Kupotea
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Posts posted by Kupotea
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3 hours ago, Saluki said:
If you play that scenario out further, then people buying index funds are buying the components of the index regardless of the valuation. So the index fund becomes like a fund with a momentum strategy. Especially if they are using some kind of dollar cost averaging strategy like contributing through a workplace retirement plan like a 401k. And the value of the top performers in the index, because it is cap weighted, will be affected more by fund flows than fundamentals. So more people contributing to it through their work 401ks will move it up and fewer contributions will move it down. So it should become, over time, much more sensitive to employment numbers: fewer people employed means fewer people contributing. It will also have a secular headwind as boomers retire and begin to sell from their index funds to meet retirement expenses rather than contributing at their end of their work life, which is when they make the most money and therefore have been pushing the index higher.
Agreed with the assertion that the index itself has become sort of its own fund or even asset class.
I’m not sure this is an entirely new phenomenon. You’ve always had the cycle of an underperforming sector gets beaten down, funds that focus in that sector are forced to redeem and it gets beaten down some more until the next up cycle. This is just an interesting situation where momentum/large cap is riding the hot hand and value/small cap is out.
Eventually the S&P 500 becomes so overbought that it underperforms other indexes and investing factors. Then you get outflows and maybe some mean reversion. I think passive indexing will remain the dominant investment strategy you’ll just see those passive flows moving into other geographies and factors.
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12 hours ago, Libs said:
Would you mind summarizing this hypothesis?
There’s no money chasing small cap value (it’s all gone to passive large cap) so if a company beats expectations no one notices. Without price discovery you need to find companies willing to initiate large buybacks if you want to get paid. In the meantime, the most overvalued components of the S&P continue to attract ever larger inflows. -
6 hours ago, schin said:
I find stocks like ARM, NuBank, Coupany, UiPath all IPO as mid to large cap stocks. It's really hard find a small stock that has growth... maybe, they IPO and then drop into a low cap valuation.... but, what's the best small cap anyone has seen lately?
I would say... maybe, maybe, Brunello Cucinelli at 5B.
North American Construction Group would be my pick. It’s cyclical though and that turns a lot of potential investors off. I think most of the successful consolidators at one point fit the criteria of small cap growth. -
35 minutes ago, mattee2264 said:
Fed has just confirmed with their dot plot that they expect three rate cuts in 2024. And Powell also said that a recession is not necessary to start cutting rates.
Market got it exactly right that Powell was just posturing to try and restore what little credibility the Fed has. Now it is election year he will give markets and the US government what they want.
Strongly agree with this. I’ve been cautious all year as global (ex US) growth has decelerated and the FED put up a good show of higher for longer interest rates. It made other central bankers reluctant to cut because of the fx implications. I thought there was a real chance that powell would go through with it but clearly today they’ve signaled otherwise. Now we can get a big round of global easing and all those beaten down value and industrial stocks can rip higher. Merry Christmas
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Price drives narrative and timeframes matter. In 2022 it was clear to everyone that rates had to go up and that would lead to slower growth (likely a recession) and lower valuations so the market tanked. The recession didn’t materalize because of excess savings accumulated during covid which meant a resilient consumer. Now we’re back close to all time highs, no excess savings, multiple contracting sectors and many marginal firms are going to struggle to roll over debt at current rates. Was the drop in 2022 justified? Does any of this matter in the long run?
I’m not personally the buy and hold forever type. I’ve yet to find a company where I feel confident what the earnings will be like 10 years from now. I know Buffet and others have done this to great success but I personally lack the conviction. I feel far more confident in finding cheap businesses with a catalyst or looking through a trough to normalized earnings. That means for certain investments i need to have some sense of where we are in the business cycle. It’s not easy but it’s also not easy to find great business that will compound for decades. There isn’t one true investment style and i find it a little funny how much energy some people are devoting to tell others the right way to invest.
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TLT and March puts on QQQ.
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30 minutes ago, TwoCitiesCapital said:
Barely slowed down is an interesting way to characterize it.
There are pockets of strength, but consumers revolving credit balances have soared and lower-end consumer demand has cratered. CRE defaults are startinf to happen right and left in top-tier cities further constraining banks that are already illiquid and potentially insolvent. Home prices are flat to down YoY (real returns are significantly negative), PMIs are sub-50 signalling both local and global contraction, and leading indicators have been falling for like ~16-17 months now.
The primary strengths seem to be equities (absurdly high relative to bond yields and their underlying profits), consumer spending (only when ignoring its funded by increasing revolving credit), and GDP (which has been significantly at odds with GDI for months now).
It's probably better characterized as stagnating - not "barely slowed". A lot of signs are pointing to continued weakness in addition to what we've already seen.
1-year ago the Fed Funds was 1.5%.
6-months ago Fed Funds was 4.25%.
WE know these things act with a lag so perhaps all were seeing now are the effects of rates surpassing 3ish%. Perhaps we do get to 6.5% on the front end, but I think it'll be seen as a policy mistake in hindsight and the bond market is sniffing that out which is why the 10-year has gone nowhere in 9 months despite significant hiking activity at the front end.
Not to mention that with the rapid decrease in headline CPI you have real yields soaring. Hard to see how this doesn’t cascade into a credit crunch unless the FED does an about face soon. -
Large buys of SU, CVE, VET, TCW, NE, STNE.
Counterintuitive market reaction and I think there's a good chance the recession sensitive/inflation trades rally hard over the next few months.
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16 hours ago, vinod1 said:
S&P 500 Earnings are $160 in 2019. Nominal GDP is up 20% over the last 3 years - about 14% inflation and around 4%ish real GDP growth. So earnings are about $190 per share in 2022 if earnings kept up just with GDP and inflation in 2022. Now add around 4% in net buybacks and you are close to $200 per share. Does not seem to be too far out of line.
Or take a look at the top 50 companies by market cap and identify which ones are "peak earnings" or overstated earnings or high PE. Except Tesla, hard to find anything obvious.
I actually went through the exercise of looking at the top 50 companies, then looking at each industry as a profit share of the S&P 500, adjusting them up and down to come up with a rough estimate. My arguable conservative estimate comes to $180 in 2022.
Now, this is the only recession that I know of where everyone and their pet is predicting. Whereas in the past, recessions have been more of a surprise. Companies started making adjustments long before the actual recession even starts.
Maybe, just maybe, we have a recession and it may produce only a small earnings dip or might not actually produce any earnings dip. Heck, earnings might even increase slightly in the midst of a recession. Consumers are still pretty flush with cash, companies have locked in low rates, banks in strong financial position. Unless we get some really spectacular corporate failures, or a major geopolitical blowup somewhere I just do not see any issues.
In 2001/2 we had 9/11 and Worldcom/Enron/Adelphia scandals. 2008/9 we had GFC. Unless we have something similar I do not see any impending doom.
I don’t think you need a recession for stocks to perform poorly again this year. Lets assume the economy keeps chugging along which by all indications it has to date, where do long term treasury yields go? What’s a fair risk premium for equities if the 10 year yields 4-5%? Look at how copper is reacting with China reopening. Do oil prices stay subdued with low inventories and a global economy moving forward at full strength? How do you convince an entire cohort of retirees to come back to the workforce?
There are compelling arguments that the economy remains strong. There are also indicators that we get a recession sometime in H2. I have yet to see a convincing argument that long term rates should be inverted without a corresponding hit to earnings.
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I think there are two very important reasons for sticky inflation:
1) Tight labour markets due to baby boomers retiring.
2) A long period of underinvestment in commodities + ESG concerns.
Hard to see anything resembling deflation unless you solve for those structural issues.
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8 hours ago, UK said:
Europe got hit by roughly $1 trillion from surging energy costs in the fallout of Russia’s war in Ukraine, and the deepest crisis in decades is only getting started. After this winter, the region will have to refill gas reserves with little to no deliveries from Russia, intensifying competition for tankers of the fuel. Even with more facilities to import liquefied natural gas coming online, the market is expected to remain tight until 2026, when additional production capacity from the US to Qatar becomes available. That means no respite from high prices. While governments were able to help companies and consumers absorb much of the blow with more than $700 billion in aid, according to the Brussels-based think tank Bruegel, a state of emergency could last for years. With interest rates rising and economies likely already in recession, the support that cushioned the blow for millions of households and businesses is looking increasingly unaffordable. “Once you add everything up — bailouts, subsidies — it is a ridiculously large amount of money,” said Martin Devenish, a director at consultancy S-RM. “It’s going to be a lot harder for governments to manage this crisis next year.”
If this is the case, I continue to think coal producers with exposure to Newcastle pricing are the biggest beneficiaries. Local nat gas suppliers are going to see those heady profits taxed away.
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I think it’s pretty much impossible to forecast a market bottom but it’s a lot easier to read existing market sentiment and general positioning. We just went through a 10+ year bull market with a classic bubble blow off. For the most part investors still have an overweighted allocation to equities. The narrative is changing to a recession without a quick FED bailout. There’s plenty of reasons for more fear and selling pressure. Whether that makes sense or not in the long run doesn’t matter because short term sentiment is what matters. One day we’ll run out of sellers and the market will start to climb on bad news and that will be the bottom. I don’t think it’s the worst thing in the world to have a pulse on the market and a macro viewpoint as long as that view remains fluid.
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Anyone else think the top is in for yields? At least until we get the next round of aggressive QE...
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Up 26% YTD. Mostly well timed entries and exits into various energy related stocks. Currently 50% invested and 50% in cash. This year has been a completely different approach than buy and hold which I've stuck to in the past. I've held the mindset all year that the general trend is down and have tended to only stick my neck out there for obvious opportunities then sold at the first sign of weakness. I'm still torn between greed in relation to structural commodity shortages and the fear of a global recession.
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Bought a fairly large chunk of NE.
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22 hours ago, Sweet said:
Kup, I’m not sure I agree that the oil market is in as deep trouble as feared.
I agree there probably is a deficit globally, but US demand is not mirrored everywhere, and in fact its strength is offset by reduced demand elsewhere. Even in the US demand looks weak, though almost certainly not as weak as the EIA numbers imply (which have just been wrong recently).
Woodmackenzie are predicting that demand will have dropped by over a million barrels a day yoy in the coming quarter, largely as a result of China. I’m not saying they are right, I just don’t know.OPEC do in fact have sustainable spare capacity, it’s not much, but it exists. It’s probably lower than they claim, but I’d say it’s at least 1 million barrels a day of sustainable capacity.
The biggest problem in the market is a lack of US refinery capacity. Crack spreads for diesel are nearing $60, not sure where they are for other products. That’s keeping lid on crude prices because it’s hurting demand.
On China, I have a feeling that there may be something bad lurking there economically, and the covid policy is not sole cause of the poor demand figures. Wouldn’t surprise me if headline ‘zero covid’ policy is being used by the CCP as cover for really bad economic data.
I agree with you that demand is likely to fall into the new year. My point was more that the broader stock market can’t have it both ways. Either we get a recession bad enough to squash demand or if the FED pivots and we skate by then an energy crisis is waiting on the other side. Based on my own positioning i’m hoping we do get a dip in energy prices so I can load up before the inevitable reflation. -
Just doing some back of the envelope math it looks like US oil+distillate+gasoline have been drawing by about 5 million barrels a week on average in 2022. You have maybe 200 million barrels of oil readily available between commercial reserves and the SPR before you run into issues and need congress to tap the remaining SPR. So that's about 10 months to get supply more in line with demand.
Global spare capacity is essentially tapped out as OPEC hit its ceiling back in July despite falling well short of their quota. It's also not just a question of capex with the oil producers as there literally aren't enough working oil rigs and fracs to meaningfully grow production if you wanted to. You need at least a 6 month lag to go out and build more fracs, etc. but with a recession looming over everyone's heads and ESG concerns will that actually happen?
I think the market is seriously underestimating these issues. Either the global economy gets whacked sometime soon and demand falls enough to meet supply or, if all these fears are overblown you just walk right into an energy crisis by next summer.
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Biden is proposing a ban on US oil products. He’s also floated the idea of reinstating the US crude export ban from the past. Obviously either or both of these scenarios would have ramifications for US refiners and producers. It would also be terrible for Canadian producers who have no access to tidewater. I’m wondering if anyone knows how it would impact Canadian producers who export out of the US to global markets? Would flow through exports have similar restrictions? If you add US diluent to Canadian heavy midstream does that make it a US product? Does anyone know any good producers tied to Brent pricing? I’m thinking Australia may be the best market to look into but wouldn’t be surprised with a windfall tax in that jurisdiction if Brent moons.
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2 hours ago, gokou3 said:
The storage tanks may be full, but is it sufficient to last them through this winter? Asking a question.
Under normal circumstances it wouldn’t be but with significant demand destruction and fuel switching it should be enough. As always though it depends on the weather. -
Yes somewhat. I don’t believe 4% long term yields are sustainable so either the FED tips their cards and the entire curve flattens down or within the next year we see the long duration stuff invert as things start to break. Seems like a good risk reward bet at this point. My only fear would be if the FED pivots so hard that inflation rips higher but that’s a pretty low probability event in my opinion.
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Bought a large amount of TLT and some energy stocks TECK.B, BNE, MEG.
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16 minutes ago, stahleyp said:
2008 and 2020 was not priced in because people underestimated the severity. However with 2020 markets were priced in very quickly.
Perhaps now people are underestimating the severity of rate hikes. I don't know.
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I think the best energy play is coal producers at the moment. You have companies like BTU trading in the range of 1x EV/EBITDA based on next year’s strip. Obviously coal will be phased out of western economies within the next decade but I just don’t see the developing world moving away from the cheapest source of available base-load electricity. As long as coal is cheaper than natural gas I expect increasing demand from India, China, etc. All the supply side constraints applicable to oil/gas (lack of available financing, lack of certainty for future demand, etc.) are even stronger for coal.
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TBF. Economy isn't that weak and inflation isn’t low. Bond yields are heading higher.
Have We Hit The Top?
in General Discussion
Posted
I think you’ve pretty much summed up the breakneck rise in desirable real estate globally. People constantly ask who can afford to live in places like Hong Kong, Vancouver, NYC and the answer is the rich can. It’s less about living there though and more about preserving wealth.