Have We Hit The Top?

[LearningMachine]

4 minutes ago, maplevalue said:

Whenever I get nervous I just look at this chart.

 

Sure the Fed tightening is helping inspire a selloff, but at the end of the day stocks still look good relative to the alternatives out there.

 

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

 

 

What earnings yield do you want for your investments if we are heading back to 1970s style inflation and 10-year-treasury is heading towards the left side of the chart? 

Edited January 24, 2022 by LearningMachine

[Gregmal]

Maybe, maybe not. It’s good relative and absolute value and if those obvious doubles and triples start showing up, at worst it’s low beta capital you can recycle into something more torquey. Main thing though is you have to be in it to win it.
 

Stocks going down 50% would be an “exception to the rule” type of situation. Fact of the matter when you look at the big, quality names, especially tech, is that they’re still up massive if you bought them any time but recently. So while you could sit around on cash or equivalents waiting for the next 30% decline across the board, everything at my disposal points to that being a losing strategy. I’d rather wade in and just let the market do it’s thing. If your horizon for accumulating is more than a few months, there’s tremendous advantage. Especially if you can hit on some shorts or hedges to generate more liquidity while protecting low basis, long term investments. I mean if I chucked my long term holdings at the first sign of a hiccup, as you say @LearningMachine I’d be sending Sam a dividend and immediately suffering an unnecessary 20% loss. 

[E. Nashton]

@LearningMachine - I've been thinking about this....more on a qualitative side...basically anyone buying consistently since 2002 or buying the dips has done extremely well. Even bond holders! The backdrop of all this was decreasing or atleast accommodative interest rates (vs historical rates). I worry that I have been conditioned to buy every dip without consideration of the 'backdrop'. If rates go much much higher, the game changes completely so how do I do well or atleast do OK with my portfolio in that case? I'm not smart enough to figure this all out...so for now I have been deploying cash, buying quality names over time, keeping some cash aside for further declines and XXXX....the XXXX I'm still trying to figure out. 

[LearningMachine]

8 minutes ago, Gregmal said:

Maybe, maybe not. It’s good relative and absolute value and if those obvious doubles and triples start showing up, at worst it’s low beta capital you can recycle into something more torquey. Main thing though is you have to be in it to win it.
 

Stocks going down 50% would be an “exception to the rule” type of situation. Fact of the matter when you look at the big, quality names, especially tech, is that they’re still up massive if you bought them any time but recently. So while you could sit around on cash or equivalents waiting for the next 30% decline across the board, everything at my disposal points to that being a losing strategy. I’d rather wade in and just let the market do it’s thing. If your horizon for accumulating is more than a few months, there’s tremendous advantage. Especially if you can hit on some shorts or hedges to generate more liquidity while protecting low basis, long term investments. I mean if I chucked my long term holdings at the first sign of a hiccup, as you say @LearningMachine I’d be sending Sam a dividend and immediately suffering an unnecessary 20% loss. 

 

@Gregmal, I was not suggesting to chuck long term holdings at the first sign of a hiccup, and agree to not send uncle Sam a dividend until you actually see something compelling .   I was just asking about adding more.  

 

Also, I agree, some of the quality tech names need to come down a lot. 

Edited January 24, 2022 by LearningMachine

[TwoCitiesCapital]

52 minutes ago, Dean said:

@LearningMachine - I've been thinking about this....more on a qualitative side...basically anyone buying consistently since 2002 or buying the dips has done extremely well. Even bond holders! The backdrop of all this was decreasing or atleast accommodative interest rates (vs historical rates). I worry that I have been conditioned to buy every dip without consideration of the 'backdrop'. If rates go much much higher, the game changes completely so how do I do well or atleast do OK with my portfolio in that case? I'm not smart enough to figure this all out...so for now I have been deploying cash, buying quality names over time, keeping some cash aside for further declines and XXXX....the XXXX I'm still trying to figure out. 

 

I do think there is a period of time where buying the dip will be punished. But what I mean by that is dips of 10-30%. 

 

I think if you get a 'crash' in excess of 30%, it probably starts making sense to accumulate - even if you think its going lower or envisage a 1930s or 1970s period for stocks/bonds. 

 

It might take you more than a decade to recover from a 50-60% loss, but that recovery period is dramatically shorter if you miss the first 30% and continue to accumulate as it falls further. 

 

Same with bonds - higher rates means lower prices to some extent, but it also means every maturity/coupon is reinvesting at higher yields and at some point the losses stop as you approach maturity/par value. I think in most historical instances of rates rising, 10-year type bond ladders break even in on average by year 3-4. 

 

Point is, hold cash if you're concerned. But the whole point of holding cash is to eventually put it to work. Not have a permanent allocation to it. Even if you admit you can't call the bottom, having set triggers to begin buying after major dips makes sense. But I define major dips as being in excess of 30%. 

Edited January 24, 2022 by TwoCitiesCapital

[maplevalue]

1 hour ago, LearningMachine said:

What earnings yield do you want for your investments if we are heading back to 1970s style inflation and 10-year-treasury is heading towards the left side of the chart? 

 

Well obviously if you get a 10yr yield at 10% stocks will probably be lower. However, it would seem from the history that US 10yr yields could go up another 300bps to 5% (this would truly be an enormous move, and I doubt the economy could really handle it -> inflation wouldn't be a problem) and stocks could still do ok.

[Viking]

1 hour ago, Dean said:

@LearningMachine - I've been thinking about this....more on a qualitative side...basically anyone buying consistently since 2002 or buying the dips has done extremely well. Even bond holders! The backdrop of all this was decreasing or atleast accommodative interest rates (vs historical rates). I worry that I have been conditioned to buy every dip without consideration of the 'backdrop'. If rates go much much higher, the game changes completely so how do I do well or atleast do OK with my portfolio in that case? I'm not smart enough to figure this all out...so for now I have been deploying cash, buying quality names over time, keeping some cash aside for further declines and XXXX....the XXXX I'm still trying to figure out. 

My read is the big risk today is the economy. PMI’s today were weak. Is this due primarily to Omicron (makes sense)?
 

if the economy is ok then my guess is we having another buy the dip moment. If the economy is slowing AT THE SAME TIME inflation in the US is ripping 8% then my guess is markets will drop further. I will remain open minded…

 

What you own is probably supremely important today. Companies with real (and growing) earnings trading at a low multiple should hold up better if we are actually in a 1999-2003 type market (where the speculative/super high multiple stuff got crushed).

Edited January 24, 2022 by Viking

[Gregmal]

You’re double counting. If the inflation is causing economic weakness you have no need to raise rates because supply and demand will take care of it. So saying an economic slowdown, plus fed raising rates substantially? Not happening. 

[Xerxes]

i am looking at RTX, it barely budged lower. Maybe it will budge when the earning come out (i.e. Aftermarket impact from Omicron etc.) but not much affected in the broad sell off.

 

 

[Parsad]

1 hour ago, TwoCitiesCapital said:

 

I do think there is a period of time where buying the dip will be punished. But what I mean by that is dips of 10-30%. 

 

I think if you get a 'crash' in excess of 30%, it probably starts making sense to accumulate - even if you think its going lower or envisage a 1930s or 1970s period for stocks/bonds. 

 

It might take you more than a decade to recover from a 50-60% loss, but that recovery period is dramatically shorter if you miss the first 30% and continue to accumulate as it falls further. 

 

Same with bonds - higher rates means lower prices to some extent, but it also means every maturity/coupon is reinvesting at higher yields and at some point the losses stop as you approach maturity/par value. I think in most historical instances of rates rising, 10-year type bond ladders break even in on average by year 3-4. 

 

Point is, hold cash if you're concerned. But the whole point of holding cash is to eventually put it to work. Not have a permanent allocation to it. Even if you admit you can't call the bottom, having set triggers to begin buying after major dips makes sense. But I define major dips as being in excess of 30%. 

 

Correct!  Losing 1-2% short-term is worth it if you can put some of that cash to work into something that has corrected greater than 50%.  But you have to put it to work at some point as you said.

 

I've been sitting on 50% cash for the last few months...today I put 15% of that to work into a couple of ideas that are down 60% plus from their highs, yet their economics have barely changed, if at all!  Great businesses that finally have come down to reasonable valuations again. 

 

And if they or markets continue to go down, I will put more of that cash to work...ever tightening the upside spring!  Cheers!

[E. Nashton]

@Viking @TwoCitiesCapital  +1 thanks for sharing your thoughts. 

[Viking]

34 minutes ago, Gregmal said:

You’re double counting. If the inflation is causing economic weakness you have no need to raise rates because supply and demand will take care of it. So saying an economic slowdown, plus fed raising rates substantially? Not happening. 

The Fed is usually the cause of an economic slow down. Due to all the liquidity they have been pumping into the economy for years (and especially the past 2 years) the Fed has finally gotten their wish… inflation. Except they have way, way too much (7%). They also have asset bubbles in financial assets and a ripping real estate market. The genie GOT OUT OF THE BOTTLE. They got too much of what they wanted. But hey, that’s what happens when you run experiments: sometimes they produce outcomes you are not expecting  
 

To combat inflation/asset bubbles the Fed now needs to quickly remove the liquidity. Except this WILL LIKELY RESULT IN AN ECONOMIC SLOW DOWN. And the air is starting to come out of some asset bubbles (spac, bitcoin, small cap tech etc). 
 

Now the stock market is throwing a tantrum. As expected. We will find out on Wed if the Fed ‘put’ still exists. 
—————

It should also be noted, in actions, the Fed is still accommodative. It is only TALKING about removing liquidity.  It actually hasn’t even started yet. And the stock market is already freaking out.

Edited January 24, 2022 by Viking

[E. Nashton]

I know we're not traders on this board but it is telling when some names this morning were trading down 5-7% and now are even or even positive for the day. The indices are still down quite a bit and yet these names are rebounding. That to me signals that there was indiscriminate selling earlier today. Baby with the bath water. Is this a long-termm signal? Probably not. Just interesting to note. 

[Gregmal]

 

1 minute ago, Dean said:

I know we're not traders on this board but it is telling when some names this morning were trading down 5-7% and now are even or even positive for the day. The indices are still down quite a bit and yet these names are rebounding. That to me signals that there was indiscriminate selling earlier today. Baby with the bath water. Is this a long-termm signal? Probably not. Just interesting to note. 

Exactly. A bunch of folks have spent a decade over investing because everything went up and a bunch of folks spent a decade shorting or being under invested because everything went up. Now people everywhere think the world is ending because of……a two week correction in the amount of ….10%. 
 

We can talk about the Fed all we want but NEN is illiquid as they come and has done A-ok. Saying the market needs liquidity to go up makes no sense. You simply need to remember what the purpose of it is. And if you’re “investing”, then I am not sure what Fed liquidity has to do with it. Rates, sure. But it’s definitely overblown 

[KJP]

7 minutes ago, Dean said:

some names this morning were trading down 5-7% and now are even or even positive for the day.

 

Take a look at Shopify's range today.

[Spekulatius]

6 hours ago, Viking said:

Well the S&P is now down 10% from highs so we have officially entered correction territory. Russell is down 20% so that index has entered bear market territory. Everything is getting hit now. Weak PMI numbers are just throwing gasoline in the fire. 
 

Netflix is now $365. Netflix was trading at these levels back in May 2018! Forget about pre-pandemic levels…

 

And Tesla is at $890. Down 25%. And was trading at $45 in Nov 2019…

 

Perhaps we need to change the title of this post to: The Bottom is Coming…

 

 

Netflix is an interesting one because the most important value driver is subscriber growth. NFLX has done 20% subscriber growth annually for quite some time, but since 2021, the growth has dropped to ~10%.

 

I sometimes watch MF Live and one analyst who tracked it (Jim Mueller?) was plugging the post earnings subscriber growth numbers in his excel model. Value went from ~$900/share with 20% to ~$400 at 10% subscriber growth. Whoops.

 

That said, if iNFLX drops to ~$300/share, it might actually be worth a look from a valuation perspective, imo. I think there is a good chance the subscriber growth may pick up a little once they come past the COVID-19 comps.

 

Although, I do think they are close to saturation in the US and perhaps other countries. They need to crack a big new market like India (which they are working on right now).

Edited January 24, 2022 by Spekulatius

[Spekulatius]

49 minutes ago, Viking said:

My read is the big risk today is the economy. PMI’s today were weak. Is this due primarily to Omicron (makes sense)?
 

if the economy is ok then my guess is we having another buy the dip moment. If the economy is slowing AT THE SAME TIME inflation in the US is ripping 8% then my guess is markets will drop further. I will remain open minded…

 

What you own is probably supremely important today. Companies with real (and growing) earnings trading at a low multiple should hold up better if we are actually in a 1999-2003 type market (where the speculative/super high multiple stuff got crushed).

I don't think it's Omicron. We had other epidemic waves before that didn't really do much.

 

I believe there is a chance that the consumer is tapped out (at least those that have received transfer payments) and/or really started to feel the inflation.

[Gregmal]

8 minutes ago, Viking said:

The Fed is usually the cause of an economic slow down. Due to all the liquidity they have been pumping into the economy for years (and especially the past 2 years) the Fed has finally gotten their wish… inflation. Except they have way, way too much (7%). They also have asset bubbles in financial assets and a ripping real estate market. The genie GOT OUT OF THE BOTTLE. They got too much of what they wanted. But hey, that’s what happens when you run experiments: sometimes they produce something you are not expecting  
 

To combat inflation/asset bubbles the Fed now needs to quickly remove the liquidity. Except this WILL LIKELY RESULT IN AN ECONOMIC SLOW DOWN. And the air is starting to come out of some asset bubbles (spac, bitcoin, small cap tech etc). 
 

Now the market is throwing a tantrum. As expected. We will find out on Wed if the Fed ‘put’ still exists. 

I am not sure all the underpinnings of this are entirely there. Is it possible to have a 10% correction in the stock market? What about 20%? Should shitty companies that got bid up for silly reasons get punished shortly thereafter? That’s perfectly sensible to me. Will people who don’t know how to invest sell their stocks because other people are selling? Sure. 
 

I don’t see why there always needs to be a lot more to it than that. The Fed put doesn’t need to be there, unless the bet is that the Fed destroys the economy…which…seems like a poor bet to me.

 

Much of the short trade I think is done. The decline in the stuff that deserves it have been huge. It could still continue but my take is there’s better use of time than shorting for the last couple drops in the bottle. Otherwise? What? Shorting good companies hoping they go down tomorrow or the day after? Not a game I wanna play. 
 

Can you explain where you see a bubble in real estate? Every thesis I’ve heard basically simplifies to “prices went up 20% in a year” which doesn’t really seem like a bubble to me, especially compared to where the rest of the world is with it. Or relative to where real estate prices have been for the past decade plus. 
 

Sometimes I think we try to hard to see what we want to see. The Fed raised rates and all that in 2018/19 and we were fine. +32% if I recall. However all we hear about is a 3 week correction in December. 
 

All in all this whole “the Fed controls stock market returns” narrative has been around forever and I kind of think it’s repeatedly been shown to be a mistake to fall back on assuming it’s true every time we have a few down days or weeks. 

[Viking]

8 minutes ago, Gregmal said:

I am not sure all the underpinnings of this are entirely there. Is it possible to have a 10% correction in the stock market? What about 20%? Should shitty companies that got bid up for silly reasons get punished shortly thereafter? That’s perfectly sensible to me. Will people who don’t know how to invest sell their stocks because other people are selling? Sure. 
 

I don’t see why there always needs to be a lot more to it than that. The Fed put doesn’t need to be there, unless the bet is that the Fed destroys the economy…which…seems like a poor bet to me.

 

Much of the short trade I think is done. The decline in the stuff that deserves it have been huge. It could still continue but my take is there’s better use of time than shorting for the last couple drops in the bottle. Otherwise? What? Shorting good companies hoping they go down tomorrow or the day after? Not a game I wanna play. 
 

Can you explain where you see a bubble in real estate? Every thesis I’ve heard basically simplifies to “prices went up 20% in a year” which doesn’t really seem like a bubble to me, especially compared to where the rest of the world is with it. Or relative to where real estate prices have been for the past decade plus. 
 

Sometimes I think we try to hard to see what we want to see. The Fed raised rates and all that in 2018/19 and we were fine. +32% if I recall. However all we hear about is a 3 week correction in December. 
 

All in all this whole “the Fed controls stock market returns” narrative has been around forever and I kind of think it’s repeatedly been shown to be a mistake to fall back on assuming it’s true every time we have a few down days or weeks. 

What stopped the 20% decline in stocks in Dec 2018 and caused the market to quickly reverse? THE FED. It did a complete 180 turn from hawk to complete dove.

 

What stopped the 30% decline we saw in March 2020 and caused the market quickly reverse? THE FED. It pumped a historical amount of liquidity into the system. 
 

Is the Feds significant impact on the direction of the stock market not obvious?

Edited January 24, 2022 by Viking

[Gregmal]

I mean I’ve literally been hearing about this Fed punch bowl for what seems like an eternity and it’s always the gold and cash hoarders and idk, if a thesis is wrong for that long maybe it’s just not as potent as we think it should be? We had a period where Fed tightened, raised rates, etc. Ended up being pretty spectacularly uneventful for the “punch bowl bear” thesis. Are we all really just afraid of having to invest on fundamentals ?

[Gregmal]

5 minutes ago, Viking said:

What stopped the 20% decline in stocks in Dec 2018 and caused the market to quickly reverse? THE FED. It did a complete 180 turn from hawk to complete dove.

 

What stopped the 30% decline we saw in March 2020 and caused the market quickly reverse? THE FED. It pumped a historical amount of liquidity into the system. 
 

Is the Feds significant impact on the direction of the stock market not obvious?

The decline in Dec of 2018 was speculated to be a number of things, it seems after the fact it became consensus “Fed”….IMO it seemed like a slower version of the 2010 flash crash which was mainly algo driven, but whatever. Either way, again, you’re talking about a 3 week correction and acting like it was a turning point? In 2018-19 the Fed raised rates and maintained the entire time they were monitoring the situation. When consensus became that they may be moving too fast, they slowed down? Why would they all of a sudden abandon caution after a decade of being really caution? Cuz they want to ruin Biden? Makes no sense.

 

If March 2020 was so obvious, why were you 100% in cash? This ain’t meant as a slight but over and over again I see people doing this hindsite stuff. With all that liquidity how come everyone was so bearish? Not just in 2020 but most of the decade! With all the rate hikes in 2018 why only a brief 3 week run of the mill correction? Even now, if the fed hikes as expected, you think the consensus of sophisticated investors will simply decide to stop investing? Throw in the towel? Come on

[John Hjorth]

14 minutes ago, Gregmal said:

... Are we all really just afraid of having to invest on fundamentals ?

The one-liner of this week on CoBF - and today is Monday!

Edited January 24, 2022 by John Hjorth

[Viking]

21 minutes ago, Gregmal said:

The decline in Dec of 2018 was speculated to be a number of things, it seems after the fact it became consensus “Fed”….IMO it seemed like a slower version of the 2010 flash crash which was mainly algo driven, but whatever. Either way, again, you’re talking about a 3 week correction and acting like it was a turning point? In 2018-19 the Fed raised rates and maintained the entire time they were monitoring the situation. When consensus became that they may be moving too fast, they slowed down? Why would they all of a sudden abandon caution after a decade of being really caution? Cuz they want to ruin Biden? Makes no sense.

 

If March 2020 was so obvious, why were you 100% in cash? This ain’t meant as a slight but over and over again I see people doing this hindsite stuff. With all that liquidity how come everyone was so bearish? Not just in 2020 but most of the decade! With all the rate hikes in 2018 why only a brief 3 week run of the mill correction? Even now, if the fed hikes as expected, you think the consensus of sophisticated investors will simply decide to stop investing? Throw in the towel? Come on

My point was what CAUSED the sell off both times to quickly reverse? The Fed’s communication and actions.
 

We are seeing a big sell off in stocks to start this year. I am simply saying, if history is any guide, what the Fed does on Wed matters to where the stock market goes from here. 
 

i am not out of the stock market (100% cash) like i was in March 2020. I am about 35% cash and was adding to my oil position this morning (currently my biggest weighting). 
 

Macro stuff usually does not matter. Except at inflection points. If the Fed ‘put’ is gone and the Fed actually starts to tighten and shrink its balance sheet (to bring inflation back under control) then the stock market will continue to be volatile. My solution is to simply carry a higher cash balance to be able to take advantage of the volatility. I am not a bear. And i am not a bull. Rather, i am just trying to preserve my wealth and make an adequate return on my investments  

Edited January 24, 2022 by Viking

[Gregmal]

All fair. I just think there’s way too much attention being paid to the Fed. It would be one thing if there was nothing worth investing in out there but that’s certainly not the case. Plus, as was my point before, hindsite everyone seems to predict 100% correct, but the real time going forward track records are much lower. So becoming “too certain” with respect to correlation to what in the past has proven challenging to handicap… just think there’s easier things to focus on. Like fundamentals of companies you own or seek to own.  Let the Fed do what they want and let short term participants carry on as they wish. 

[Parsad]

1 hour ago, KJP said:

 

Take a look at Shopify's range today.

 

That's one I finally took a position in.  When it was down 10% today...now it's 6% higher!  The other stock I bought down 8% is now up 5% as well.  I made my whole 2% across all my cash in one 7.5% investment between two stocks. 

 

If prices continue to rise, well my cash hasn't been sitting worthless.  If prices fall, I can put more money to work.  The flexibility of cash always makes it king!  Cheers!