SHDL

I probably need to revise this. It's becoming increasingly clear that the Fed is going to cut rates as a "pre-emptive" measure, even though the US economy seems to be doing just fine at the moment. I don't understand why they think that's a good idea, but it looks like there's been a regime/paradigm shift in their thinking. Other things equal, I think this makes a stock market melt up similar to the one in the mid-late 1990s a lot more likely. I imagine speculators are bidding up stocks in anticipation of that as we speak... We'll see. I'm currently in of the belief that while you might see stocks bid a day or two after the cut, it's basically priced in at this point and any cut will bee seen as concession that things aren't as rosy as equity investors are pricing in. Any cut simply means that weakness that used to be "transitory" is not necessarily. We're still seeing broad deterioration/deceleration in a lot of respects - for example the Conference Board's Leading Indicators index turned negative for the first time since December in the June release this morning. The only thing that's held up is employment and employment is largely a lagging indicator IMO. I think a cute could be the confirmation of the next down cycle more than a continuation of the current one. That is what I was expecting until a short while ago so I understand your view point. I still think it is/was the rational view. Now, though, I’m not so sure given the Fed’s abrupt shift. It’s very difficult to predict the behavior of someone whose thinking you do not understand. Anyway, I think the bulls have a lot going for them. First there are a lot of similarities here with the 90s, when the Fed reduced rates even though the domestic economy was doing fine and stock prices subsequently went crazy. That alone will likely get some pattern recognition algorithms to tell traders to go long in a big way. Consumers and workers in the US are doing more than fine, so most people, who don’t pay much attention to this stuff, will likely keep on with their buy and hold plans. Some may increase their stock allocations because TINA or because they like the stock price momentum. Finally, we have a President who is clearly trying very hard to keep the market climbing and a Fed Chairman who apparently regards Greenspan as a hero. Valuations are not in favor of a melt up, obviously, but that was actually true in the late 90s too, and a lot of value oriented people “missed out” on the final burst for that reason (and some got back in right at the top). If the economy really does go south though it’s another story. It’s fairly easy to see why stocks can go down in a big way if that happens even if the recession itself isn’t too bad. Speaking of which, why is the VIX so low?

I got this report in the mail: https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2019/july-2019.pdf There is some data and discussion starting on p. 24 on who owns these loans (directly or through CLOs). Apparently banks own a big chunk of this, which I don’t like.

I probably need to revise this. It's becoming increasingly clear that the Fed is going to cut rates as a "pre-emptive" measure, even though the US economy seems to be doing just fine at the moment. I don't understand why they think that's a good idea, but it looks like there's been a regime/paradigm shift in their thinking. Other things equal, I think this makes a stock market melt up similar to the one in the mid-late 1990s a lot more likely. I imagine speculators are bidding up stocks in anticipation of that as we speak...

Also, see this for some general background on CLOs: https://www.bloomberg.com/opinion/articles/2019-03-03/collateralized-loan-obligations-are-riskier-than-most-realize I must say, this looks pretty bad...

I am waiting for the day when a couple of negative interest rate loans default. If indeed momentum and hope for capital gains (betting on negative interest rates becoming more negative) is the driving force, then everyone knows it’s a fools game and jut hopes they can sell before the rest does and once momentum turns, things could get rather strange when everyone runs for the exit. This was in the news yesterday: https://www.bloomberg.com/news/articles/2019-07-16/a-leveraged-loan-collapses-and-reveals-key-risk-in-credit-market It's an obscure story that has not been widely reported, but probably worth noting because this is how these things tend to start.

Few companies maintain their greatness forever and no company can grow at a > 20% rate forever (unless the world economy starts growing at a > 20% rate too), so I don’t find any of this surprising. I like Alphabet’s prospects the best, though I have questions as to whether they’re “over earning” from online ad sales at the moment (see the GOOG thread for a discussion). I have similar feelings about Amazon, though my reservation about them has more to do with how defensible their AWS moat is over the long haul. But in any case I think these two will adapt quite well to whatever the world throws at them. I have no opinion on Netflix. Finally, I really dislike Facebook. Maybe I’ll write something about it on the FB thread at some point.

I wouldn’t be so sure about that...

I’m no real estate expert, but between the high transaction costs and illiquidity, this seems to me like an inefficient way of expressing your short term market views... If I thought a huge market melt up was likely I would just buy some OTM SPX calls or something and call it a day.

So today (a) the CPI report showed signs of an uptick in inflation, and (b) long term Treasury yields went up following an auction of 30-year bonds that didn’t go so well. Yes, this could be just noise but they are still interesting data points because they suggest that things might actually be moving in the opposite direction of what a lot of people seem to be expecting.

IPOA. A frivolous YOLO trade obviously, where the thesis basically amounts to "front run the dumb money."

I agree, and this is part of what I was vaguely alluding to above when I suggested that current earnings may not be sustainable. Like you say, one of the big risks here for investors is contagion, whereby a group of questionable businesses go bust and take down other seemingly unrelated businesses along with them. For certain companies like, say, Google or Facebook, the effects may be especially pronounced for reasons discussed here on the GOOGL thread.

Gents: Just to be clear, no offense is taken so no worries about that. With regard to how I feel about the Fisher article, as you can probably tell from my previous posts, I think it’s silly. Obviously what matters at the end of the day is the price you pay vs what you expect to get back, not what other investors think according to some survey. My own opinion about the general stock market is that this is a time to be cautious given that stock prices in general are somewhat (but not extremely) high relative to, say, TTM profits, which may themselves prove to be unsustainably high. Personally I’m fully hedged at the moment for this reason. I’m not exactly in the “this is 1999 and the market’s gonna crash soon” camp, but I certainly see a disconnect between economic fundamentals and where the major US equity indexes currently stand. The big wild card in my mind is what is going on with the corporate bond market, which a few posters like RuleNumberOne have been writing about. Apparently a lot of US corporate bonds are essentially mis-rated as investment grade, and there are real concerns as to what is going to happen if we were to enter a recession and those bonds get downgraded or even default. In particular, who owns those bonds and what does that mean for the broader economy? I’m not connected enough to the relevant networks to have good answers to those questions but it’s certainly something I’m paying attention to.

Fisher back in Jan 2008: https://www.forbes.com/forbes/2008/0128/106.html#219a2a143ea6 "Since the foreign economy is twice America's size, and is strong, America should do well in 2008--better, at any rate, than people expect." Thanks, wow. That AIG pitch at the end is like a cherry on the top. Although yes it’s easy for me to say that with hindsight...

Assuming you’re talking about the author of the article I posted, I think he literally meant fear. The narrative is basically that because certain investor surveys indicate that other investors are cautious/bearish, now must be a great time to be a contrarian and get really greedy and make a fortune in the market. Now what can I say...

It’s a data point on market sentiment, John, which is a big part of what this thread is about. Publications like USA Today are useful for that if nothing else. SHDL, OK, but then you need to add some kind of personal comment to your linking. Otherwise, you just bring market sentiment to CoBF. Yes you may be right about that.

I’ve never bothered researching this, but the USA Today story above refers to the “Bank of America’s fund manager survey” and “American Association of Individual Investors’ weekly survey.” Those might be worth looking into.

It’s a data point on market sentiment, John, which is a big part of what this thread is about. Publications like USA Today are useful for that if nothing else.

USA Today: “If everyone else is worried about stocks, capitalize on the fear and make a fortune” https://www.usatoday.com/story/money/columnist/2019/07/07/dow-when-stock-markets-scare-most-investors-fear-your-friend/1642596001/

Enjoy your barbecues guys.

He certainly deserves a great pseudonym.

I posted this on another thread too, but there’s a very recent research piece by Jesse Livermore that speaks to some of this: https://osam.com/Commentary/the-earnings-mirage The author basically comes up with an improved measure of shareholder’s equity or book value (which he calls “integrated equity” [iE]) and shows that the P/IE ratio has historically been an astonishingly good predictor of 10-year forward returns for the S&P 500. Currently the ratio stands where it was in the late 90s (but below its 2000 peak), and suggests that future total returns will be in the low-mid single digits. Of course this time may be different for some reason, but given how well this and several related predictors have worked for decades, I’m very skeptical. BTW I actually like this setup as I think it bodes well for active value investing.

The paper discussed in the podcast has been posted: This is good stuff.

Seth Klarman, one among many underperforming value investors, with a denigrating and condescending tone around his remarks, called Bitcoin a "trading sardine". In fact here is what he had to say: "There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, 'You don't understand. These are not eating sardines, they are trading sardines.' Like sardine traders, many financial-market participants are attracted to speculation, never bothering to taste the sardines they are trading. ... trading in and of itself can be exciting and, as long as the market is rising, lucrative. But essentially it is speculating, not investing. You may find a buyer at a higher price — a greater fool — or you may not, in which case you yourself are the greater fool." Meanwhile, yesterday, Klarman got a life raft when Abbvie decided to acquire Allergan, a position he found to be more to his liking. Nevertheless, on his "value investment", Mr. Klarman is still said to have lost over $100M as his basis was significantly higher than the acquisition price. Prior to the acquisition, Mr. Klarman was likely down 30-40% on his AGN position. What I find hilarious is the premise that "OMG DONT BUY THIS ITS SPECULATIVE, ITS FOR MORONS, ITS A MANIA, YOU MIGHT LOSE BIG!!!!", when these guys then go and end up suffering the exact fate they snidely predict others will, buying "their own" type of investments! They underperform, then they need to make excuses why they are missing things. SO they disparage the people that are making money rather than say, "I didn't see that way to make money".They play the "sound and responsible fiduciary" card, but as a money manager, your job is to make money, not be a fiduciary. Give me all your money and I'll buy 30 acres and bury it in a fortified compound and have it guarded by people with AK-47's all day.. I'm not raising capital on that despite being a great fiduciary. Make money, or shut up. A good money manager is fine waiting for things, but also needs to be able to see what is working and what is not and how to capitalize on what is working. Sure there are a lot of idiots buying Bitcoin, and Tesla, and Beyond Meat. Figure out how to make money off the idiots.... Not sit there and whine and make excuses and disparage those who are actually making money... You have a point; however, with professional money managers it’s probably not as simple. Mike Burry apparently took his “just find value and make money” mandate a bit too literally and bought a huge amount of CDS on subprime mortgage bonds before anyone else in 2005. His LPs balked, and not only that, they kept withdrawing money even as the bet was paying off like crazy. Some (like Greenblatt) called him a liar tried to sue him. Now if that is what happens when you make strange, exotic bets managing OPM, it’s not at all surprising that most money managers shy away from (and even criticize) them. Anyway, I thought I’d mention this as I think these things tend to be a good source of market inefficiencies.

Interesting, this is probably the most optimistic valuation number I’ve seen regarding the current market. One thing to note though (besides the points about SBC, CapEx, and taxes that are already discussed in the Twitter thread) is that changes in working capital tend to provide a cyclical boost to OCF (and therefore the author’s version of FCF). I’d be interested in seeing a decomposition that shows how important this was for the final numbers. Details aside, the fact that TTM P/FCF isn’t at an extreme level is probably not too surprising, since TTM P/E isn’t at an extreme level either. What we have instead is a combination of a relatively high P/E and somewhat high E/GDP, which together give us a historically high P/GDP. The key question to me here is what will happen to E/GDP going forward: will it stay elevated or will it mean revert? My vague worry at the moment is that politicians will crash the party one way or another, but we’ll see.

Yes, never be so sure about humans, especially those who are drunk all the time. ;)