Have We Hit The Top?

[rkbabang]

I hold over 30 stocks and in the last 14 days 5 of them have hit 52 week lows and none have hit 52 week highs.  When does this discussion move to the "Is the bottom almost here?" thread?

 

 

[rkbabang]

My question was a serious one.  If you look at the S&P500 chart.  It hit a top in 2000, then went sideways (up & down) until the bottom in 2009.  Then it hit a top in 2022 and has gone basically sideways since.  The question really isn't have we hit the top, the question is  when will the bottom be before another period of growth, or have we hit the bottom already?

[TwoCitiesCapital]

38 minutes ago, rkbabang said:

My question was a serious one.  If you look at the S&P500 chart.  It hit a top in 2000, then went sideways (up & down) until the bottom in 2009.  Then it hit a top in 2022 and has gone basically sideways since.  The question really isn't have we hit the top, the question is  when will the bottom be before another period of growth, or have we hit the bottom already?

 

I expect bonds and gold w/ still outperform the average equity indices, but the correction in equities does seem to be playing out sideways as opposed to a large drawdown and recovery. Being flat-to-down for ~2.5 years while inflation ranged from 4-8% annually during that period even without another substantial drawdown - especially considering the additional repurchases/retained earnings that accrued over that period. 

 

If we manage to avoid the recession, I still expect it to be awhile before we make new highs ATH, but perhaps we avoid another 20+% drawdown. 

 

 

 

Edited November 3, 2023 by TwoCitiesCapital

[brobro777]

29 minutes ago, rkbabang said:

My question was a serious one.  If you look at the S&P500 chart.  It hit a top in 2000, then went sideways (up & down) until the bottom in 2009.  Then it hit a top in 2022 and has gone basically sideways since.  The question really isn't have we hit the top, the question is  when will the bottom be before another period of growth, or have we hit the bottom already?

 

Well my thinking as I said before on this site is that we continue to move sideways for a while, 5-10 years. I dunno if a bottom has been reached - maybe there is another puke out like the 2009 bust at some point. The trigger? US debt and deficit getting a bit out of control? Maybe, who knows

 

Haha

 

 

[Spekulatius]

2 hours ago, rkbabang said:

My question was a serious one.  If you look at the S&P500 chart.  It hit a top in 2000, then went sideways (up & down) until the bottom in 2009.  Then it hit a top in 2022 and has gone basically sideways since.  The question really isn't have we hit the top, the question is  when will the bottom be before another period of growth, or have we hit the bottom already?

You are not holding the magnificent seven, so you are doing it wrong. Small and medium caps were close to the 2022 September bottom before the recent rally.

[Parsad]

5 hours ago, RedLion said:

What do you think we are doing wrong? Is it the weather? 
 

The problem seems to be getting worse in California even as our population shrinks, seems like it can’t just be a housing issue. 
 

It definitely got worse when we decriminalized drug possession and theft but it was already a crisis before any of that. 
 

 

 

No idea!  I've been watching this problem grow in Vancouver for 30 years now and the pandemic/recovery has just made it worse.  Different countries handle this differently...weather be damned. 

 

I remember not seeing a single panhandler or homeless person anywhere in China...but we know where they put them!  In India, they are all over the place in Mumbai and Delhi.  I saw very few in New Zealand and outskirts of Australia, but a lot more in Sydney or Melbourne.  In the UK, I saw more in London and Belfast, but none in Inverness, Cork or Edinburgh...maybe one in Dublin.  

 

Vancouver has thrown the bucket at this for 20+ years, and it hasn't made a dent.  Money, resources, policing, mental health support, drug policy, etc...nothing!  In fact, there are 3,000 homeless people this winter in Vancouver and only 1,500 cold weather shelter beds.  They are trying to figure out where to put more beds!  

 

Maybe this is why Buffett originally wasn't going to give away his money till he died...he said something to the effect that he can compound it faster and give more later rather than giving it now...that the problems would all exist in the future as well.  Susie changed his mind about giving, but maybe he was right!  Cheers!

 

 

[Xerxes]

From WeWork to WeBankrupt

 

[ValueArb]

On 11/3/2023 at 7:52 AM, rkbabang said:

My question was a serious one.  If you look at the S&P500 chart.  It hit a top in 2000, then went sideways (up & down) until the bottom in 2009.  Then it hit a top in 2022 and has gone basically sideways since.  The question really isn't have we hit the top, the question is  when will the bottom be before another period of growth, or have we hit the bottom already?

 

 

The Shiller PE is still near historic highs. One flaw in it is that it doesn't adjust for interest rates, as lower interest rates make it more reasonable to pay higher PEs. That could explain why we saw much higher than historical median PEs from 2010 to 2022 because interest rates were at unprecedentedly low levels from 2008 to May of this year. What it doesn't explain is why are PEs so high now, as interest rates are closer to median historical levels.

 

It could signal liquidity is slowly draining and the first to see it is the smaller caps. Supporting that is that the Shiller PE is based on the SP500. Not only is that index only the largest of the largest caps, it is weighted by market cap meaning it is heavily weighted to the magnificent seven nowadays. So essentially the rest of the market may be at much lower CAPE PEs already, and the mega-caps will follow over time. Or it just takes years to adjust and the market will be in a holding pattern for a few years as earnings slowly catch up to valuations.

 

https://www.multpl.com/shiller-pe

 

[ValueArb]

Gotham Yield (as of 11/07/20231	11.1%
Percentile Towards Cheap:	52nd
Average Two-Year Forward Return*:	38.13%

 

I'm not sure I buy this analysis. Gotham.com currently says that a portfolio of the highest value 700-800 stocks out of the top 1,400 has a "Gotham" yield of 11.1%, which historically is consistent with an average future two year return of 38%. I will say that the outliers on their chart (Gotham yield > 17%) are perfectly consistent, and below 10% is heavily weighted towards poor returns. But anything in the middle seems basically a crap-shoot.  Would be good to know explicitly how Gotham Yield is calculated, it only says "Gotham Yield is a proprietary assessment of earnings and cash flow relative to the adjusted enterprise value of a business" and that financial companies have been excluded.

 

 

[Parsad]

21 hours ago, Xerxes said:

From WeWork to WeBankrupt

 

 

https://www.cnn.com/2023/11/07/business/wework-bankruptcy-offices-real-estate/index.html

 

Cheers!

[mattee2264]

I think it is very difficult to compare multiples over time because the composition of the market is always changing. Current market is 30% Magnificent 7 and they are the top 7 companies by market cap despite all being at heart technology companies. Jeffrey Gundlach did an interesting memo in Q2 that talked about how weightings can be useful bubble indicators with the Japan share of MSCI World and energy company share of S&P 500 in early 80s among the examples used. 

 

Clearly if you strip out Magnificent 7 then the market multiple comes down a lot and is more in line with historical averages. Then again economic growth prospects are probably worse than historically. 

 

I think if we do end up with higher for longer then there will be some adjustment to multiples even for Magnificent 7 stocks. But I think markets are still in denial and eager to leap onto any reassuring words from the Fed and any softness in the economic data to indicate a pivot is coming.

 

Other thing is there is probably a better correlation between inflation and PE multiples rather than interest rates and PE multiples. In the initial inflation shock in 2022 Magnificent 7 had an epic collapse. But the immaculate disinflation set the stage for a V shaped recovery. And what happens next probably depends on whether we end up with stagflation or just a slowdown. 

 

And a slowdown with lower interest rates is probably very favourable to Big Tech because the slowdown will be assumed to be temporary whereas the lower discount rate is projected to infinity. 

 

[mattee2264]

Yep does seem like another flight to safety to Big Tech underway. 

Same playbook as during the pandemic when economic uncertainty during the summer led to a a melt up of technology stocks and a sell off of old economy stocks. 

[changegonnacome]

“Keep your eye on one thing and one thing only, how much government is spending. Because that’s the true tax. Every budget is balanced. There is no such thing as an unbalanced federal budget. You’re paying for it. If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends. And the real problem is to hold down government spending as a fraction of our income. And if you do that, you can stop worrying about the debt.” - Milton Friedman

 

Stolen from top of Wedgewood letter - https://imonkey-files.s3-us-west-1.amazonaws.com/WP_3Q202_-Client_LetterFedUp.pdf

 

I think its about right - at this point......the last mile in terms of inflation and the final landing we have all been waiting for wont occur until fiscal spending by hook or by crook is reigned in. Fiscal is fighting the Fed..and fiscal has won until now levitating the economy...the last mile of inflation 3% to 2% is difficult to close using interest rates with 7-8% budget deficits.......the price the fiscal authorities are going to pay for this largesse is the incremental debt itself, sure....but the real cost is buried and is in the amount of debt that is going to roll over into this higher for longer period that didnt need to happen........higher for longer BECAUSE the authorities wont stop fiscally stimulating an economy at full capacity......forcing the Fed to raise the short end....while scaring the holders of the long end.

 

This period of government borrowing relative to the set of cards for the US economy that drove that borrowing (full employment/debt to GDP ratio+ inflationary backdrop) is by far away the most reckless its ever undertaken.

[Red Lion]

1 hour ago, changegonnacome said:

Fiscal is fighting the Fed..and fiscal has won until now levitating the economy...the last mile of inflation 3% to 2% is difficult to close using interest rates with 7-8% budget deficits.......the price the fiscal authorities are going to pay for this largesse is the incremental debt itself, sure....but the real cost is buried and is in the amount of debt that is going to roll over into this higher for longer period that didnt need to happen........higher for longer BECAUSE the authorities wont stop fiscally stimulating an economy at full capacity......forcing the Fed to raise the short end....while scaring the holders of the long end.

 

This is the exact sort of rationale that makes me want to hide in real assets. In the short run, higher rates act like a lid on the price, but in the long run they should still do ok in real terms in an inflationary debt spiral as long as they're financed appropriately. 

 

A lot of other people think I'm stupid, and these higher rates and low affordability are going to cause a huge correction in housing and stock prices. They might be right I really have no idea, and plan to hold on through the market cycles. I think this inflationary debt spiral is going to happen, whether it's right now or maybe a decade from now. Not sure what I want to be holding when that happens, but real estate seems OK especially if it coincides with a lot of on-shoring and wages rising faster than GDP. 

[Gregmal]

2 hours ago, RedLion said:

 

This is the exact sort of rationale that makes me want to hide in real assets. In the short run, higher rates act like a lid on the price, but in the long run they should still do ok in real terms in an inflationary debt spiral as long as they're financed appropriately. 

 

A lot of other people think I'm stupid, and these higher rates and low affordability are going to cause a huge correction in housing and stock prices. They might be right I really have no idea, and plan to hold on through the market cycles. I think this inflationary debt spiral is going to happen, whether it's right now or maybe a decade from now. Not sure what I want to be holding when that happens, but real estate seems OK especially if it coincides with a lot of on-shoring and wages rising faster than GDP. 

From what we’ve spoke about you’ve probably already gotten a good bit of validation on the safety of these assets. It’s just a real world vs paper world where the dynamic and debate exist. If one owns private assets and sees the fundamentals first hand, such as you’ve done say with the farm acreage, you know the reason most are scared or whatever is cuz they’re priced out or just not very well versed in how the asset behaves. 

The little people literally run around scared of headlines or think stock prices reflect reality, but anyone who’s a big boy just doesn’t think like that. There’s an age old saying about he who has the gold makes the rules and that hasn’t changed. Ownership in critical resources is the modern gold. 

Edited November 9, 2023 by Gregmal

[mattee2264]

Agree re the safety of real assets in an inflationary world. 

 

However does that apply to Magnificent 7?  If you look at 2022 the inflation shock absolutely savaged Big Tech. 50% declines on average.  The V-shaped recovery was because there was a seemingly immaculate disinflation (with an added kicker from AI). You get some protection from their pricing power but if their customers are getting squeezed by inflation there might be a limit to its exercise. And the very high multiples are predicated on double digit growth as far as the eye can see and law of large numbers is starting to work against them.

 

But I am not really seeing a future of high inflation. Perhaps in pockets such as food prices and natural resource prices due to scarcity. But fiscal spending will slowly get diverted into debt service and become less effective in stimulating demand and the higher interest rates necessitated will crowd out private sector spending and we will probably have another decade of sluggish economic growth and moderate inflation (say 3-4% averaged over the economic cycle) until the AI productivity miracle occurs. 

[Gregmal]

12 minutes ago, mattee2264 said:

The V-shaped recovery was because there was a seemingly immaculate disinflation (with an added kicker from AI).

How do you determine this?
 

Couldn’t it also just have been the recovery from an unwarranted short term panic?

[Gregmal]

19 hours ago, RedLion said:

 

This is the exact sort of rationale that makes me want to hide in real assets. In the short run, higher rates act like a lid on the price, but in the long run they should still do ok in real terms in an inflationary debt spiral as long as they're financed appropriately. 

 

A lot of other people think I'm stupid, and these higher rates and low affordability are going to cause a huge correction in housing and stock prices. They might be right I really have no idea, and plan to hold on through the market cycles. I think this inflationary debt spiral is going to happen, whether it's right now or maybe a decade from now. Not sure what I want to be holding when that happens, but real estate seems OK especially if it coincides with a lot of on-shoring and wages rising faster than GDP. 

Further on this, I think it’s important to look at who’s doing well right now?

 

Largely in the real estate world, the owners of high quality assets are doing very well. Those well capitalized in residential are killing it. Those who know how to do value add are killing it.  Pretty much anyone who does it the way it’s supposed to be done and thinks long term which is what you’re supposed to do with a long term asset. 
 

Who’s doing poorly? Mainly just the suited monkeys whose entire game relies on cash out refis and high LTV borrowing, leeching fees off OPM, etc….those aren’t true owners or investors. 

[Red Lion]

1 minute ago, Gregmal said:

Largely in the real estate world, the owners of high quality assets are doing very well. Those well capitalized in residential are killing it. Those who know how to do value add are killing it.  Pretty much anyone who does it the way it’s supposed to be done and thinks long term which is what you’re supposed to do with a long term asset.

This rings so true to me. I’m in the middle of three residential value add projects if you include my primary. I don’t even know how to do it (yet) but I know a lot more than I did this time last year, and all indications are that could flip these projects for nice returns even in this market backdrop, even as a beginner.

 

On this point there’s a huge shadow inventory of old homes that need to be updated and not much work force skilled in providing this service. As a father of teenagers, I’m not seeing any desire in the younger generation to get into construction trades (even though the numbers look great for the lack of necessary education). 
 

[brobro777]

Egg prices are back up to $3.99 per dozen in Los Angeles, guys. 

 

That's not good baby, not good

 

[Cigarbutt]

On 11/9/2023 at 1:44 PM, changegonnacome said:

...

This period of government borrowing relative to the set of cards for the US economy that drove that borrowing (full employment/debt to GDP ratio+ inflationary backdrop) is by far away the most reckless its ever undertaken.

"Reckless" is a strong word and can be debated (here?) but the burden to meet the meaning of unusual is met.

"Large and ongoing deficits have fed (sic) expectations..."?

What's the point apart from 'interesting' discussions?

[changegonnacome]

On 11/11/2023 at 7:54 AM, Cigarbutt said:

What's the point apart from 'interesting' discussions?

 

Well we've got to an interesting point.....for the longest time we worried about what would happen in a recession if the Fed was already at lower bound (0% + QE). The pushing on a string problem....or out of bullets one.

 

Whats actually occured is that the Fed has reloaded the monetary bullets (5% Fed Fund) which feels like things should be ok at the next downturn.....they'll pull out the 1981-2021 Fed playback.....cut Fed funds....shift the whole curve downwards but with a nice steepener......which encourages fiscal borrowing and the banks to increase credit & feeds a general rebound. Standard stuff.

 

However what's occured is the fiscal authorities have got themselves in a very curious position...they are running an annual fiscal deficits as if there was a recession right NOW....they have a debt to GDP ratio that as if we just had WW3......so ironically its the fiscal authorities that lack bullets.......if/when a recession occurs the budget deficit is in danger of blowing out to almost double digits.....there will be no IRA's, BBB's bills being enacted in congress this time around to send peeps/business cheques. The fiscal bullets were fired (misfired) in 2020/2021/2022.

 

Ok so what could potentially happen.

 

Sure the Fed will cut rates........as they always do....but what wont happen this time potentially, unlike every other time....is the Fed will pin the short end down........but the mid & long end won't cooperate in a traditional manner...cause it will have one eye on the fiscal deterioration.....treasury holders will also remember the three years of losses doled out to them too in the face of steepening supply of issuance.......so IMO its possible the curve will not be one that is conducive to an economic recovery......too flat & high in the the first third perhaps (the 2's-10's)...or the long end blows out. This is only going to exacerbate the problem in some of the banks with too much duration (CRE coming due + treasury exposure) all at a time when folks would ordinarily be relying on expanding credit from the banks as the first step in an economic recovery.

 

Put it all together - the fiscal authorities dont have bullets......the Fed has bullets but because of the poor fiscal situation it might f-up up the treasury curve you'd/they'd ordinarily like to see in a recession. The banks b/s's are kind of zirp'd up. You've got a sh!t show potentially in the next downturn. One where the answer can only reach for yield curve control & likely straight up monetization of debt coming out of the treasury by the Fed. Which is the point where the dollar drops and inflation comes back.

 

Very long way of saying that a standard recession playbook for stocks that worked from 1981 to 2021 might not be the right answer for prospective equity returns at the next downturn.

[Cigarbutt]

2 hours ago, changegonnacome said:

...

Very long way of saying that a standard recession playbook for stocks that worked from 1981 to 2021 might not be the right answer for prospective equity returns at the next downturn.

Yes since the early 80s, we (the global we) have gradually learned, in a Pavlonian way, to expect the fiscal-monetary playbook to play out, as expected.

But is this sustainable? Is there a risk of a non-linear change in trend? Won't the US retain relative refuge value?

[vinod1]

Next time there is a serious recession. Expect trillions in fiscal spending. Who is afraid of double digit percentage deficits, especially if it is for short duration? That is one big lesson learned from the pandemic. 

 

Who is going to be against it? Not politicians. Not Fed. Not people. 

 

Only bears who are preparing for a recession/redemption in markets since 2008 would be against it. 

 

That is my quota of Macro for this year

 

Vinod

 

 

Edited November 14, 2023 by vinod1

[Gregmal]

4 minutes ago, vinod1 said:

Next time there is a serious recession. Expect trillions in fiscal spending. Who is afraid of double digit percentage deficits, especially if it is for short duration? That is one big lesson learned from the pandemic. 

 

Who is going to be against it? Not politicians. Not Fed. Not people. 

 

Only bears who are preparing for a recession/redemption in markets since 2008 would be against it. 

 

Vinod

 

 

You speak soundly on a lot of issues!

 

The Fed has basically committed ALREADY! to cutting rates, and potentially hard, on economic weakness. They’ve backed themselves into a corner on the “landing” part, since they’ve been 100% the reason for it even existing! Double down on that with their constant bs about rooting for economic weakness, and you bet your last buck they’ll be there to save face, along with the politicians and all the usual suspects.

Edited November 14, 2023 by Gregmal