Wilshire 5000 market cap / GDP exceeds dot-com peak

[Spekulatius]

^The Japanese cycle reference is interesting.

If used as a benchmark, then it's possible that US markets could double overnight and reach Nikkei 89's height.

 

On top of earnings decline and margin compression, Japan has had to deal with a triple whammy as they sort of went (are going?) through some kind of paradigm shift.

From Dec. 1989 to somewhere in 2019, total annual return in yen: -0.8%.

https://dqydj.com/nikkei-return-calculator-dividend-reinvestment/

 

Tell me where I'm going to die so I don't go there.

 

The Japanese market is for trading not investing. I have had decent results doing just that. In all that dreariness, there seem to be blurbs of euphoria or momentum trading or whatever it is that can be used to exit. It’s just a matter of when usually.

[Cigarbutt]

^The Japanese cycle reference is interesting.

If used as a benchmark, then it's possible that US markets could double overnight and reach Nikkei 89's height.

 

On top of earnings decline and margin compression, Japan has had to deal with a triple whammy as they sort of went (are going?) through some kind of paradigm shift.

From Dec. 1989 to somewhere in 2019, total annual return in yen: -0.8%.

https://dqydj.com/nikkei-return-calculator-dividend-reinvestment/

 

Tell me where I'm going to die so I don't go there.

 

The Japanese market is for trading not investing. I have had decent results doing just that. In all that dreariness, there seem to be blurbs of euphoria or momentum trading or whatever it is that can be used to exit. It’s just a matter of when usually.

Actually, it seems that the Japanese market has entered (until proven otherwise) a moving sideways kind of market.

https://www.macrotrends.net/2593/nikkei-225-index-historical-chart-data

Those log and long-term graphs sometimes give an artificial and disconnected picture compared to the habit of looking at prices several times a day. Interesting to decompose:

Total return, annualized, in yen. from December 1989 to April 2003: -10.5%    -----) if you achieved "decent" absolute results then, I am more than impressed.

Total return, annualized, in yen. from April 2003 to August 2019: 8.0% 

To compare: Total return S&P 500, annualized, in USD. from April 2003 to August 2019: 9.6%

 

If you invest in Japan, you may be interested in the following:

https://www.burgundyasset.com/wp-content/uploads/Is-Japan-Our-Future-July-2012.pdf

For fun, given the article was written in July 2012:

Total return Nikkei, annualized, in yen. from July 2012 to August 2019: 15.3% 

Total return S&P 500, annualized, in USD. from July 2012 to August 2019: 13.5%

 

A potential conclusion would be to simply look at individual names and to stop fighting the Fed?

[Spekulatius]

I thinking that hedge funds are the likely marginal buyer pushing stocks higher. It’s had to find any large hedge fund that is bearish and most seem to be long. In addition, the FED repo action since  Fall 2019 provides them with more liquidity (hedge funds are one beneficiary of the Fed providing liquidity via Repos). I could be wrong, but they my guess - the trade phase 1 deal with China provided the all clear sign, and after having underperformed for so long, these guys needed to do something and going long with liquidity provided is the lowest resistance way to go.

https://www.cnbc.com/2020/01/17/david-tepper-and-stanley-druckenmiller-both-still-bullish-on-stocks.html

[wabuffo]

In addition, the FED repo action since  Fall 2019 provides them with more liquidity (hedge funds are one beneficiary of the Fed providing liquidity via Repos).

 

Bingo - that's it.  The Fed expanded its balance sheet and stocks went up. But, wait ... before the Sept repo madness, the Fed was removing liquidity, right?  To the tune of $300B! 

 

So of course, stocks went....DOWN UP...22% during that time. 

 

Fed removes liquidity, stocks go up, Fed adds liquidity, stocks go up.  Maybe, just maybe one has nothing to do with the other and our mental models when it come to how the Fed works are ... wrong.

 

 

wabuffo

[RuleNumberOne]

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

[thepupil]

the multipl.com numbers are inflation adjusted.

 

Here are nominal earnings per share for the S&P 500 from 1999 to 2004, they drew down by about 16% and grew by about 5% / year 1999-2004. the SPX started this period at 29x (1230 price on 50/share of earnings, 3.4% earnings yield). It troughed at around 800 (about 19x trough earnings in the low 40's per share), price drawdown from 99 of 35%. the actual peak to trough drawdown was higher because SPX peaked at ~1500 in March 2000.

 

 

50.17 54.62 42.99 46.00 54.08 65.45

 

if we were sitting here in 1999 with the SPX at 29x earnigns, we might have been inclined to put a portion of out money in bonds. The 10 year real yield based on core CPI in 1999 was 4.6% (6.4% nominal 10 yr on 12/31/1999). So the S&P was at 29x and the you could make CPI+4% pre-tax risk free. today the SPX trades for 19x 2020 eanrings and 21.5x 2019 earnings. the equity risk premium is much higher today than it was in 1999.  The 10 year real yield today is -30 bps.

 

If we are indeed in early 1999 and earnings might decline by say 20% and then recover some 4,5,6 years later, should I own cash or bonds instead? It's not clear to me given my time horizon.

 

Just providing the unrelenting TINA perspective here. Go read some Jeremy Siegel and quit worrying  :D

 

[RuleNumberOne]

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.

 

 

the multipl.com numbers are inflation adjusted.

 

Here are nominal earnings per share for the S&P 500 from 1999 to 2004, they drew down by about 16% and grew by about 5% / year 1999-2004. the SPX started this period at 29x (1230 price on 50/share of earnings). It troughed at around 800 (about 19x trough earnings in the low 40's per share), price drawdown from 99 of 35%. the actual peak to trough drawdown was higher because SPX peaked at ~1500 in March 2000.

 

 

50.17 54.62 42.99 46.00 54.08 65.45

 

if we were sitting here in 1999 with the SPX at 29x earnigns, we might have been inclined to put a portion of out money in bonds. The 10 year real yield based on core CPI in 1999 was 4.6%. So the S&P was at 29x and the you could make CPI+4% pre-tax risk free. today the SPX trades for 19x 2020 eanrings and 21.5x 2019 earnings. the equity risk premium is much higher today than it was in 1999.  The 10 year real yield today is -30 bps.

 

If we are indeed in early 1999 and earnings might decline by say 20% and then recover some 4,5,6 years later, should I own cash or bonds instead? It's not clear to me given my time horizon.

 

Just providing the unrelenting TINA perspective here. Go read some Jeremy Siegel and quit worrying  :D

[thepupil]

Sales per share (2012-2019)

 

1,064.46 1,095.34 1,137.23 1,106.83 1,129.54 1,213.80 1,315.80  1,374.03

 

Diluted Earnigns from continuing Ops per share

99.09 106.20 112.08 108.84 108.97 122.57 150.85  150.09

 

 

I agree with you that sales and earnings growth has recently turned weak. I agree with you we are late cycle.

 

I just think that it's  hard to make the case that stocks are very expensive. You can justify owning stocks if they just can have 0% real growth. (2-3% nominal) over the next decade or so. Indeed, Bridgewater (generally recently turned bearish) says stocks are discounting about 0% real earnings growth. I have money to put to work and struggle to not put in risk assets.

 

That whole financial repression thing works!

 

I do think the lack of a lower risk alternative higher yielding alternative (bonds) and lower absolute valuations today should play a role in one's thinking when you're comparing to 1999.

 

Also, the world is not only US large cap stocks. From 1999 to 2004, the EM index returned 15.4% / annum while the MSCI USA did -1.1%. The US REIT index made 20.4% / annum. Now I don't think either REITs or EM will do that in the next 5 years, I'm just saying that if you think US stocks are super expensive and awful, there are other investable asset classes. If we are indeed in an "everything bubble" that won't matter, though.

 

 

[Gregmal]

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.

 

 

the multipl.com numbers are inflation adjusted.

 

Here are nominal earnings per share for the S&P 500 from 1999 to 2004, they drew down by about 16% and grew by about 5% / year 1999-2004. the SPX started this period at 29x (1230 price on 50/share of earnings). It troughed at around 800 (about 19x trough earnings in the low 40's per share), price drawdown from 99 of 35%. the actual peak to trough drawdown was higher because SPX peaked at ~1500 in March 2000.

 

 

50.17 54.62 42.99 46.00 54.08 65.45

 

if we were sitting here in 1999 with the SPX at 29x earnigns, we might have been inclined to put a portion of out money in bonds. The 10 year real yield based on core CPI in 1999 was 4.6%. So the S&P was at 29x and the you could make CPI+4% pre-tax risk free. today the SPX trades for 19x 2020 eanrings and 21.5x 2019 earnings. the equity risk premium is much higher today than it was in 1999.  The 10 year real yield today is -30 bps.

 

If we are indeed in early 1999 and earnings might decline by say 20% and then recover some 4,5,6 years later, should I own cash or bonds instead? It's not clear to me given my time horizon.

 

Just providing the unrelenting TINA perspective here. Go read some Jeremy Siegel and quit worrying  :D

 

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.

[Spekulatius]

I have started to invest in Japan (after dabbling with some Japanese large caps trading in the US) after the 2011 Fukushima disaster, which caused a huge selloff in mid and small caps and offered a significant opportunity. After that played out, I have done some investments, that mostly turned out to be longer term swingtrades. I bought the stocks mostly based on metrics, but feel that my lack of understanding is a real issue, so expect for my post Fukushima trade, I never allocated much resources (capital or time) in Japanese stocks.

[RuleNumberOne]

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."

 

 

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.

 

 

the multipl.com numbers are inflation adjusted.

 

Here are nominal earnings per share for the S&P 500 from 1999 to 2004, they drew down by about 16% and grew by about 5% / year 1999-2004. the SPX started this period at 29x (1230 price on 50/share of earnings). It troughed at around 800 (about 19x trough earnings in the low 40's per share), price drawdown from 99 of 35%. the actual peak to trough drawdown was higher because SPX peaked at ~1500 in March 2000.

 

 

50.17 54.62 42.99 46.00 54.08 65.45

 

if we were sitting here in 1999 with the SPX at 29x earnigns, we might have been inclined to put a portion of out money in bonds. The 10 year real yield based on core CPI in 1999 was 4.6%. So the S&P was at 29x and the you could make CPI+4% pre-tax risk free. today the SPX trades for 19x 2020 eanrings and 21.5x 2019 earnings. the equity risk premium is much higher today than it was in 1999.  The 10 year real yield today is -30 bps.

 

If we are indeed in early 1999 and earnings might decline by say 20% and then recover some 4,5,6 years later, should I own cash or bonds instead? It's not clear to me given my time horizon.

 

Just providing the unrelenting TINA perspective here. Go read some Jeremy Siegel and quit worrying  :D

 

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.

[RuleNumberOne]

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."

[thepupil]

On 1/10/2020 at 1:32 PM, thepupil said:

I see little credit risk in the entirety of the S&P 500. I'm not talking just the top 10, not talking about my holdings, I'm talking all of it.

 

In the S&P 500 ex financials (439 companies), 263 have 5 yr CDS  spreads below 56 basis points, and a further 138 ar between 56-106 bps, so 400 / 439 have credit spreads below 106 bps.

 

There are like 3 companies above 200 bps: Apache, Occidental and L Brands.

 

Now we are on COBF so we don't believe in perfect market efficiency and that low credit spreads is necessarily evidence of low credit risk, so let's take a look at some fundamentals.

 

247 of those companies are less than 2x levered using trailing EBITDA. Only 80 are above 4x. the median is 1.7x levered. Even at higher borrowing rates, these companies will be fine.

 

Listed below are the scary companies that are over 5x levered and that's just using bloomberg dumb data, not adjusted or anything.

I see a bunch of well covered real estate companies and some onese that actually carry a fair bit of leverage (TDG for example).

 

I'm not trying to completely dismiss the macro risk. But the data is the data. I see a bunch of very healthy credits in publicly traded corporate america; i see a bunch of highly levered private equity portcos where the lenders are CLO's and private debt funds that themselves aren't levered and comprise a small portfion of various institutional investors portfolios. Perhaps the risk of LBO, CLO, etc. will bleed into the economy there'll be a recession and stocks go down. But don't look to big publcily traded corporate america to start experiencing credit events.

 

fear not the all time high corporate debt ratios if you hold broad indices. if you hold individual stocks you can avoid that too. I happen to have a large position in the 4th most levered company on this list. I think it has virtually no net corporate debt.

 

Equifax Inc

Newell Brands Inc

Edison International

Vornado Realty Trust

Alliance Data Systems Corp

CarMax Inc

Williams Cos Inc/The

Zimmer Biomet Holdings Inc

SL Green Realty Corp

Campbell Soup Co

General Electric Co

Digital Realty Trust Inc

Hologic Inc

Harley-Davidson Inc

Apartment Investment & Management Co

Dominion Energy Inc

TransDigm Group Inc

Western Digital Corp

Kimco Realty Corp

Healthpeak Properties Inc

Boston Properties Inc

Molson Coors Beverage Co

Welltower Inc

Noble Energy Inc

Dollar Tree Inc

SBA Communications Corp

NiSource Inc

Essex Property Trust Inc

Ventas Inc

American Airlines Group Inc

Entergy Corp

Alexandria Real Estate Equities Inc

Conagra Brands Inc

Extra Space Storage Inc

AES Corp/VA

CMS Energy Corp

Federal Realty Investment Trust

Duke Energy Corp

Simon Property Group Inc

PPL Corp

Realty Income Corp

Constellation Brands Inc

Kinder Morgan Inc/DE

Sempra Energy

Eversource Energy

Duke Realty Corp

MGM Resorts International

Microchip Technology Inc

Equity Residential

Prologis Inc

TechnipFMC PLC

 

 

 

 

Rates are up a lot non-financial corporate america is seeing its net interest payments decline steeply as it earns high rates on its cash and pays  low rates on its debt. 

 

the S&P 500's debt has a wgt average maturity of 10.5 years so this dynamic will likely persist. wealthy consumers with locked up mortgages are the same way. 

 

 

 

 

 

 

 

 

 

 

[UK]

1 hour ago, thepupil said:

the S&P 500's debt has a wgt average maturity of 10.5 years so this dynamic will likely persist. wealthy consumers with locked up mortgages are the same way. 

 

Interesting regarding average maturity. I think I have read somewhere, that avarege maturity of federal debt is 6.3 years, so it seems that SNP did a better job:)

 

Edited October 9, 2023 by UK

[mattee2264]

Isn't this metric a bit meaningless now that US companies are so global. Obviously a lot of the market cap is inflated by Big Tech companies but they have eaten the world. 

[changegonnacome]

2 hours ago, UK said:

 

Interesting regarding average maturity. I think I have read somewhere, that avarege maturity of federal debt is 6.3 years, so it seems that SNP did a better job:)

 

Yep one of the biggest mistakes treasury made during the crisis was that they didn’t extend maturities….they should have been issuing 30/50/100yr bonds like maniacs.

 

instead a huge chunk of existing federal debt is going to roll over into higher rates to say nothing about all the incremental ‘new’ issuance…very poor treasury mgmt…and what happens when civil servants and committees run the show. 

[UK]

42 minutes ago, mattee2264 said:

Isn't this metric a bit meaningless now that US companies are so global. Obviously a lot of the market cap is inflated by Big Tech companies but they have eaten the world. 

 

I think it was Munger who said a while ago on this subject something like this: "just because Warren said something that was true 20 years ago does not necessarily make it true today".

[thepupil]

my point for resurrecting thread was we had a debate about the credit health of S&P 500 a while back. Rates have skyrocketed since then and for now at least, the credit health (as defined by net interest expense in that chart, assuming its right) has potentially improved. 

 

my view then ( and now) is that anyone who actually looks at the data for large cap corporate america will have close to zero worries about the DIRECT effect of increased rates on the companies. 

 

there are far reaching and important INDIRECT effects, but in terms of credit risk, I think it's almost entirely confined to the private market (which is actually consistent with history, the S&P 500 is and has been mostly IG which has a very low historical default rate). 

 

@wabuffo also has been a consistent pointer-outer of US households on the whole being cash rich and how rising rates improves their income...so if households in aggregate are seeing incomes go up, large cap corporate seeing them go up because of rising rates, it feels like rising rates is actually stimulative. But we have to balance that with car / house / durable goods payments for new purchases being terrible and you should start seeing companies and buildings with floating rate debt getting hurt....

 

that's a bit of a ramble...