1999 again?

[Spekulatius]

Yeah, the market in 2007 was even cheaper... Of course interest rates were higher back then as well as other issues.

[jschembs]

I'm more so talking about nearing inflection points in earnings where forward multiples become far less predictive.

[CorpRaider]

Yeah, as we all know the forward multiple is going to be really, really wrong when/if GDP declines and corporate profits as a percentage of GDP/margins decline at the same time. 

[Liberty]

I'd certainly agree the S&P is not nearly as frothy as the R2K or R3K.

 

And of course, use of forward earnings this late in a cycle should be taken with a grain of salt. Look at forward earnings in mid-2007 through 2008.

 

https://www.yardeni.com/pub/sp500trailpe.pdf

 

It's not even the same SP500 anyway. Look at the composition of the index during different periods, and then ask yourself if some businesses are worth higher valuations than others.

 

Is it worth the same multiple when you're railroad and heavy industrial and commodity-heavy as if you're tilted toward capital-light, high ROIC businesses (healthcare, software, services, advanced IP-based engineered products, etc).

 

There's also the globalization aspect. 60 years ago, most of the US-listed companies did most of their business inside one country. Now a lot of the biggest companies in the index are global and are capturing some of the rapid growth in places like Asia..

 

Anyway, comparisons are a lot harder to get right than most people think.

[gfp]

Jesse Livermore eh?  The boy plunger lives!

[jschembs]

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.

 

Quite the tome from Mr. Livermore, thank you.

 

Interesting that for all of that work, he ends up with a measure that largely tracks CAPE (which seems to be discarded as a useless metric by the new guard).

[CorpRaider]

I haven't read the new piece yet, but I caught the podcast episode with Patrick O-shag-hennessy and he talked about some of his prior CAPE adjustment articles.  I had basically the same takeaway/impression as you:  when I read them, I filed under "reinforces legitimacy of CAPE/critiques are nits."

 

I think I remember Buffett talking about how depreciation usually understates required cap-ex, in one of his answers dealing with the failings of EBITDA (think it was somewhere around 2000 in one of the annuals) (and also maybe in "how inflation swindles....haven't read in a while"). 

 

Will be interested to read Livermore's article, but when they said that was the takeaway I was kind of less enthused; could be interesting if they talk about amortization of intangibles though.  I wonder if those aren't generally overstated; I guess they are in the huge winner, quality-compounder-bro portfolios.

[RuleNumberOne]

Yeah, good point Spekulatius. If the bubble is in bonds or cloud stocks (i.e Russell 1000) or housing, no point in looking at the S&P 500.

 

Italian 2-year at 0%!

https://www.bloomberg.com/opinion/articles/2019-07-02/italy-proves-how-markets-have-abandoned-logic?srnd=premium

 

"Let this sink in for a minute: Yields on two-year Italian government bonds briefly fell below 0% on Tuesday. That's right - for a moment, investors decided it was just fine to pay Italy for the privilege of lending it money, even though barely a month ago the country was on the verge of a fiscal crisis so bad some wondered whether it would be need to leave the euro zone. It matters little that yields ended the day on the right side of zero at 0.02%, but even that shows how the “greater fool” theory in markets has gone too far.

 

What makes the developments in Italy’s bond market even more shocking is that at Baa3, its debt is rated just one step away from junk status by Moody’s Investors Service."

Yeah, the market in 2007 was even cheaper... Of course interest rates were higher back then as well as other issues.

[RuleNumberOne]

Credit risk doesn't exist anymore in Europe.

 

Greece 10-year yield at 2.14%. The same as the US 10-year.

 

BofA CEO says US yields are low because Europeans are buying up all the US bonds to escape negative rates. Can't blame them.

 

Germany applied retroactive rent freezes to control inflation in Berlin (aka wealth confiscation)

 

 

[CorpRaider]

Carry = EAFE stocks + U.S. Bonds  :o

[Guest]

For the guys that think this is 1999, can you please share your performance numbers over the past 5 and 10 years?

[RuleNumberOne]

The 5-year return in my wife's IRA accounts is 38% (I invest the money.)

 

My own IRAs have moved between WellsFargo, BofA-ML, Schwab to get a mortgage rate reduction, and on top of that I have Fidelity, Vanguard accounts that have been moved and merged etc. But my returns should not be too different (same portfolio contents and decisions.)

 

Actually, upon checking my returns more closely, they are lower because of some losses - took more risks with my money. The returns should comfortably be above 25-30% though.

 

For the guys that think this is 1999, can you please share your performance numbers over the past 5 and 10 years?

[Guest]

The 5-year return in my wife's IRA accounts is 38% (I invest the money.)

 

My own IRAs have moved between WellsFargo, BofA-ML, Schwab to get a mortgage rate reduction, and on top of that I have Fidelity, Vanguard accounts that have been moved and merged etc. But my returns should not be too different (same portfolio contents and decisions.)

 

Actually, upon checking my returns more closely, they are lower because of some losses - took more risks with my money. The returns should comfortably be above 25-30% though.

 

For the guys that think this is 1999, can you please share your performance numbers over the past 5 and 10 years?

 

If that's an annual return, that is pretty spectacular!

[John Hjorth]

I have issues with that you just posted that, SHLD,

 

This is CoBF.

 

 

 

 

[Liberty]

 

December 1999 Paine Webber-Gallup survey of investors: average expected returns over the next decade was 19%. (Do they still do those surveys?)

 

I can't think of a systematic survey recently, but most of what I've seen since about 2011 was the mid-single-digits "new normal" stuff, with investors mostly getting surprised to the upside during that period.

[John Hjorth]

I have issues with that you just posted that, SHLD,

 

This is CoBF.

 

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.

[RuleNumberOne]

Fear you say? Maybe they meant the "fear of missing out." This is what WSJ found:

 

https://www.wsj.com/articles/wework-to-raise-billions-selling-debt-ahead-of-ipo-11562524614?mod=hp_lead_pos4

 

"The money-losing office-space manager is seeking to raise as much as $3 billion to $4 billion in coming months through a debt facility that could grow as big as $10 billion over the next several years, the people said. This debt offering—independent of the money WeWork will raise in its initial public offering—is designed to fund WeWork’s growth until its business is profitable, the people said.

 

WeWork, which confidentially filed for an IPO late last year, has aspirations to be more than a real-estate company. Mr. Neumann and his deputies have said investors should treat WeWork more like a tech company, pointing to its rapid growth and various services it eventually hopes to offer that cater to its tenants."

 

 

December 1999 Paine Webber-Gallup survey of investors: average expected returns over the next decade was 19%. (Do they still do those surveys?)

 

I can't think of a systematic survey recently, but most of what I've seen since about 2011 was the mid-single-digits "new normal" stuff, with investors mostly getting surprised to the upside during that period.

 

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.

[BG2008]

This maybe a reason for me to short the company when it comes public.  Will keep an eye on it. 

 

Fear you say? Maybe they meant the "fear of missing out." This is what WSJ found:

 

https://www.wsj.com/articles/wework-to-raise-billions-selling-debt-ahead-of-ipo-11562524614?mod=hp_lead_pos4

 

"The money-losing office-space manager is seeking to raise as much as $3 billion to $4 billion in coming months through a debt facility that could grow as big as $10 billion over the next several years, the people said. This debt offering—independent of the money WeWork will raise in its initial public offering—is designed to fund WeWork’s growth until its business is profitable, the people said.

 

WeWork, which confidentially filed for an IPO late last year, has aspirations to be more than a real-estate company. Mr. Neumann and his deputies have said investors should treat WeWork more like a tech company, pointing to its rapid growth and various services it eventually hopes to offer that cater to its tenants."

 

 

December 1999 Paine Webber-Gallup survey of investors: average expected returns over the next decade was 19%. (Do they still do those surveys?)

 

I can't think of a systematic survey recently, but most of what I've seen since about 2011 was the mid-single-digits "new normal" stuff, with investors mostly getting surprised to the upside during that period.

 

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.

[Guest]

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/

 

 

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."

[RuleNumberOne]

jschembs,

 

We can include all the constituents if we use their earnings yield or FCF yield.

 

E.g. if X has an earnings yield of -10% it means we would lose all our money in 10 years.

E.g. if Y has an earnings yield of +10% it means we would get back our money in 10 years.

If we invest equal amounts in both, it means we stay flat.

 

I wonder how the average earnings yield of the Russell 1000 compares with 1999. Back then, we had wide-moat, wide-GAAP-profit-margin companies like MSFT and CSCO and QCOM. These companies had wide profit margins right from their IPO.

 

MSFT/CSCO/QCOM sales (EV/S) were very high-quality from an investing point of view when compared with the current crop of low-moat, never-profitable, low-barrier-to-entry IPOs.

 

 

 

 

I'd love to see the underlying data. Even when you exclude industries like REITs, financials, and O&G E&P companies, whose cash flow statements are not comparable to other operating companies, you still have data integrity problems.

 

I pulled the Russell 1000 data from CapIQ. Excluding the above industries, the average / median P/FCF is 30x / 21x (25x / 22x if excluding SBC). The valuations go down when excluding SBC because of the numerous FCF negative companies, where deducting SBC makes their valuations less negative.

 

If you exclude negative FCF companies, average / median P/FCF is 48x / 22x (46x / 24x excluding SBC - 46x is lower than 48x because a number of companies have positive FCF, but negative if deducting SBC).

 

Remember, these valuations EXCLUDE the highly valued growth stocks like TWLO (24x revenue, negative FCF) and NFLX (9.5x revenue, negative FCF). Those are the ones most susceptible to the 50+% declines.

 

It's always hard to compare valuations over time, particularly when accounting rules change (no longer amortizing goodwill, now expensing SBC).

 

Here's the data. I also excluded a few names that recently reported earnings where CapIQ hadn't updated their LTM financials, but the impact is insignificant.

 

More food for thought - given the prevalence of negative earnings / FCF constituents, EV/sales perhaps more enlightening? At least you can include more of the constituents in the data set.

[Liberty]

I have issues with that you just posted that, SHLD,

 

This is CoBF.

 

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.

 

That's not how things work. Market sentiment won't just invade a forum unless there's a caveat and it's pre-digested by someone else. We can make up our own minds, no need for the paternalism. And nobody's forcing you to click his links or agree with what he says. If you have a counter-argument or comment, post it, but don't just tell people not to post things that are on topic, please.

[John Hjorth]

Naturally SHDL is right that it's a data point with regard to sentiment. I suppose my post came out as an acid burp from an grumpy old man. I apologize for that. What I actually meant was that I'm 100 times more interested in how SHDL thinks about that particular data point than Mr. Fisher's opinion. Based on a supplementary question from RuleNumberOne SHDL elaborated shortly in post #134. [And personally, I agree with SHDL on that stance.]

 

So I suppose all is good.

 

- - - o 0 o - - -

 

My post may also be severely biased by the fact that Mr. Fisher is very promotional here in Denmark with ads, trying to collect AUM, which I consider really annoying. That should really not be mixed into a reply to SHDL, naturally. That article on USA Today that SHDL linked to represent a stance and investment approach, that is a special type of market timing, that I personally speculate has no support among CoBF members. But naturally, still a data point.

[RuleNumberOne]

I think the central bankers see the IPO bubble as a smaller worry compared to the gigantic bond bubble in Europe. I was looking for some data on possible losses, and found this Bloomberg article (thanks to heisenbergreport)

 

https://www.bloomberg.com/news/articles/2019-06-26/trillion-dollar-monster-lurks-as-bonds-price-out-duration-risk

 

"Investors riding easy-money policies are breeding a trillion-dollar monster in the bond market, the likes of which has never been seen in decades of history...

 

Bloomberg Barclays sovereign-debt index is near a record high of 8.32 years, meaning just a one-percentage-point increase in yields would equate to more than a $2.4 trillion loss.

 

“At one point the market may start challenging central banks about the effectiveness of their monetary policy,” said the chief investment officer. “They may start pricing in credit risk, and that’s going to push yields higher.”

[RuleNumberOne]

In my opinion, they can't push rates down anymore. For example, only a central bank can buy a -5% yielding bond (real investors don't want an offer where their net worth will be wiped out 5% per year.) Denmark's negative rate mortgages don't make sense at more negative rates either - the bank forgives -0.4% of the loan every year. Would it make sense for the bank to forgive 4% of a mortgage every year? The bank would go broke.

 

But if rates were to go back up just a bit, the bond losses would cause a recession. The ECB is currently fueling housing bubbles in most of Europe. How are they going to retreat from zero rates?

 

Meanwhile, WFC and BAC have an earnings yield of 11% and are returning 14% to investors this year. What a contrast, investors can't get enough of negative rate debt, but they run away from WFC and BAC.

 

Whoever identifies the snapping point can make a ton of money. The setup is similar to 2008. Can individual investors buy CDS?

[RuleNumberOne]

The reason for the contradiction is "mandates." The same Bloomberg article I linked above says:

 

"JPMorgan Chase & Co. estimates U.S. mutual funds with active mandates have recently increased long-duration exposures after turning underweight last month."

 

Bullard and Kashkari are undermining US investors with their calls for rate cuts, pushing mutual funds farther on the precipice.

 

"US mutual funds with active mandates" are forced to play Russian Roulette. Buffett of course can buy whatever he pleases, but these "mutual funds" have "active mandates", they are forced to increase long-duration.

 

Bullard refused Fed Governorship, doesn't mean he will refuse Chairmanship.