RuleNumberOne

Yeah, this shows the Fed is on the wrong track. They need to buy earth-movers from Caterpillar, airplanes from Boeing and chemicals from Dow. That would get them the inflation they want so badly without generating a debt-bubble. The Fed has been making the wrong kind of asset purchases all these years.

The following suppliers used for drug discovery by pharma/biotech fell today really hard. A, PKI, TMO, BRKR, ILMN, WAT, MTD The Iowa caucuses are on Monday. A Bernie win there will be a real jolt to healthcare stocks. Pharma capex must be on hold until the elections are over. Edit: Added MTD.

Yeah, i have been thinking a lot about this too. Many questions on my mind: - is it different this time? - have valuations reached a permanently higher level? - can central banks stave off recession forever? - can EV/EBITDA of certain stocks keep going up forever? - can venture capitalists fund loss-making businesses forever? - can Europe inflate its housing bubble forever? Some conclusions i have reached are: - the ECB will die trying otherwise they will all be out of a job. This means keep Italy's interest rate as close to zero as possible, buy as much sovereign and corporate debt as it takes to do that. - professional investors will keep buying otherwise they will be out of a job. - it is easier for investors who have never gone through a bear market to believe it is different this time. - if we ignore what Buffett, Klarman, Soros etc say, we have nothing else to go on. Better to listen to them than the newbie gunslingers. - the Fed will not raise rates until after the election because the bubble is bigger now than in 2000 (record government debt, record US corporate debt, record worldwide debt to gdp implies higher rates will cause a big crash). The nomination of Bernie Sanders adds to the complexity. It rules out some areas of the stock market because you never know what the new Hugo Chavez might decide to nationalize.

@thepupil We were discussing CSX a few days ago. Today NSC reported and it looks just like CSX. Revenues down 7%, operating income down 9%. They took on more debt and bought back stock. Stock hit an all-time high today along with their debt of $11 B. EPS actually declined slightly but stock exploded upwards. Yeah, our situations are probably different. I am looking to keep what i have, to paraphrase Munger, i can't go back to 'Go'.

@Cigarbutt Yeah, thats what i meant. The all-time high valuations are not compatible with the diminished revenue growth. Unless the Fed starts buying stocks upon Trump's urging. @thepupil I just remembered i have subscribed to Sharadar data for the last few months with the intention of writing my own screeners. So going through the Russell 3000 or S&P 500 for the last quarter should be easy if i can find a few hours. Yeah, i left out a few positive numbers such as MCD, INTC. Some media source or analyst might provide the revenue growth numbers for the S&P 500 for the latest quarter soon.

Yeah, the 2013-2019 revenue growth looks good. And the 2009-2019 revenue growth would look even better. But that is because you are measuring from when the business cycle began. Today morning two more DJIA members reported for the latest quarter: DOW -14% revenue growth, -20% Operating EBIT. BA -21% revenue growth -43% Operating income growth Do you people think I didn't know the DJIA was price-weighted? It is not an arbitrary collection. You need to be a large and dominant company in an industry before you can get into the DJIA. And 30 was a small enough number for me to go through it one by one. I don't have time to go through the 500 companies in the S&P 500 this quarter.

In the latest quarter, we have these revenue growth figures for DJIA members: PFE -9% JNJ 1.8% UTX 1% organic IBM 0.1% (very inorganic) MMM 2.1% (down 1.9% for the year) AAPL (revenue up 4% from two years ago, stock is up 81% from two years ago) PG (5% but revenue is below where it was pre-2015, has seen lot of negative quarters) JPM had the strongest revenue growth.

The best performers have been the large stocks that are not in the S&P 500. It is very simple: - they are not in the S&P 500 despite their size because they have never been profitable. - because they have never been profitable their valuation is limited only by human imagination. These include: all the SaaS stocks, Shopify, and others. If a SaaS stock becomes barely profitable, it gets admitted into the S&P 500 (like ServiceNow). There are countless unprofitable companies that are much larger than the smallest S&P 500 company.

Shopify has climbed 60% in the last 53 trading days. P/S of 37 with gross margin of 55%. Revenue growth has slowed from 75% in 2017 to 44% in the latest quarter. I think Paycom has GAAP profits while the other one don’t. It’s a nice and well run company, but the multiple is very rich, as you correctly pointed out.

One weekend risk is Italy (the regional elections). The European media has consistently downplayed anything that goes against European integration. That is why the Brexit vote in June 2016 turned out to be a "surprise." It is possible the current government could avoid elections until 2023 because Salvini is sure to win a general election. I read somewhere that only 11% of Salvini voters think it would be wrong to leave the Euro. I heard this on the radio and made a note to follow up. I mean, Australia seems to be doing it so why not US? He did say we are importing deflation so as long as you don't import too much of it or too little, things will stay as is. Maybe, this time is different :). On a more serious note, I'm having hard time identifying excesses. Everyone around me (and I get the concept of selection bias) is cautious and is sitting in 60/40 portfolios and this includes newcomers to the market, old timers, and those who bought and lost houses in 2007. Market climbs the wall of worry. 1) For starters, housing in Silly Con valley is more expensive than it was in 2007. That applies to other west coast areas as well. 2) startup boom may collapse. Lots of froth apparently getting funding. Collapse will impact real estate, could computing, software revenues and housing (see 1) 3) Increased leverage of public companies - nothing too concerning, but will definitely reduce the flexibility in a recession for higher leveraged companies 4) Private equity bubble (hard to quantify, but based on the multiples being paid, there could be problems if credit dries up a little) 5) lower or negative interest rates - if those come to pass, they will destroy the financial system like cancer. 6) political change or geopolitical events (Markets assume that Trump wins, but is this a sure thing. Democratic candidate isn’t picked yet and could be negative for the market too). Iran or North Korea going rogue and forcing our hand. A recession could be occurring not because of one it factor, but because a garden variety of factors all nudge things into one direction (as they impact each other). Example of those garden variety recession were 2001/2002 and 1990/91. Just a few ideas of what can happen. If everyone expects sunshine even just a regular shower will get everyone running for cover.

The newest entrant to the S&P 500 at a P/E of 100 and a P/S of 25 is the SAAS company Paycom. Shopify, Tesla and Workday got left out despite having much bigger market caps.

This time people just "index." Everybody uses index funds. That is approximately the same as buying tech because most of the stock market returns over the last 8 years have come from the tech stocks.

I was wrong in saying Reagan had a bad market because the 1982-2000 bull market took off in August 1982, well before the November 1984 election. I think both the previous two one-term Presidents both had bad stock markets that did not recover in time. Did you know Neel "50bp-cut" Kashkari was the Republican nominee for California Governor in the 2014 election? "Minneapolis, which was last an FOMC voting member in 2017, will next be a voting member in 2020."

IBM reported +0.1% revenue growth thanks to an increase in net debt of $20 billion. But this was heralded as a "strong earnings" report. The M&A lever still works. I don't know what will happen to IBM+RedHat in 3 years, I am sure neither do analysts. Trump slashed Powell last week, today, and will continue doing so every few days until the election. Maybe the Fed won't initiate a bear market in the first Presidential term. Though Carter, Reagan, Bush-I had bad markets in their first terms, as Trump himself said, right now "we have a very weak Fed." This was the crux of my Trump rally thesis. 2014-2016 we saw margins maxed out as in the years prior almost all waste was purged. The only two levers left to pull in 2016 were tax cuts and perhaps the pro economy policy ticking up growth a little bit. I dont see anything else now.

My point was that earnings grew from early 1999 to early 2000 and therefore you could justify buying in early 1999. But this time we haven't had operating earnings growth in some companies for a while, no earnings growth for a year. Yeah, everyone says rates were higher in 1999-2000, so the stock market cap today is justified in being higher than the dot-com peak. At least Paul Tudor Jones pointed out that the inflation numbers in 1999 were identical to today. But what about the business cycle? If everyone who wanted to invest in capex has done so, everyone who has bought cars and houses has done so, where is the revenue growth and operating earnings going to come from. I see companies take on more debt for buybacks to boost EPS, but that only leaves less room for later.

TTM S&P earnings did not exceed their Dec 1999 number until Dec 2004. I think we are at the end of the business cycle and that is why companies like CSX are not seeing revenue growth. Paul Tudor Jones said today that he thinks we are in early 1999. But what i see is good earnings growth in 1999, probably because we were earlier in the business cycle (unemployment was higher). Ray Dalio also advised people today that cash is trash. But why do earnings keep declining? Did that happen during 1999? https://www.multpl.com/s-p-500-earnings/table/by-year

LC, you said the most insightful thing about the markets. Until Powell sees inflation in the tents in rock creek park, he is not going to raise rates. If you go back and read Trump's tweets from last year, Trump spoke the truth: he said we have "a very weak Fed"

The more relevant ratio is EV/EBITDA rather than Debt/EBITDA because people here are buying the stock. I don't have a Gurufocus membership but i bet the EV/EBITDA is at an all-time high outside of recessions. Their EBITDA is only trending down. But more importantly, the big picture is that the 2000 and 2008 blowups happened when the inflation rate (at least in the growing areas such as the West Coast) was similar to what we have now. Over the last two years, the CPI-U for the 13 Western states has hovered around 2.5-3.5%, not different from the times when Greenspan and Bernanke raised rates to 6% and 5.25% to pop asset bubbles. They popped bubbles at higher-unemployment levels and lower stockmarket-to-GDP and debt-to-GDP levels. The one big difference between the last two times the Fed popped bubbles is that they were in the second Presidential terms. Other than that excuse, we have record valuations for corporate-debt-to-GDP, stockmarket-to-GDP, lowest unemployment since the 1960s for the last two years.

I am glad he is still alive. The PTSD from Trump's tweets must have been really bad. He was last heard to say that the previous two recessions weren't preceded by inflation spikes, but were caused by popping asset bubbles. Then Trump started tweeting and Powell ran away from his job and family.

When Jim "back-stabber" Bullard announced on TV (right after he publicly asked for a "25bp cut immediately") that he would "love to be Fed Chair" and that he had just rejected a job offer from the White House of the lowly 14-year-term Fed Governor, I hadn't imagined he was planning to murder Jay Powell. With record stock market cap to GDP, record corporate debt to GDP, rapidly climbing government debt to GDP, record low unemployment, we would have thought a Fed Chair might have an opinion about the Fed's 1.75% interest rate. Where is Jay Powell?

The record non-financial US corporate debt is where the buybacks and dividends came from. Most recent example is CSX: reported 8% fall in Q4 revenue this week, 8% fall in operating income, said 2020 revenue will be less than 2019. But increased net debt by about $1.4 billion and bought back stock. Barrons writes in all directions just to hedge their reputation. Whether the market goes up or down, they have something to point to. One Barrons roundtable member said this weekend TSLA can go up 10x.

No, I think if they want to support birth rates, they could give subsidies and stuff like that if they leave the Euro. Right now their budget has to be approved by the EU because of their massive debt. The purpose of Italy's whole existence is to pretend European banks are solvent. It is like being a prisoner that is allowed a slice of bread and a glass of water everyday. They will default immediately when they leave and can start from a clean slate. Presumably they will get a special trade deal from the US because Salvini is part of the Bannon-Trump-Bolsonaro club. I think the youth in Italy need a fresh debt-free country. Right now they have already lost one generation of youth with their 50% youth unemployment. There may be temporary disruptions, just like Brexit, but they will be better off long-term. The rest of Europe will then feel the pain. Of course, US hedge funds like Ray Dalio's team, are already on top of all this. They profited from Italy-related disruptions in 2018. When Italy had its Lira, they had high inflation and high interest rates. yes, they will have problems either way, one thing they will happen is they there will be an immediate and substantial loss in buying power though currently devaluation, which will make Italian goods cheaper, important more expensive and for new debt the cost much higher. Then there is also the issue that on day one, Italy’s debt will still be denominated in Euro, which then will be even harder to pay back. The only option for Italy’s government is to pull an Argentina and immediately default and cause an exchange of the current debt into Lira notes. Of course any of the above doesn’t solve the demographically issues (low birth rate etc. ) either.

No, Italy can pursue whatever fiscal policies it wants if it leaves. I mean even developing countries are much better off, they are not headed for extinction. I think we can get a 2008-sized meltdown in Europe when Italy leaves with entertaining contagion in European banks. European banks stocks will be worth less than zero unless their respective governments bail them out, which leads to even higher debt-to-GDP ratios in places like France. It will be a real thriller like 2008. If US banks have derivative contracts with European banks, they will go down too. Salvini has raised a lot of big hopes in Italy with a lot of daring talk, so he has got to do bold stuff when he wins. Like Boris Johnson of the UK, he has gained a lot of popularity very quickly for his anti-EU, big nationalist talk and will have to deliver. https://www.axios.com/matteo-salvini-chance-to-become-prime-minister-715082d5-bfc6-4f19-8590-9d4485f2a5ce.html "Where things stand: Any sighs of relief from Salvini's foes, who include French President Emmanuel Macron and many in Brussels, now appear premature. Salvini and the League have only grown more popular in opposition and lead the PD and Five Star by 10+ points in national polls. With elections looming on Jan. 26 in the left-wing stronghold of Emilia-Romagna, polls show the League neck-and-neck with the PD, something that would have been unthinkable not long ago. What to watch, per the FT: “If the PD lose in Emilia-Romagna, it 100 per cent has the potential to bring down the national government and set Salvini on course to become prime minister,” says academic Daniele Albertazzi. “This coalition is already so fragile that the only thing gluing it together is their fear of Salvini,” says Erik Jones of the Johns Hopkins School of Advanced International Studies in Bologna. “If they lose it is hard to see how they make it through the spring.”" Government debt will never be repaid. If any government on earth needs to repay debt, and can’t roll it over, they will default. This applies to the US as well. We are running 5% deficit as a percent of GDP in one of the hottest economy ever 10 years plus into a recovery, how would we ever repay debt? Give it a recession and we run at 10% GDP deficit quickly. Government debt is never repaid, it is only rolled over. Say the euro goes extinct. What does that even look like? What is the path forward from there for European countries? Italy will still have its issue regardless of the euro at this point right?

Italy cannot even afford the interest on its massive debt. Italy is allowed a deficit of just 0.8% of GDP by the EU. It has debt of 135% of GDP and GDP growth has been zero for a long time. Unless the rates are close to zero, Italy cannot even afford the interest. With a fertility rate of 1.2, Italy is headed for certain extinction, like one of those civilizations that got buried under the sea in folklore. Unless Germany gifts 100 billion Euros every year to Italy forever, year after year, the Euro won't work. This is what California has been doing forever - gift a massive amount annually to places like Alabama/Mississippi that will never have any growth. German government spending is already higher than the US as a percentage of GDP, so Germany is right that there is no need for it to spend anymore on its own citizens. (Germany has a surplus because it also has higher taxes.) When laid out this way, anyone in either Germany or Italy can see that the Euro is an insane idea. Italy's government-seized steel plant churns out toxic waste and fumes. The nearby schools are closed on windy days. Italy cannot even afford a cleanup. Italy is allowed just enough by the EU to survive and pretend that French banks are not bankrupt. The Emilia-Romagna regional elections are a week from today, lets see what happens. Regarding US debt, I agree it looks worse than it did in 2007 when a higher Fed rate kept the government disciplined. But the US has competitive advantages that no other country has. Government debt will never be repaid. If any government on earth needs to repay debt, and can’t roll it over, they will default. This applies to the US as well. We are running 5% deficit as a percent of GDP in one of the hottest economy ever 10 years plus into a recovery, how would we ever repay debt? Give it a recession and we run at 10% GDP deficit quickly. Government debt is never repaid, it is only rolled over.

The link I posted earlier said the data was from the World Bank. https://www.theglobaleconomy.com/Japan/stock_market_capitalization/