RuleNumberOne
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Posts posted by RuleNumberOne
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Look at CSX, reported earnings this week, 8% fall in revenue, 8% fall in operating income (only due to big expense reductions in fuel and materials). CSX took on even more net debt and bought back stock. The company has more than $15 billion of net debt.
2020 revenue outlook is flat to down 2% compared to 2019. The stock ended the week $3 higher than where it began the week.
I would look at interest rates as a bell curve. Too low means economic problems and certainly not stocks to the moon. It's the combination of low rates and recovering economy. Too high rates also will snuff out the high valuations. So it's like the habitable zone in exoplanet hunting. It's a range and either side of that range is dangerous.
I think this is a very good way/ mental model to look at this issue. Negative interest rates imply lack of growth or even shrinking GNP, which can’t be good for stocks.
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https://www.theglobaleconomy.com/Japan/stock_market_capitalization/
The ratio was 139% in 1989 and 106% in 2018. IMO, GDP is much less volatile than earnings and less subject to manipulation or arbitrary accounting ideas.
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/
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Is Jay Powell still alive? Nobody has heard from him for over a year. I am getting worried. Doesn't look like anyone is in charge at the Fed.
There are rumors circulating that Bullard stabbed Powell in the back and buried him.
I was looking at Japan's 1989 stock market bubble. That one topped out at a 139% ratio of stock market to GDP (would have been a lower ratio if GNP was used.) So the current stock market is in uncharted territory.
Jay Powell has turned out to be the weakest Fed Chair in history. We have been at 3.x unemployment for a long time but the Fed promised to not raise rates until after the November elections. Powell got bullied easily.
The market may go up another 5-50% this year even with no earnings growth. If central bankers excuse is they are waiting for inflation in Alabama or growth in Europe, they are waiting for rain in a desert - it is not going to happen. A lot of investors will feel the pain at some point in the next few years.
The guys has been doing it for less than 2 years and you're deeming him weakest in history?
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I was looking at Japan's 1989 stock market bubble. That one topped out at a 139% ratio of stock market to GDP (would have been a lower ratio if GNP was used.) So the current stock market is in uncharted territory.
Jay Powell has turned out to be the weakest Fed Chair in history. We have been at 3.x unemployment for a long time but the Fed promised to not raise rates until after the November elections. Powell got bullied easily.
The market may go up another 5-50% this year even with no earnings growth. If central bankers excuse is they are waiting for inflation in Alabama or growth in Europe, they are waiting for rain in a desert - it is not going to happen. A lot of investors will feel the pain at some point in the next few years.
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https://www.wsj.com/articles/chinas-auto-market-stumbles-after-30-year-boom-11578949633
"“This is now the new normal,” Volkswagen Group China Chief Executive Stephan Wöllenstein told The Wall Street Journal in November. Other major markets typically see ups and downs in car demand every few years, but China has known only growth for three decades. The slump, he said, is “a new phenomenon in China which nobody was really aware of—that an automotive market also could turn down.”
Auto makers operated at 76.1% of their production capacity in the July-September period, down 3.5 percentage points from a year earlier for a fifth straight quarter of decline, data from the National Bureau of Statistics show.
The downturn has been unfolding for the past year and a half.
When Pangda listed, “the overall Chinese auto market was booming and growing rapidly,” the company’s new president, Zhao Tieliu, said in an interview. “No one could see at that time the market was at a saturated stage and would quickly go down.”"
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The DAX is at an all-time high but GDP growth is at a 6-year low.
"Germany is the first major economy to report full-year growth figures for 2019.
The German economy grew by 0.6% last year, the slowest rate since 2013, at the height of the eurozone’s debt crisis.
Many German companies have been laying off staff, raising concerns that the manufacturing slowdown could start to affect private consumption.
Brose Group, an auto parts producer, said in October it would reduce its German workforce by around 2,000 by late 2022. It blamed the declining auto market, especially in China. Continental AG , a giant auto parts manufacturer, announced plant closures in Germany in November as part of a sweeping restructuring plan.
With Chinese economic expansion unlikely to return to earlier rates, German growth “will remain close to zero for now,” said Marco Wagner, an economist at Commerzbank."
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Global debt to GDP at all-time high. European countries hitting all-time highs in household debt to GDP as central bankers blow a housing bubble in Europe.
"The global debt-to-GDP ratio hit an all-time high of 322% in the third quarter of last year, according to a report released Monday by the Institute of International Finance.
“While borrowing costs remain very low, many countries are finding a debt-driven growth model increasingly difficult to maintain,” said Sonja Gibbs, managing director of global policy initiatives at the institute. “High and rising debt-to-GDP ratios are making debt service and refinancing more challenging, and the 2020s are likely to see a greater incidence of debt distress and restructuring.”
Government debt-to-GDP hit a new high in the U.S. and Australia. Household debt-to-GDP reached a record high in Belgium, Finland, France, Lebanon, New Zealand, Nigeria, Norway, Sweden and Switzerland."
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1) Buffett never predicted whether inflation would go up or down in "how inflation swindles the equity investor." He explained how it affects return on capital and business investment decisions, didn't predict the future.
2) If generating prosperity were as easy as keeping rates low so that extremely high P/Es could be justified ("rates are 1%, a P/E of 50 is low"), Europe and Japan should have been booming. Instead Europe and Japan are dying. You need to wash away the mal-investments from time to time.
Instead of exposing failure, Europe and Japan just cover everything up forever and their media participates in the coverup. Europe has had negative rates for 5 years (under the pretext of 1.4% inflation but really to cover up insolvency) and what are the results? If we had a Fed Chairman with a backbone, he would have raised US rates and told the IMF+ECB to go to hell.
3) Every Dem candidate wants to take the corporate tax rate back to where it was. It will eventually happen because many in the US population feel very entitled to all the good stuff even if they contribute nothing back to the system.
in 1999, (one of the very rare occasions when he talked more specifically about the 'market' in general) that expectations that net profit margins could go higher than 6% for any sustainable time..were not reasonable
Buffett is not a great macro-forecaster (and he admits as such). Remember his "how inflation swindles the equity-investor"? Well the publication of that article pretty much marked the top for inflation in the US. As I continue to point out - there are two major valuation inputs that have changed since Buffett's iconic 1999 Fortune article.
1) At the time of the article, the 30-year Treasury was yielding over 6.5%. Today it is 2.3%. Buffett admitted in that article, that this was a factor that could change his forecast (though he didn't predict it). This input is a two-fer for valuation purposes. Corporate America is paying less for its debt - plus discount factors for equity valuations have to be pegged lower. This was also a reason Buffett was bearish at the time - in 1999, 30-year Treasuries were yielding a higher rate than the earnings "yield" on Corporate America. That is not the case today.
2) The Federal tax rate on corporate pre-tax income was 35%, today it is 21%. Uncle Sam has decided to transfer 14% of his ownership stake in Corporate America to us, the private sector owners, at no cost. I think that's a big deal.
It seems to me, one would have to adjust a time series of market cap ratios for these two important input factors. Whether these input factors continue to stay at their current values, I have no idea (though I am not betting against it).
wabuffo
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Yeah, i bought my current house from someone who wanted to escape CA's short-term capital gains tax and moved to Austin, Texas.
It seems Austin is one of the hottest housing markets in the country. I think it is the first choice for people looking to run away from the Bay Area.
Texas is completely flat and has a lot of land, so it may not go up too much over the long term.
Tequila (CUERVO.MX)
Artificial body parts and organs
Space Technology
Housing in Texas
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Corporate debt is a minor issue. The main issue is the all-time high Market cap/ GNP and EV/GNP, higher than even the dot-com peak. I just prefer using GNP in the denominator because when people say "profits" it could mean anything. There is a wide spectrum full of bullshit in the area between GAAP and non-GAAP.
This bubble is so big, central bankers are going to prop it up with everything they have. Even if Eurocrats have to suppress democracy and central bankers have to turn into dictators:
"Some newspapers have speculated that the outgoing European Central Bank President Mario Draghi might be asked to try to form a government of technocrats should the current administration fall.
Salvini dismissed such a prospect as "disrespectful" for Italians. "If this government falls, the only way forward would be new elections," he said."
Remember "will do whatever it takes to preserve the Euro"? The world would be better off without the Euro. The Euro has inflicted so much misery in Europe.
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The 13 states in the Western region contribute 22.1% of US GDP. With a 3% inflation rate, the Western region alone would contribute 0.66% to the overall total if inflation were weighted by GDP.
https://en.wikipedia.org/wiki/List_of_U.S._states_and_territories_by_GDP
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The 13 states in the West were found by the government to have an inflation around 3% over the last two years. That implies the remaining states dragged down the inflation average. (See the link below).
https://www.bls.gov/regions/west/news-release/consumerpriceindex_west.htm
Anybody who lives in Silicon Valley can check their credit card statements from a few years ago and see that they were paying around $35 for an oil change. Now the prices have doubled to around $70 in just 3-4 years.
Why does the Fed expect the NASDAQ boom to generate inflation in deserted states like Alabama or Mississippi? If inflation is weighted by GDP, it should be easily above the Fed's 2% target.
If GDP-weighted inflation is found to be above 2%, the pile of debt will catch fire. Poof!
^This is not a black or white topic (corporate leverage) and a fundamental reflex is to reflect on individual holdings in one’s portfolio and not ‘worry’ about aggregate numbers.
Despite the above, this may be relevant. First step, strengthen the opposing view’s argument. Yes, banks are in a much better shape and, for corporate debt, bond issues have taken the lead and depository institutions have not really participated in the rising ‘loan’ presence (especially leveraged loans, CLOs etc). Yes, averages, in a way, don’t tell much but (according to S&P sources), of the about 2000 issuers that are graded in the US, 25 firms hold about 50% of the cash and smaller firms tend to show increasingly poor coverage ratios. Also, if one focuses on the average debt service ratios, historical norms are respected and, of course, that’s an input used to justify also the real estate market dynamics in Canada (and other countries), the public debt levels etc.
However, in balance, the corporate debt level has reached very unusual levels and for this level to be maintained requires a relatively unusual set of assumptions.
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Personal anecdote (so extremely limited value)
When I graduated in the 90’s, for various reasons, most of my ‘colleagues’ went back or decided to go to the US and I kept contact. This was also a fundamental source of ‘bottom’ sentiment when, for instance, I became interested in the US real estate phenomenon in the years 2000s. These acquaintances and ‘friends’ had strong earning power, strong debt-service ratios and basically signaled that averages didn’t really matter. This group was exposed to real estate (sometimes in more ways than one) and they really hurt when prices came down and, in fact, have barely recovered. When I spoke to them around the holidays (most are doing reasonably well, average for their group I guess), it was mentioned that the relief had come in part from the booming equity markets. It would have been inappropriate to discuss corporate leverage during those conversations and, because of social conventions and the always present uncertainty, I did not tell them that, maybe, again, I may end up buying what they’re selling. Most of the times, I just shut up but anonymity alters conventions.
FWIW, I think thepupil will do very well whatever the circumstances but that may not be true for the average (corporate or not) citizen.
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Look at the graph:
https://www.dallasfed.org/research/economics/2019/0305.aspx
Overlevered depends on the rate. If the rate is zero, there is no interest expense, and nothing overlevered (like Italy).
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
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stahleyp, I am mostly cash today, but i might get back into the market any time. We have a very weak Fed Chairman - no courage, no credibility, no confidence, easily bullied by the likes of Trump/Bullard/Cramer.
Greenspan raised rates to 6% and inverted the yield curve at a lower level for the Wilshire 5000/GNP ratio (and higher unemployment). Paul Volcker said if you don't want deflation, don't blow bubbles. Volcker also thought the obsession over 2% inflation was ridiculous. This is either in Volcker's latest book or some WSJ/FT op-ed he wrote before he died.
This is a special bubble, one so big that central banks are too scared to pop it and are doing everything they can to preserve the bubble. Europe is worse off than it was in 2007-2008. The debt to GDP in US+Europe is higher than 2008. US corporate debt ratios are at all-time highs.
The Wilshire 5000/GNP first exceeded the dot-com peak in Q3 2018. The Fed has only lowered rates since then.
If you're so bearish, why be 100% stock?
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Yeah, thanks. We need to click on "Max". Pretty staggering that the Fed vice-chair reassured everyone today that they won't raise rates.
Wilshire 5000 / GNP at all-time highs, though it first crossed the dot-com peak in Q3 2018.
US corporate debt at all-time highs.
The link you provided only shows up to 2014 as its default adjust it to 2020 and sit down before you do. I always understood the important thing to look at was GNP not GDP. That being said the GNP still is higher than it was in the dot com bubble but I think it's better apples to apples.
https://fred.stlouisfed.org/graph/?g=oQt
Don't forget to adjust the time scale to now.
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Yeah, I know, GDP is not a good metric. But it is more accurate than non-GAAP adjusted earnings.
https://fred.stlouisfed.org/graph/?g=qLC
Trump has ordered drones to keep circling above the houses of FOMC members. Jay Powell hasn't come out of his house since he heard the Iran news and is even avoiding sunlight.
Richard Clarida reassured everyone (from his basement) that the Fed will not hike rates - i.e. that he is worried about low inflation. In Silicon Valley, oil change prices go up 20% every 6 months, healthcare providers have promised and are delivering a 10% price hike every year, home price growth has resumed.
Debt held by Wilshire 5000 would be much higher than the dot-com peak, meaning the EV would be much higher.
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Yeah, labor laws in Germany don't allow layoffs to happen right away, they take years to take effect.
2019 jobs cuts in manufacturing total 100k with more expected in 2020. The DAX is close to its all-time high despite the job cuts! I just want the Euro to fall apart because things have gotten very boring.
"The full effect of the cuts -- which also affect units of German companies abroad --- may not be felt immediately. Labor laws and powerful unions make it difficult to fire workers, and many large companies have agreements banning forced dismissals, meaning job-cut programs have voluntary elements and sometimes run for years."
https://think.ing.com/snaps/germany-new-orders-nov-19/
Looks like the Euro doesn't work for Germany either?
"Germany: Getting worse instead of getting better
A sharp fall in November industrial orders shows that a bottoming out of the manufacturing slump is anything but near
Currently, 2019 is on track to record a monthly average drop of some 0.6%. Moreover, while 2018 was mainly about weaker foreign orders, the order book deflation reached the domestic economy, with domestic orders dropping faster than foreign orders. To illustrate how unique this long stretch of falling orders is for German industry, the last time German order books shrank for two years in a row was in in 2001 and 2002. Ahead of the Great Recession, order books shrank by 2.9% on average every month in 2008.
All in all, there are still no signs at all of a bottoming out for German industry. Instead, the free fall continues. In fact, there is simply one word to describe the current state of the German industry: ‘dire’.
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This is all true to some extend, but as I mentioned before , most Germans don’t own stock and the unemployment rate is 3.2%, which is full employment and then some. The unrest in the populace, which will eventually eventually Merkels removal (imo) is related to I immigration policy etc and not to economic issues.
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My point is inflation calculations should use GDP as a weight. I think they take a simple average of all the regions instead of a weighted average.
Oil change prices where I live went up 20% in 6 months. It takes at least two weeks to get a car service appointment.
How does the government manage to not find inflation. Central bankers are creating a larger and larger pile of debt while pretending to want to see inflation (inflation which would set the debt pile on fire.)
31 counties 1/3 of GDP is kind of a meaningless stat. There's lots of GDP tied in the wholesale value chain.
For example, Boeing 737 sale gets booked in King County. But the bill of materials includes parts and services scattered all over the US.
It is meaningless also because of population density. LA county has more people in it than the least populated 9 states do.
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https://think.ing.com/snaps/germany-new-orders-nov-19/
Looks like the Euro doesn't work for Germany either?
"Germany: Getting worse instead of getting better
A sharp fall in November industrial orders shows that a bottoming out of the manufacturing slump is anything but near
Currently, 2019 is on track to record a monthly average drop of some 0.6%. Moreover, while 2018 was mainly about weaker foreign orders, the order book deflation reached the domestic economy, with domestic orders dropping faster than foreign orders. To illustrate how unique this long stretch of falling orders is for German industry, the last time German order books shrank for two years in a row was in in 2001 and 2002. Ahead of the Great Recession, order books shrank by 2.9% on average every month in 2008.
All in all, there are still no signs at all of a bottoming out for German industry. Instead, the free fall continues. In fact, there is simply one word to describe the current state of the German industry: ‘dire’.
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Inflation rages on in Silicon Valley causing people to flee.
Inflation by metro area data shows California inflation in the 3-4.5% range over the last year.
How does the crooked BLS manage to massage this into 1.5% inflation?
https://www.bloomberg.com/graphics/2019-us-gdp-concentration-counties/
https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-metro-area.htm
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I want to relive the 2008 meltdown. Italy needs to leave the Euro.
Italians were richer than Americans until they switched to the euro
"Italy was not always this way.
In the 1980s and 1990s, Italians were richer, on a purchasing power parity basis, than Americans. They managed that because Italy used the lira, and the currency was competitively devalued. It made Italian goods and services cheap, and spurred growth.
At the same time, Italy's debt load is rising. It currently stands at about €2 trillion ($2.25 trillion). Debt to GDP has reached 130%, a level not seen since World War II.
"The public debt ratio [to GDP] will probably continue rising and eventually prove unsustainable," Allen said."
https://www.businessinsider.com/italy-perma-recession-systemic-crisis-threatens-eurozone-2019-4
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Is Europe/Italy in a stable equilibrium or not? Italian government doesn't have the money to remove toxic waste from a steel plant, but owes $2.3 trillion?
Italy
- allowed a budget deficit of 2% of GDP
- miraculously reports 0% GDP growth for 7 quarters in a row
- ECB zeros out the interest rate, debt-to-GDP keeps climbing.
- December factory orders in Italy had the worst contraction since 2013
- Largest steel plant of Europe looks to shut down in Italy
- Italian government gives legal immunity against toxic waste from the plant for buyers (see below).
- Closes schools on windy days to protect children from toxic fumes from the steel plant.
- German car production falls to 23-year low in today's news (Italy must be part of the supply
chain).
https://www.dw.com/en/debt-and-doom-loops-the-eurozones-italian-nightmare/a-50019077
"Italy owes $2.3 trillion (€2.06 trillion) in public debt. That's around 133% of its GDP — a massive ratio that puts it in the top five in the world.
While the majority of that stock of borrowing is weighing down banks in Rome and Milan, European banks are severely exposed in the event of anything going wrong. France is in the hole for a potential €285 billion according to a study by Bloomberg, while German, Spanish, British and Belgian banks also have cause for concern."
https://www.nytimes.com/2020/01/04/world/europe/italy-ilva-arcelormittal-steel.html
"Outside, a towering smoke stack loomed above a landscape of blast furnaces and stockpiles of dangerous minerals. Dark puffs of industrial exhaust drifted in the sky like rain clouds. On “wind days,” the mayor cancels school for fear of toxic dust blowing through the town.
“I’m constantly cleaning,” Mr. Musciacchio said, showing how the metallic soot stuck to a magnet. Photographs on the wall honored his mother and other relatives who he said had died of cancer. “They died from living here, breathing here.”
At this point the steelworks appears to be too big to fail, and failing too much to keep running.
Its history mirrors the trouble of Italy’s broader economy, which over the last decade has, according to a leading Italian economist, experienced its lowest growth rates since the country formed in the 19th century."
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Yeah, Europe will never ever be a force in computer hardware/software or biotech. The main advantage the US has is that scientists and engineers from all over the world want to study and work in the US. It is a network effect, a self-reinforcing loop.
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The FTSE MIB (Italian index Europe's third-largest economy) is up less than 1% since April 2015.
The DAX (German index, Europe's strongest economy) is up by less than 7% since April 2015.
The European stagnation has been going on forever. The ECB already owns one-third of all government debt of the Euro area.
Can the Italian government fake GDP growth rates (of -0.1% to 0.1% every quarter for the last two years) or are those growth rates real? Even with zero interest rates they still need to refinance the debt because there is no hope of ever repaying it.
Will Europe crash or will it manage to stay forever in the zero-rate zero-growth state?
Negative interest rates take investors into surreal territory
in General Discussion
Posted
The main reason interest rates cannot go up in Europe is Italy. Interest rates there will stay negative so that Italy can continue to refinance forever.
Italy's fertility rate is 1.32 (lowest in the EU) according to the latest data. That is only because immigrant mothers had a fertility rate of 1.9. Native Italians had a fertility rate of 1.2.
There is no way Italy's $2.3 trillion debt can ever be paid. Which implies there is no way French banks are not bankrupt. But the Eurocrat coverup continues.
Italians hate their plight and keep voting for Salvini. But the Eurocrats won't allow general elections in Italy because Salvini will win easily. The world would be better off without the Euro. The Euro has destroyed or distorted everything.