiced profit margins (PC and automobiles being a great example) , but those are going away and get replaced by supply gluts or demand and supply chain whiplashes.
Yes things can get tricky in the short term when inflation suddenly accelerates but my thinking is that if we were to settle down to a long term regime where the price of everything keeps going up 5% per year like clockwork then revenues, costs, and cash flows should all keep going up 5% per year even if there is no real growth.
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Agree that’s an important point. I’m personally not particularly bullish on stocks generally but I’m nevertheless “fully invested” (with whatever is left after buying RE) because I’m pretty negative on fiat currencies. I really think governments have now re-discovered the joys of seignorage and they’ll keep using it every time something bad happens to the economy, the end result being persistently high inflation. Looking at the price action in gold for instance I get the sense that the market is starting to take notice.
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One thing I’ll add (somewhat related to thepupil’s post above) is that there can be a meaningful difference between the two in terms of passive investment flows.
What I mean is this:
Suppose I own SPY and I automatically reinvest the dividends. So every now and then JNJ pays a dividend to SPY, SPY sends the cash to me, which then gets reinvested in SPY. Let’s say my SPY position is such that the JNJ dividend is $1000. JNJ’s SPY weight is around 1.5% so this means I will be passively buying $15 worth of JNJ when the dividend comes.
Now suppose JNJ were to scrap the dividend and buy back shares with the same cash flows instead. Then I would no longer get the $1000 dividend but instead JNJ would buy $1000 worth of JNJ stock on my behalf.
This means that by switching from dividends to share buybacks JNJ was able to increase my passive investment flows from $15 to $1000.
Now this doesn’t have any impact on intrinsic value so it probably makes little difference long term but I tend to think that it can affect how the stock trades in the interim - for instance my own theory is that AAPL would not have held up as well during 2022 if they just had a big dividend instead of their share buyback program.
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The SPX EPS series on that website are already inflation adjusted (to Nov 2022 dollars) so you basically just need to take the 10 year average and divide the current index level with it to get the CAPE ratio. I believe the ratio is indeed around 28.
https://www.multpl.com/s-p-500-earnings/table/by-year
"S&P 500 Earnings Per Share. 12-month real earnings per share — inflation adjusted, constant November, 2022 dollars."
Is The Bottom Almost Here?
in General Discussion
Posted
Yeah that's the game plan for me as well. I might look to hedge at some point but not until I have more conviction.
To be fair though I was more negative in late 2019 or so looking at similar signals - but back then things were clearer (at least in my head) as we were not coming out of such a bizarre macro environment. My suspicion is that Mr Market is similarly confused and hence the extended period of go-nowhere index price action.