Have We Hit The Top?

[mattee2264]

"That being said, the market is 18.7x for trailing 2021 EPS  (5.3% earnings yield), and much cheaper on a forward looking basis. Meh."

 

I think this is the real issue. 2021 earnings were inflated for many companies because of changing spending patterns during the pandemic and for the most part they were able to pass on higher input prices as consumers were relatively flush with cash. Not to mention the delayed impact of the massive amounts of fiscal and monetary stimulus. 

 

Forward looking estimates are inaccurate at the best of times but it seems quite possible that 2021 were peak earnings for this cycle and 2022 earnings will come in lower. How much lower is tough to guess. But 19x is a generous multiple to pay for peak earnings so could be a lot further room for disappointment as lower earnings and lower multiples kick in. 

[aryadhana]

On 5/15/2022 at 5:39 PM, Gregmal said:

I mean really think about who and what is driving this “rates” discussion? Then ask yourself how raising rates fixes anything? The majority of the “inflation” is absolutely fixable and the result of stupidity. Energy, already discussed…stop being hostile and pushing this climate bullshit. Consumer products…thanks for finally ending the mask and vaccine mandates. That’s correcting now. Housing, again, fix the supply chain. Cars? For real? We re having trouble producing cars! GTFO. Rates have nothing to do with fixing these things. So why are people pushing for them? Again, who’s pushing for them? Look around. The “inflation” started COVID crap + like 6-12 months after. It’ll probably end 6-12 months after the shit stops which IMO started around February or March. And just like COVID itself, the answer is to just suck it up and deal with it, not start letting the bureaucrats interfere with things.

 

I'll quote this one, but in response to several of your points.  

 

The problem with inflation is that unstable price levels foul up business planning and bookkeeping, making it rather hard to tell how much value your business is creating.  And as far as this is concerned the situation is more troubling than just an 8 percent headline rate.  Since the beginning of the pandemic used car prices are up a little over percent whereas new car prices are up about 14 percent.  But the observed prices of used cars are firm and fixed whereas the MSRP isn't actually a real offer you can accept.  So inflation measured in prices you can actually buy at today is probably appreciably higher across the board.  

 

The problem with low rates is that considerably negative real interest rates are very bad and encourage the destruction of value, and over a period of time inculcate bad psychological habits.  I think it's bad for real rates to be negative period, but it is strange and unusual for them to be so far negative for as long as they have been.  We will see but I don't think this is a problem that corrects itself without nominal rates rising to a point that real rates are positive enough for long enough, and absent that the problem will compound itself.  

 

Nor do I think bringing rates up enough will destroy the economy, just considerable parts of the economy that deserve destruction.  Coinbase said in its recent presentation to shareholders, "we may make a profit when revenues are high, and we may lose money when revenues are low, but our goal is to roughly operate the company at breakeven, smoothed out over time, for the time being."  This is the sort of thing that has got to go, and will go when non-dilutive access to further sources of wasteful spending become a tad bit too expensive.  Temporarily rather high, and over a decade moderately elevated nominal interest rates will not destroy actually and intentionally profitable concerns, nor allow the rich and well-connected to grab productive assets on the cheap.  

 

I do not want economic destruction, just want a sane monetary and corporate order.  

 

There are also supply-side problems, yes; and positive real rates and stable price levels help there as well.  It is hard to invest in stuff when you do not know how much money you are making.  It is hard to invest in stuff when ESG schoolmarms might come and confiscate or cause substantial impairment to your assets a few years down the line.  It is hard to invest in stuff when you are going out of your way not to give good jobs to certain races.  But considerably easier to do a lot of this stuff when money is not cheap.  

 

[SharperDingaan]

8 hours ago, mattee2264 said:

"That being said, the market is 18.7x for trailing 2021 EPS  (5.3% earnings yield), and much cheaper on a forward looking basis. Meh."

 

I think this is the real issue. 2021 earnings were inflated for many companies because of changing spending patterns during the pandemic and for the most part they were able to pass on higher input prices as consumers were relatively flush with cash. Not to mention the delayed impact of the massive amounts of fiscal and monetary stimulus. 

 

Forward looking estimates are inaccurate at the best of times but it seems quite possible that 2021 were peak earnings for this cycle and 2022 earnings will come in lower. How much lower is tough to guess. But 19x is a generous multiple to pay for peak earnings so could be a lot further room for disappointment as lower earnings and lower multiples kick in. 

 

Just to add to this. Outside of O/G, market Q12022 earnings were barely as forecast. Most would expect Q2-Q4 2022 earnings to underperform current forecasts, and updated forecasts to progressively lower the bar. Better numbers starting Q1 2023, after the Fed has had the time to demonstrate its thing. Assume 2022 earnings 5-10% (7.5%) below 2021.

 

2022 is not 2021, and the inflation/Covid/Ukraine veil 'dance' is a time limited gig. Assume the 2022 P/E multiple, relative to the 2021 P/E multiple, compresses 10-20% (15%) by 12/31/2022. $100 of 2021 earnings becomes $92.50 of 2022 earnings, and multiplies by 15.9 (.85 x 18.7). 2021 value of 1,870 (100 x 18.7) becomes a 2022 value of 1,470 (92.5 x 15.9).

 

2022 market fall of 21% (100x((1470/1870)-1)).

 

SD

[Gregmal]

The only caveat is not to get too short sighted based on one year, or even two of earnings. Didn’t we learn that during COVID?

[changegonnacome]

10 hours ago, mattee2264 said:

Forward looking estimates are inaccurate at the best of times but it seems quite possible that 2021 were peak earnings for this cycle and 2022 earnings will come in lower. How much lower is tough to guess. But 19x is a generous multiple to pay for peak earnings so could be a lot further room for disappointment as lower earnings and lower multiples kick in. 

 

+1

 

2021 - S&P peak earnings, peak margins I'm on this train..........exactly what you would expect at the beginning of an inflationary boom bust cycle......it feels good for a while pushing price & getting away with it.........but then your customers start to feel the pinch & quit on you........and then your employees start showing up in your office looking for a raise or else they'll quit so you give em one....or they do actually quit on you and their replacement costs +25% on the fella that came before...............soon your earnings & margins start to roll over.....you can't push price without tanking volumes....you try to tighten your belt on costs, but so is everybody else at the same time......the paradox of thrift writ large and boom now your in a recession.....earnings recession possibly an economic wide recession.

 

I dunno possibly too bearish........2019 S&P earnings feels to me like a descent place to conservatively underwrite broad market direction valuations......IF directionality is needed in your "where we are" I assess businesses and don't really care what the market does per se........but certainly discounting any companies earnings back a couple of years seems prudent now, you don't want to be underwriting large P/E's with significant multiples AND earnings..........multiples & earnings contractions happening together at the same time can lead to OUTRAGEOUS stock moves you just can't believe can happen but as @SharperDingaan showed the "math" is irrefutable.....its just you underwrote a wrong earnings figure AND a wrong market multiple at the same time and got your ass handed to you.

Edited May 20, 2022 by changegonnacome

[Gregmal]

Right on. Where’s my money and when do I get it back goes without fail here because multiple contractions are brutal and if that’s the factor you are relying on, you’re fucked. If you can buy something earning it back in 7-10 years who cares about the market. If you can buy something that would immediately sell for 3x in an auction, good. Whereas forget Tesla, but something like Amazon, or Netflix, where do you get comfortable at those multiples and with so many underlying question marks? That’s clearly what the market is struggling with and things always tend to get nasty when there is no underlying consensus among market participants on a valuation floor. The only thing everyone is becoming aware of is that the framework of this past decade just went out the window.

Edited May 20, 2022 by Gregmal

[Sweet]

Agree Simba

[changegonnacome]

40 minutes ago, Gregmal said:

The only thing everyone is becoming aware of is that the framework of this past decade just went out the window.

 

Yep slowly slowly - but I haven't seen a get me out at any price just yet moment......but feel like its coming & the Fed isn't riding to the rescue this time everyone needs to put on their own big boy pants

Edited May 20, 2022 by changegonnacome

[SharperDingaan]

We have an entire generation of analysts who have seen nothing but repeated fed bailouts, and now we have an aggressive Fed that means business. If/when they discover that moral suasion is back on the table ... we have the get me out at any price moment.

 

Some of that money will run to O/G, pushing both price up, and the O/G multiple.

Even at 50-60% of current Tech multiples, O/G does a healthy jump 

 

SD

[crs223]

2 hours ago, SharperDingaan said:

we have an aggressive Fed that means business.

Name one aggressive thing this Fed has done.

[Viking]

15 minutes ago, crs223 said:

Name one aggressive thing this Fed has done.

Communication is THE KEY policy instrument the Fed has. The Fed’s hawkish pivot (rate increases and QT) - communicated a couple months ago (and ypdated at each subsequent meeting) - has been quickly priced into the market. The increase in rates the past 2 months has been exceptionally aggressive - and was driven by Fed communication. 

Edited May 21, 2022 by Viking

[aryadhana]

3 percent 10 year rates are aggressive?

[Gregmal]

7 minutes ago, aryadhana said:

3 percent 10 year rates are aggressive?

2018 aggressive 

[Sweet]

Interesting article:

https://www.marketwatch.com/story/selloff-puts-s-p-500-on-bear-markets-doorstep-if-history-is-a-guide-theres-more-pain-ahead-11653002466?mod=home-page

[Gregmal]

Anyone want this entire “inflation” thing put in a nutshell? Here you go.

 

How in the fuck do you create a shortage of baby formula? Answer: have the government shut down the largest factory producing baby formula! Easy. 
 

Now apply to oil and gas. Apply to farms/factories. Apply to restaurants. Apply to the pool of potential laborers. Apply to the entire economy as we saw over and over again the last few years. Making sense now?

[flesh]

16 hours ago, Gregmal said:

Anyone want this entire “inflation” thing put in a nutshell? Here you go.

 

How in the fuck do you create a shortage of baby formula? Answer: have the government shut down the largest factory producing baby formula! Easy. 
 

Now apply to oil and gas. Apply to farms/factories. Apply to restaurants. Apply to the pool of potential laborers. Apply to the entire economy as we saw over and over again the last few years. Making sense now?

When someone with some balls/the emotionality of the moment allows a retrogressive analysis, all the deaths resulting from shut downs should be counted against those saved by shutting down. All excess suicides, drug od's, starvation (death and life years lost from malnutrition for however long), all medical procedures that weren't done, murders, plus what I'm not considering atm. These ramifications will be felt for years and for 5-10 years all the excess deaths worldwide (not just USA, major economies effect the world) should be counted. Also, some weight should be given to education lost/mental disorders etc. 

 

I've been saying since 3-2020 to deaf ears, I guarantee life years lost will be greater than those saved and perhaps even lives lost vs saved. 

 

When the Italian data came out and the average age of death was 78 with 2.5 comorbidities (numbers might not be exactly right) beginning of march 2020.... we should have done whatever it takes to protect the old/weak and nothing else. In this case I'm totally confident total deaths would have been reduced. 

 

I really hope someone does this work so we don't do it again. 

 

 

[Thrifty3000]

48 minutes ago, flesh said:

When someone with some balls/the emotionality of the moment allows a retrogressive analysis, all the deaths resulting from shut downs should be counted against those saved by shutting down. All excess suicides, drug od's, starvation (death and life years lost from malnutrition for however long), all medical procedures that weren't done, murders, plus what I'm not considering atm. These ramifications will be felt for years and for 5-10 years all the excess deaths worldwide (not just USA, major economies effect the world) should be counted. Also, some weight should be given to education lost/mental disorders etc. 

 

I've been saying since 3-2020 to deaf ears, I guarantee life years lost will be greater than those saved and perhaps even lives lost vs saved. 

 

When the Italian data came out and the average age of death was 78 with 2.5 comorbidities (numbers might not be exactly right) beginning of march 2020.... we should have done whatever it takes to protect the old/weak and nothing else. In this case I'm totally confident total deaths would have been reduced. 

 

I really hope someone does this work so we don't do it again. 

 

 

The Economist has been tracking and reporting on excess deaths for a while now.

 

With a 95% confidence interval the Economist estimates 21.4 million excess deaths resulting from covid-19. This compares to 6.3 million "official" global covid-19 deaths.

 

https://www.economist.com/graphic-detail/coronavirus-excess-deaths-estimates

Edited May 23, 2022 by Thrifty3000

[LC]

19 hours ago, Gregmal said:

Anyone want this entire “inflation” thing put in a nutshell? Here you go.

 

How in the fuck do you create a shortage of baby formula? Answer: have the government shut down the largest factory producing baby formula! Easy. 
 

Now apply to oil and gas. Apply to farms/factories. Apply to restaurants. Apply to the pool of potential laborers. Apply to the entire economy as we saw over and over again the last few years. Making sense now?

Even drinks in the hood are getting hit with inflation 

 

https://www.google.com/amp/s/nypost.com/2022/05/23/illegal-nutcracker-drinks-skyrocket-to-15-around-nyc/amp/

[fareastwarriors]

Saving America  one can at a time.

 

https://www.today.com/food/trends/arizona-iced-tea-99-cents-founder-don-vultaggio-rcna24899

 

Arizona Iced Tea founder says the 99-cent price tag will stay the same

 

 

.

Edited May 23, 2022 by fareastwarriors

[Gregmal]

Just now, fareastwarriors said:

Saving American one can at a time.

Dude I remember chugging those at my little leagues games in the 90s. Were only 99c. Great value 

[Castanza]

2 hours ago, fareastwarriors said:

Saving America  one can at a time.

 

https://www.today.com/food/trends/arizona-iced-tea-99-cents-founder-don-vultaggio-rcna24899

 

Arizona Iced Tea founder says the 99-cent price tag will stay the same

 

 

.

Dude is one Hell of an operator 

 

https://www.tasteofhome.com/article/arizona-iced-tea-99-cents/

 

 

[crs223]

@Gregmal will you share your thoughts: should the Fed ever “unwind” the printing of the last decade?

[rkbabang]

On 5/16/2022 at 12:58 AM, changegonnacome said:

 

I disagree with that point of view fundamentally on so many levels, we wont even bother going 'there'........but your other blind spot, connected to the first.......is those same people can & do vote....and that has consequences your Darwinian framework misses.

 

I agree with everything he is saying.  There is so much opportunity and work out there it is insane.  The other day my wife and I went grocery shopping.  In our town Whole Foods and Trader Joes are right near each other.  We usually park half way in between and go to both.  There was this guy playing a fiddle in the middle of the parking lot between the two with a sign saying that he has kids and needs help.  My wife turns to me and says "F#cking artists! Both of these places are hiring at $18 per hour and he's out here playing with his instrument."

 

[Gregmal]

3 hours ago, crs223 said:

@Gregmal will you share your thoughts: should the Fed ever “unwind” the printing of the last decade?

What do you mean by unwind? Printing as everyone calls it, is a process generally used to smoothen out turbulent markets and economic times. They can or can’t unwind? IDK…who is really effected either way? How? And does it really matter? 

[crs223]

16 minutes ago, Gregmal said:

What do you mean by unwind? Printing as everyone calls it, is a process generally used to smoothen out turbulent markets and economic times.

 

Sorry for the imprecise/confusing language.  I'll use your words:

 

Q: Should the fed ever undo printing?

 

a) No. Printing causes nothing bad.  No need to undo it.  The fed cannot make baby formula.

b) Yes. But maybe later, not now.  The fed cannot make baby formula.

c) I do not understand the question.