Have We Hit The Top?

[mattee2264]

Is a soft landing, interest rate cuts and productivity led growth driven by AI wildly bullish for markets or has it been largely priced in at this point?

 

It is the companion error of getting bearish at the point when things are obviously bad in the economy and stock prices have already fallen significantly. 

 

 

[Gregmal]

15 minutes ago, mattee2264 said:

is the companion error of getting bearish at the point when things are obviously bad in the economy and stock prices have already fallen significantly. 

How so? Markets aren’t demonstrably higher than years ago. Lots of the real big economy stuff like Dow components for instance…Dow pre COVID was what? 30k or something? So 3.5 years later it’s 20% higher? I think the companion error is finding excuses not to invest at either the top or the bottom because it’s indicative of a strategy that probably leads one to always be underinvested or said differently, never invested.

 

It comes back to that convo people tend to have where they state matter of factly, with perfect rear view mirror vision, that…it was so easy investing the last decade because all you had to do was follow the Fed. Low rates and money printing bubbles….blah, blah, blah.  And invariably, they use that same fallacy in terms of logic to justify their position of currently “fighting the Fed” and therefore holding lots of pansy positions. But then you ask if they were levered big and super long call options since the past decades exuberance was so obvious and the answer is always…..NO! Often they were positioned….drumroll, EXACTLY the same way they’re currently positioned today!

 

People do a lot of really weird shit to psychology remain convinced of their correctness even when there’s mountains of evidence suggesting otherwise.

[brobro777]

Come on guys, all I wanna do is short 50 NQ Futures and make 2000 points each contract so I can get back at those bastards at Reddit who made 20X off Carvana calls! 

 

Stop ruining my dreams! 

[mattee2264]

Agree that so far the market as a whole has been able to grow earnings in line with inflation and have been relatively unaffected by the increase in interest rates. 

And if that continues to be the case and inflation remains low and interest rates can fall back to around 3-4% (above pre-COVID levels) but very manageable in a growing economy then there is nothing much to worry about.

 

But there could be a false sense of security explaining some of the seeming complacency in markets. 

 

-Cutting the excess fat accumulated during the boom years before falling demand hits prices and margins can help maintain or even grow profits. And it is a nice story to sell when earnings disappoint slightly and buys companies a bit of time. 

-Similarly it is easier to keep pace with inflation when consumer demand is still resilient and you can put through cost increases without impacting volumes. Especially as there is some inertia in spending patterns and wage bargaining when there is unexpected inflation

-As you mentioned companies still have low cost debt entered into during COVID and are benefiting from higher interest income giving a boost to earnings 

-And consumers still have some excess savings and so far job cuts have been quite limited 

-And energy prices have swooned which has taken a lot of the edge off. Although there are signs this trend may reverse

-Also even the Dow still reflects the concentration in Big Tech and the AI story has helped investors overlook near term softness in revenues and earnings. But already some of the hype has died down and companies are trying to manage near term expectations. And during a bull market it is easy to have a longer term horizon and get excited over such things. But investors have a tendency to become very short term oriented when sentiment reverses. Case in point dot com bubble when some very good companies who would clearly benefit from the internet changing the world in much the same way AI eventually will still sold off massively. 

 

Anyway time will tell 

 

 

 

 

 

-

[Gregmal]

1 hour ago, mattee2264 said:

Agree that so far the market as a whole has been able to grow earnings in line with inflation and have been relatively unaffected by the increase in interest rates. 

And if that continues to be the case and inflation remains low and interest rates can fall back to around 3-4% (above pre-COVID levels) but very manageable in a growing economy then there is nothing much to worry about.

 

But there could be a false sense of security explaining some of the seeming complacency in markets. 

 

-Cutting the excess fat accumulated during the boom years before falling demand hits prices and margins can help maintain or even grow profits. And it is a nice story to sell when earnings disappoint slightly and buys companies a bit of time. 

-Similarly it is easier to keep pace with inflation when consumer demand is still resilient and you can put through cost increases without impacting volumes. Especially as there is some inertia in spending patterns and wage bargaining when there is unexpected inflation

-As you mentioned companies still have low cost debt entered into during COVID and are benefiting from higher interest income giving a boost to earnings 

-And consumers still have some excess savings and so far job cuts have been quite limited 

-And energy prices have swooned which has taken a lot of the edge off. Although there are signs this trend may reverse

-Also even the Dow still reflects the concentration in Big Tech and the AI story has helped investors overlook near term softness in revenues and earnings. But already some of the hype has died down and companies are trying to manage near term expectations. And during a bull market it is easy to have a longer term horizon and get excited over such things. But investors have a tendency to become very short term oriented when sentiment reverses. Case in point dot com bubble when some very good companies who would clearly benefit from the internet changing the world in much the same way AI eventually will still sold off massively. 

 

Anyway time will tell 

 

 

 

 

 

-

Yea there’s a lot to it and it’s never simple because usually once it gets simple, by nature, it changes, that’s just how markets work. Really, in a funny way, if everything came down to sentiments the markets would either be at zero or all time highs, all the time, with little in between due to stampede mentality that has only grown with internet and auto trading.  
 

So it’s important to pay attention, but also ignore noise. Use noise to identify extremes. Right now hardly screams extreme to me. Too many negative Nancy’s still. Too much cash built up. Too many bond bros. And again, broadly speaking, too much of the market is just meh on valuation. Good not great but hardly expensive. Last year 2H did seem extreme. Q121 to me did with spac and short squeezes. The constant “you can’t short the markets” talk which of course is always a signal you want to see if you want to short the market. Basically every time in my life little things become big things, you want to look to get on the other side of it. CPI reports, daily COVID case counts, Fed meetings, etc becoming events that move markets in massive ways….they’re just not that important in the long run so if you’re getting that price action it’s a signal. 
 

So IDK, just stick to your knitting and circle of competence and wait for things to come to you. In a way it’s why margin is sooooo helpful to me. As long as I’m over 100% invested, I can trade, hedge, scratch all those itches because it’s money that isn’t mine so I’m entitled to nothing and therefor worrying about tops and bottoms and catching all of the moves in between is irrelevant. If something goes 10-78 and I only get the 20-25 part of the move, it’s still money I wouldn’t have made if I wasn’t levered. Whereas if I was 60% stocks and 40% cash and I bought at 20 and sold at 25 I’d be fuckin pissed if it went to 78. So everyone’s just gotta roll how they see fit but finding ideas is crucial and it’s always something that can be done whether at highs or lows or whatever. 

[UK]

7 hours ago, mattee2264 said:

And if that continues to be the case and inflation remains low and interest rates can fall back to around 3-4% (above pre-COVID levels) but very manageable in a growing economy then there is nothing much to worry about.

 

I think one could worry somewhat about this or maybe should in the future if market continues to do what it did in 1H: 

 

7 hours ago, mattee2264 said:

And during a bull market it is easy to have a longer term horizon and get excited over such things. But investors have a tendency to become very short term oriented when sentiment reverses. Case in point dot com bubble when some very good companies who would clearly benefit from the internet changing the world in much the same way AI eventually will still sold off massively.

 

But in my humble opinion it is still to early and more importantly not at a such an extreme point yet to make any big market calls. Maybe it is the case with some AI related or other hot things (avoid), maybe already even somewhat with big tech (avoid or be less greedy/more selective), but even in case of general market (not to hot, not to cold, no opinion), but especially the universe of not so magnificent another 493 companies or companies not even in SNP500, I think you can still find/own things to be quite excited about. 

 

Edited July 31, 2023 by UK

[Whensthepaintdry?]

14 hours ago, brobro777 said:

Come on guys, all I wanna do is short 50 NQ Futures and make 2000 points each contract so I can get back at those bastards at Reddit who made 20X off Carvana calls! 

 

Stop ruining my dreams! 

Ha, You can go bet on the Yellow company, If you want to bet on a bankrupt company going to the moon. Even insiders are buying. 

[Cigarbutt]

16 hours ago, dealraker said:

The bubble?

 

Can you provide an explanation (fundamental or sentimental) for the bubble that you describe?

A bubble, if such thing exists, usually means high prices, what is highly priced in MMFs?

[brobro777]

58 minutes ago, Whensthepaintdry? said:

Ha, You can go bet on the Yellow company, If you want to bet on a bankrupt company going to the moon. Even insiders are buying. 

 

Hey that could work. I was thinking I might take a shot in Peloton, which I always thought had brand value. More importantly though, I have a friend who lost money in this during the big decline from 2021-2022 and it would be awesome to make money in PTON and rub it in his face, haha

 

 

[Whensthepaintdry?]

Good luck! I’ll keep my distance from both. I’ll just get my kicks by sitting back and watching. 

[mattee2264]

Yeah I meant the current market level can be easily justified if earnings stabilize and resume growing (i.e. soft landing) and interest rates moderate (i.e. disinflation continues). You'd then end up paying just over 20x growing earnings relative to 3-4% interest rates which would make equities look pretty attractive so long as earnings growth rather than multiple expansion can do the heavy lifting from hereon out. Most of the recovery so far has been driven by multiple expansion as sentiment has swung from pessimistic back to optimistic. Corporate earnings for the market as a whole are continuing to decline albeit more moderately than was initially expected. 

 

Outside Big Tech I agree things are pretty meh. I think a little too much optimism is being baked into the financial sector as it is interest rate sensitive and we still haven't seen all the fall out and especially in relation to commercial real estate which is under a lot of strain. Commodities I think are a bit undervalued as supply is still incredibly tight and Biden can't drain the SPR forever. And there is some economic sensitivity so if we do go into recession some further downside there. And consumer staples/utilities etc are still trading as bond proxies and perhaps haven't fully reflected the end of ZIRP. 

 

Big Tech is too hard for me. But if you are commenting about the overall market you do need to form an opinion. 

Main questions I am thinking about are:

 

1) Is there a potential for an investment slowdown similar to dot com bubble? During the pandemic a lot of technology investments in cloud etc were pulled forward and that provided a major boost to earnings. But what if this investment spending slows down or goes into reverse?

 

2) In a weakening economy where the cost of new debt is very expensive how much appetite will there be for non-technology companies to invest in AI? And until they are willing to make those investments how will the technology companies monetize their own AI investments?

 

3) How will Big Tech pass the test of a more garden variety recession? Google and Facebook are reliant on ad spending. Amazon is reliant on online retail spend. Apple is reliant on people upgrading their phones and renewing subscriptions to apps etc. Tesla is reliant on people buying cars and so on. COVID was unusual because Big Tech were major beneficiaries. But if there is a fall in consumer spending and investment spending then we might see that Big Tech is more cyclical than people are expecting.

 

 

 

 

 

 

 

 

[Kupotea]

Price drives narrative and timeframes matter. In 2022 it was clear to everyone that rates had to go up and that would lead to slower growth (likely a recession) and lower valuations so the market tanked. The recession didn’t materalize because of excess savings accumulated during covid which meant a resilient consumer. Now we’re back close to all time highs, no excess savings, multiple contracting sectors and many marginal firms are going to struggle to roll over debt at current rates.  Was the drop in 2022 justified? Does any of this matter in the long run?
 

I’m not personally the buy and hold forever type. I’ve yet to find a company where I feel confident what the earnings will be like 10 years from now. I know Buffet and others have done this to great success but I personally lack the conviction. I feel far more confident in finding cheap businesses with a catalyst or looking through a trough to normalized earnings. That means for certain investments i need to have some sense of where we are in the business cycle. It’s not easy but it’s also not easy to find great business that will compound for decades. There isn’t one true investment style and i find it a little funny how much energy some people are devoting to tell others the right way to invest. 

[Luca]

https://markets.businessinsider.com/news/stocks/economy-outlook-us-recession-delayed-corporate-debt-binge-low-rates-2023-7

 

The bank highlighted that going back to at least 1975, corporate net interest payments would rise as the Fed raised interest rates. But for the first time in a long time, that isn't happening. Instead, as the Fed raised rates over the past 15 months, corporate net interest payments actually fell.

 

"Normally when interest rates rise, so too do net debt payments, squeezing profit margins and slowing the economy. But not this time," Societe Generale's Albert Edwards said in a Thursday note, pointing to a chart that he called the "strangest" he has seen in a very long time.

 

 

It turns out that during the period of near-zero interest rates, especially leading up to the pandemic and during the pandemic, corporations took advantage and refinanced a ton of their liabilities into long-term, low-rate, fixed debt.

 

According to data from Bank of America earlier this year, companies bought themselves some time to navigate higher rates. The debt composition of SP 500 companies includes just 6% in short-term floating rate debt, just 8% in long-term floating rate debt, 10% in short-term fixed debt, and a whopping 76% in long-term fixed debt.

 

"Companies have effectively played the yield curve in reverse and become net beneficiaries of higher rates, adding 5% to profits over the last year instead of deducting 10%+ from profits as usual," Edwards said.

 

The lack of a profit decline means companies didn't have to resort to a big wave of layoffs that would have dented the economy and thrown it into a recession.

 

The low-rate, long-term debt held by corporations, combined with their pricing power during a time of elevated inflation, means most businesses were able to grow profits in a big way. (especially true for SP500

businesses, average Joe restaurant has a harder time)

 

 

Edited July 31, 2023 by Luca

[Gregmal]

24 minutes ago, Luca said:

https://markets.businessinsider.com/news/stocks/economy-outlook-us-recession-delayed-corporate-debt-binge-low-rates-2023-7

 

The bank highlighted that going back to at least 1975, corporate net interest payments would rise as the Fed raised interest rates. But for the first time in a long time, that isn't happening. Instead, as the Fed raised rates over the past 15 months, corporate net interest payments actually fell.

 

"Normally when interest rates rise, so too do net debt payments, squeezing profit margins and slowing the economy. But not this time," Societe Generale's Albert Edwards said in a Thursday note, pointing to a chart that he called the "strangest" he has seen in a very long time.

 

 

It turns out that during the period of near-zero interest rates, especially leading up to the pandemic and during the pandemic, corporations took advantage and refinanced a ton of their liabilities into long-term, low-rate, fixed debt.

 

According to data from Bank of America earlier this year, companies bought themselves some time to navigate higher rates. The debt composition of SP 500 companies includes just 6% in short-term floating rate debt, just 8% in long-term floating rate debt, 10% in short-term fixed debt, and a whopping 76% in long-term fixed debt.

 

"Companies have effectively played the yield curve in reverse and become net beneficiaries of higher rates, adding 5% to profits over the last year instead of deducting 10%+ from profits as usual," Edwards said.

 

The lack of a profit decline means companies didn't have to resort to a big wave of layoffs that would have dented the economy and thrown it into a recession.

 

The low-rate, long-term debt held by corporations, combined with their pricing power during a time of elevated inflation, means most businesses were able to grow profits in a big way. (especially true for SP500

businesses, average Joe restaurant has a harder time)

 

 

Yup. Textbook vs real world. Rates rising means debt will be more expensive and therefor it will HAVE TO! dent profits…..real world? Go look at most balance sheets. Debts a non issue for most. Add in a perfect excuse to jack up prices…it was visible from afar for sure. Mostly everyone was prepared. As we discussed earlier, the ones who get fucked are the mom and pop companies. Same as COVID.

Edited July 31, 2023 by Gregmal

[changegonnacome]

10 hours ago, mattee2264 said:

Yeah I meant the current market level can be easily justified if earnings stabilize and resume growing (i.e. soft landing) and interest rates moderate (i.e. disinflation continues). You'd then end up paying just over 20x growing earnings relative to 3-4% interest rates which would make equities look pretty attractive so long as earnings growth rather than multiple expansion can do the heavy lifting from hereon out. Most of the recovery so far has been driven by multiple expansion as sentiment has swung from pessimistic back to optimistic. Corporate earnings for the market as a whole are continuing to decline albeit more moderately than was initially expected. 

 

Yep - the ECI had some good news recently on possible soft landing immaculate disinflation being achieved through wage moderation alone........which would take the easy inflation wins we've had.....and actually start to chip away at the underlying sticky inflation which I call made in america inflation......too early to tell

 

This is a beautiful rally.......but let's be clear right now.........the market is "all in" on the soft landing narrative right now IMO........in that sense things feel overbought to me.......but forgetting 'feels' and 'vibes'.......the simple fact remains that the straight line progress on disinflation is running out of the easy 'wins' that were predictable, baked in the cake and helped drive the soft-landing narrative flows of the past few months with MoM 'good news'..........disappointments to this thesis....such as recently increasing energy costs for example or just simply flatlining HEADLINE and CORE inflation converging at or above 3% are what comes next...at which point the Fed will have to remind folks that the target is 2%.....and 3% is significantly above target still....better than 8% sure.....but 3-4% inflation is not what the world's reserve currency and shining city on a hill is meant to be delivering from its central bank

 

Back half of the year will be interesting....maybe the FOMO rally continues (i hope it does...my portfolio is enjoying it as much as the next fellows)........but we've got some serious and possibly thesis destroying knocks coming for the softlanding folks......feels like a time to hedge and lock-in some of these nice gains for 2023....will be interesting to see what the folks who get marked for yearly performance do when they get back to their desks after labor day.

[mattee2264]

Agree that it is foolish to be scared off by PE ratios over 20. For most of a bull market the PE ratio can comfortably stay above 20 with growing earnings taking markets higher such as in the 60s and 90s and second half of this bull market. 

 

Problem is that corporate earnings are falling. And the overall market PE ratio is 28x and even if you exclude the Magnificent 7 (with an average PE ratio of 43x) the market PE only falls to 24x which is pretty rich by any measure.

 

So feels as if not only is market expecting a soft landing but it is also expecting a lot of future growth. Whether it is from an AI productivity miracle, some kind of green economy investment boom or these continued trillion dollar government deficits actually enhancing future growth rather than just keeping the economy afloat. 

 

 

 

 

 

 

 

 

 

 

[changegonnacome]

1 hour ago, mattee2264 said:

Problem is that corporate earnings are falling.

And those long bond yields just keep climbing and climbing…..

[Parsad]

5 minutes ago, changegonnacome said:

And those long bond yields just keep climbing and climbing…..

 

If the 30 year bond is at 4.3% and rising, then how can stocks have a multiple of 25?  Should be at P/E of around 16.

 

Cheers!

[cameronfen]

5 minutes ago, Parsad said:

 

If the 30 year bond is at 4.3% and rising, then how can stocks have a multiple of 25?  Should be at P/E of around 16.

 

Cheers!

As I’m sure you know, if you have robust enough growth this could change the fair value multiple. 

[Gregmal]

It really does seem like every week or month there’s a new headline risk and of course, THIS! is the one that does us all in….

[changegonnacome]

15 minutes ago, Parsad said:

If the 30 year bond is at 4.3% and rising, then how can stocks have a multiple of 25?  Should be at P/E of around 16.

 

Cheers!

Exactly…the rising piece is the most curious….the level of issuance recently and to come to fund the deficits and to fund the rising cost of servicing the deficit have a real negative feedback loop…..very interesting to see where the 10yr/30yr get too in this cycle 

[Spekulatius]

1 hour ago, Parsad said:

 

If the 30 year bond is at 4.3% and rising, then how can stocks have a multiple of 25?  Should be at P/E of around 16.

 

Cheers!

It’s is remarkable - every time I sell dividend stocks, I increase my income as the proceeds roll into 5%+ yielding treasury MM funds.

 

If you are retiree or close to retirement, now is the chance to derisk your retirement funds, imo. I am not a bond guy, but this is the best risk reward to park in cash since 2000/2001.

[thepupil]

21 minutes ago, Spekulatius said:

It’s is remarkable - every time I sell dividend stocks, I increase my income as the proceeds roll into 5%+ yielding treasury MM funds.

 

If you are retiree or close to retirement, now is the chance to derisk your retirement funds, imo. I am not a bond guy, but this is the best risk reward to park in cash since 2000/2001.

yea. it's a breath of fresh air. parents portfolio feels so much safer with all this yield...been locking in w/ some duration. they also just turned 70 and both worked long and paid a lot into SS, deferred til 70, they have ~$100K/yr of inflation linked SS income turning on. While that's obviously not typical, lots of boomer savers out there benefitting from the (seemingly unsustainable) simultaneous rise in real and nominal rates and the stock market...while getting fat CPI adjustments to their checks...and the real estate market still humming...just a crazy time

Edited August 4, 2023 by thepupil

[Dinar]

1 hour ago, Parsad said:

 

If the 30 year bond is at 4.3% and rising, then how can stocks have a multiple of 25?  Should be at P/E of around 16.

 

Cheers!

Why do you think so?   How do you think what is the appropriate p/e for a given level of interest rates?  Thank you.

[Parsad]

1 hour ago, Dinar said:

Why do you think so?   How do you think what is the appropriate p/e for a given level of interest rates?  Thank you.

 

Stocks generally should be trading at a price that gives you a return equivalent to the risk-free rate.

 

Risk free rate is going to be around 4.5% for the 30 year treasury. 

 

At a P/E of 16, stocks earnings yield is 4.5%.  Add growth in GDP (historically will be around 5%) minus 2% inflation, which equals 3%.  At a P/E of 16, stocks will give a 7.5% annualized return after inflation.

 

Cheers!