Have We Hit The Top?

[ArminvanBuyout]

6 hours ago, Luke said:

First, the diagnosis. In finance and accounting, America has overlearned the lessons of the 1960s through the ’90s. Visionary companies of the time, from Teledyne to Berkshire Hathaway, took the view that the efficient use of corporate capital distinguished good managers from mediocre ones.4 It was undeniable that, at the time, capital was often poorly allocated, and corporate leaders have since made their reputations (and fortunes) by increasing shareholder returns. The drive for the highest possible capital efficiency, however, eventually created bi­zarre incentives. Wall Street’s ideal company became one with no assets and infinitely scalable profits. Great American companies in manufacturing-based, capital-intensive industries, like shipbuilding or steelmaking, were encouraged and finally forced to outsource their manufacturing overseas—not to save on labor costs or improve their output, but simply because outsourcing manufacturing to a foreign third party made their balance sheets look more impressive. If they were unable to offshore, they abandoned product categories altogether, which means the United States entirely lost those industries and capabilities. It is hard to look at Wall Street trends over the past thirty years without drawing the perverse conclusion that the most effective use of capital, in Wall Street’s eyes, is to pour it into financial assets or the valuations of software companies.

 

Some reason for the increasingly high multiple of the SP 500. Question is if this trend reverses a bit with onshoring and anti-China sentiment or if offshoring just slowly changes countries with still chinese manufacturing owners? 

 

Which in turns drivers higher ROIC, which coupled with declining rates, just means average SPY company probably on net is creating more value. 
 

Shift towards tech post-GFC (which have better incremental ROIC vs. banks/cyclicals, etc.) further cements multiple expansion

[Luke]

11 minutes ago, ArminvanBuyout said:

Which in turns drivers higher ROIC, which coupled with declining rates, just means average SPY company probably on net is creating more value. 
 

Shift towards tech post-GFC (which have better incremental ROIC vs. banks/cyclicals, etc.) further cements multiple expansion

Yes, but in that case even better to just own the nasdaq directly if you believe in the longlasting continuity of the tech mega caps, or your favorite tech stock

Edited September 12 by Luke

[mattee2264]

I think that stock markets are still priced for low interest rates. And when markets are dominated by growth stocks low interest rates translate into very high multiples. 

 

The idea though is that we will have "benign" rate cuts i.e. rate cuts because disinflation means that interest rates do not need to be so high rather than rate cuts because the economy is heading into recession.

 

If we do go into recession then even with lower rates you'd expect multiples (and earnings) to fall. And I do not think Big Tech will be spared from this double whammy. 

 

Clearly high multiples also reflect high confidence that market leaders (which are mostly tech) will continue to grow at fast rates. And given the massive investments they've made in AI, they also reflect confidence that AI will be a major source of that continued fast growth.

 

I agree that over the long term PE multiples have structurally drifted higher. 100 years ago 20x earnings was a bull market mania valuation. This century it has been about the norm. Right now we are closer to 30x earnings. Perhaps that could be the new normal if tech dominance continues. And as we saw during the Roaring 20s and the Nifty Fifty Bubble investors are willing to pay very high multiples for blue chip growth companies. The problem is that once you are a blue chip growth company either you mature and your growth slows OR competition/creative destruction can send you into decline. 

 

Big Tech are trying to avoid this fate by being at the forefront of innovation and entering into new markets and basically buying or investing in any emerging competition and are also engaged in all kinds of anti-competitive practices. But it is not an easy feat and there are already signs of cracks. 

 

[John Hjorth]

Bloomberg - Markets [September 18^th 2024] : Stocks Rise as Fed Decides to Go Big With Rate Cut: Markets Wrap

 

Subheaders : 

 

Quote

• Fed cuts rates by half point in decisive bid to defend economy
• Committee sees another half-point of cuts in rest of 2024

 

Decisive, perhaps even hell bent? Go big? And then a guy from JP Morgan Assets Management pops up on Bloomberg with the message : 'Buy bonds!'  - It's just so funny!

[Gregmal]

Yup this is where the usual clowns come in and spin the cut as "thats because they see bad things on the horizon" or some variant of the usual "everything is a big deal" nonsense. 

[Spekulatius]

That headline should really be - stocks  rise because people are buying or stocks fall because people are selling. That’s never wrong.

[Dalal.Holdings]

https://finance.yahoo.com/news/america-car-mart-inc-announces-201200827.html

 

Man wasn’t the Boston Omaha guy buying this stock?

 

I wonder if Warren building up $300B in T-Bills has something to do with live data he’s getting from Berkshire subsidiaries. Nah, I’m sure everything will be fine.

[mattee2264]

The spin is that it is "benign 50". This is the Fed's view. That the economy is just fine and progress on disinflation means that it is appropriate to lower interest rates and we are still on track for a soft/no landing.

 

The bear view is that the economy is heading into recession (or is already in recession) and the Fed is behind the curve and playing catch up. And JPOW mentioned that some other central banks have already started cutting. So to some extent it might be making up for not doing 25 bps last time round. 

 

The cynical view is that government debt is unsustainable and lower interest rates are required to allow the government to service debt etc. 

 

Who knows what the truth is because economic data has been all over the place. 

 

And I think that is something that people are not fully appreciating. How unpredictable the economy has become after COVID because of all the different shocks (policy shocks, supply side shocks, geopolitical shocks, immigration shocks, technology shocks etc). 

 

And probably to some extent economic data is subject to manipulation as it is an election year. 

 

But I think far too much importance is given to interest rates. Earnings are the main driver and the stock market pretty much shrugged off rising interest rates because they realized that inflation was good for earnings as the big firms have pricing power and obviously AI has been a huge driver of the market indices since the October 2022 lows. What happens next will be far more dependent on what happens to corporate earnings and in particular those of Big Tech who will be expected in coming quarters to show some kind of return on their massive AI investments. 

 

[UK]

 

[Kizion]

10 hours ago, mattee2264 said:

 

But I think far too much importance is given to interest rates. Earnings are the main driver and the stock market pretty much shrugged off rising interest rates because they realized that inflation was good for earnings as the big firms have pricing power and obviously AI has been a huge driver of the market indices since the October 2022 lows. What happens next will be far more dependent on what happens to corporate earnings and in particular those of Big Tech who will be expected in coming quarters to show some kind of return on their massive AI investments. 

 

Definitely, +1

[Sweet]

 

[TwoCitiesCapital]

On 9/19/2024 at 4:17 AM, mattee2264 said:

But I think far too much importance is given to interest rates. Earnings are the main driver and the stock market pretty much shrugged off rising interest rates because they realized that inflation was good for earnings as the big firms have pricing power and obviously AI has been a huge driver of the market indices since the October 2022 lows. What happens next will be far more dependent on what happens to corporate earnings and in particular those of Big Tech who will be expected in coming quarters to show some kind of return on their massive AI investments. 

 

 

I don't disagree with you in theory, but in practice.....

 

Nominal earnings are only just now back to where they were in 2021 (a hair less actually). But the S&P 500 is ~20% higher than it was at the end of 2021 when many people were pointing to bubble valuations in names like Rivian, Zoom, Peloton, etc.

 

So we're higher than bubble-induced valuations from 3-years ago despite contracting nominal earnings over that time (and still dramatically negative on a real basis). 

 

It does not seem earnings, real or nominal, are what are driving this market. Nor the TINA argument that was used for much of the last decade given that rates became very attractive for the first time in 15 years IMHO. 

 

I don't know what drives equity values/valuations other than saying its sentiment because price growth has far outpaced any sort of revenue/profit growth and has so for most of the last decade. 

[Dalal.Holdings]

https://finance.yahoo.com/news/fedex-stock-plummets-after-earnings-miss-lower-outlook-flashes-warning-on-economy-150444995.html

 

Everything is fine

[james22]

On 9/19/2024 at 4:17 AM, mattee2264 said:

Who knows what the truth is because economic data has been all over the place. 

 

We dance round in a ring and suppose . . .

[Spekulatius]

 

Funny how this can work out. 10x in revenue and zero appreciation. But but stock price always follows us ones performance…. IF you buy at a reasonable price.

 

[UK]

8 hours ago, TwoCitiesCapital said:

I don't know what drives equity values/valuations other than saying its sentiment because price growth has far outpaced any sort of revenue/profit growth and has so for most of the last decade. 

 

Perhaps momentum and also this short scare in the summer seems did nothing bad for a sentiment either, anecdotally, lots of folks are incuiring which ETF is the best to buy again, some are doing this for the first time since really ancient times:)

 

Edited September 21 by UK

[John Hjorth]

Here is a thread on X about the rate cut and its effects by professor Aswath Damodaran, that at least to me personally makes some sense :

 

 

 

[Xerxes]

1 hour ago, John Hjorth said:

Here is a thread on X about the rate cut and its effects by professor Aswath Damodaran, that at least to me personally makes some sense :

 

 

 

 

he is wrong about 1 thing. 
 

Fed fund rate (and not the bond market) has 100% correlation with variable mortgage rate. 

[Xerxes]

12 hours ago, Spekulatius said:

 

Funny how this can work out. 10x in revenue and zero appreciation. But but stock price always follows us ones performance…. IF you buy at a reasonable price.

 

share count is up substantially over the period, so market cap has gone up as well, just that “per share” value got nuked. 

[John Hjorth]

46 minutes ago, Xerxes said:

 

he is wrong about 1 thing. 
 

Fed fund rate (and not the bond market) has 100% correlation with variable mortgage rate. 

 

Thanks, @Xerxes ,

 

Not exactly immaterial, I would say. Is there a difference here between conditions, terms and systems for USA and Canada?

 

Here, we have a separate market for underlying bonds issued related to morgages, and separate morgage institutions with separate regulation, but same oversight as banks ['the Danish model'].

[Xerxes]

4 hours ago, John Hjorth said:

 

Thanks, @Xerxes ,

 

Not exactly immaterial, I would say. Is there a difference here between conditions, terms and systems for USA and Canada?

 

Here, we have a separate market for underlying bonds issued related to morgages, and separate morgage institutions with separate regulation, but same oversight as banks ['the Danish model'].

I think the big difference is 30-year (US) vs max 5 year in Canada for the term. 
 

So that means a change in the interest rate regime transmits in the Canadian economy more efficiently than the U.S., where the consumer is somewhat more insulated. 
 

In Canada, we can get variable or fixed up to five years. Variable is correlated by the fed rate, adjusted by a premium/discount that the bank offers as they compete for market share. 
 

Fixed rate has a complex formulae, but it is correlated with the 5-year mortgage rate which in turn is influenced by the 5-year treasury. 
 

I still have 1.7 fixed rate on half of my mortgage that is due Dec 2025/Jan 2026. The other half I got nailed by Vladimir Putin, as it came due in March 2022 and had to swallow 5% for the renewal.
 

I am thinking of taking a third tranche in 2026, and use the proceeds to lump-sum the 5% to my maximum contractual capacity. Effectively buying back and re-pricing my debt. 

[John Hjorth]

Thanks, @Xerxes.

[mattee2264]

I think I can guess one of the explanations for this. 

 

Mag7 are a much larger proportion of the index than they were at the 2021 peak and their earnings expectations are appreciably higher which has had a corresponding knock on effect on their multiples. 

Of course that is partly sentiment as there is clearly a lot of AI enthusiasm. But also grounded in fundamentals as growth stocks are valued on future earnings power. 

 

Also cyclicals haven't really sold off that much so markets aren't pricing in a recession or even much of a slowdown at this point. Well other than commodities which have taken a bit of a hit although probably more because of China's economic malaise.

 

 

 

 

[UK]

 

[Dinar]

What are people's favorite Chinese stocks to buy now and why?  Thank you.