1999 again?

[SHDL]

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/

 

[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.

[SHDL]

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]

 

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.

[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.

[SHDL]

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.

 

Yes you may be right about that.

[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.

[SHDL]

Fear you say? Maybe they meant the "fear of missing out."

 

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...

[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.

[SHDL]

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."

 

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...

[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.

[Liberty]

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.

 

That's all valid, I'm just encouraging you to say this to him rather than tell him not to post at all or how to post. I think we all want the same thing: Interesting discussions. How we get there is by asking each other questions and suggesting ideas and by constructively disagreeing.

[John Hjorth]

Agreed, Liberty,

 

Peace.

[SHDL]

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.

[jschembs]

What I find interesting is that for a subject heading of "1999 again," the discussion has almost exclusively focused on valuations. The late 90s were certainly a time of euphoria in the capital markets, which gave plenty of startup enterprises a long leash of funding that otherwise wouldn't have existed. With that leash came jobs, office leases, computer equipment, consultants, etc.

 

I see plenty of parallels today. While we can argue whether or not a "pets.com" exists today, there are plenty of very questionable business models being funded, which, whenever the cycle turns (and it will), results in shuttered businesses, lost jobs, unpaid leases, and plenty of excess capital spending.

 

Even for the well-regarded business models, as growth slows and the market begins to demand profits, opex cuts will be the first place to look. The double-edged sword of high margin SAAS companies is that operating leverage cuts both ways.

 

I know I'm jaded from having graduated college around the time of the dot com bubble, and I acknowledge we're nowhere near that time, but I am honestly surprised to see little to no consideration of how these factors may play into the current cycle.

[mcliu]

This paper on IPO stats is kind of interesting, I've attached an excerpt (page 29):

 

https://site.warrington.ufl.edu/ritter/files/2019/01/IPOs2018Statistics_Dec.pdf

 

The % of companies IPOing with negative earnings in 2018 is definitely at a high of 81%.

However, the euphoria is nowhere near 1999 in terms of the number of IPOs and the first day stock price increase.

[RuleNumberOne]

The big difference between now and 1999 is the ECB has no ammo left.

 

I wish the market calls Draghi's bluff. The ECB is destroying free markets, hurting the banking system, fueling housing bubbles. If the market senses Draghi is waving an empty gun, it will be an enormous bond bubble bursting.

 

My own sense is that the ECB's latest stimulus threat is their last jawboning effort. The French central bank governor doesn't sound confident in my opinion:

 

ECB Officials Ready to Add Stimulus But Won’t Say When or How

https://www.bloomberg.com/news/articles/2019-07-08/ecb-officials-ready-to-add-stimulus-but-won-t-say-when-or-how

 

[RuleNumberOne]

If Danish mortgage rates are at -0.43%, are deposit rates even more negative?

 

If they are not, on a 30 year mortgage, the bank would lose -13% (since the negative rate is implemented by forgiving -0.43% of the loan every year.)

 

I really liked that Bloomberg article headline about the stimulus - "won't say when or how." Not sure if the bears will continue to believe there are bullets in Draghi's gun.

 

The bond bears can make a killing, duration has increased so much that a one percent interest rate increase results in $2.4 trillion in sovereign debt losses alone. Not to mention home price implosion.