Have We Hit The Top?

[Gregmal]

This really isn’t an issue for most companies. It’s only really related to investment managers and such, and those certainly don’t trade at a market multiple.

[Cigarbutt]

14 hours ago, blakehampton said:

I was reading BRK shareholder letters when I had a thought:

Since unrealized investment gains are now included in net income, wouldn’t that mean that the S&P 500’s EPS is overstated? Buffett has repeatedly explained since 2017 how Berkshire’s reported net income isn’t actually representative of its earnings. In a rising market, wouldn’t this then have the same effect with the S&P? It’s sort of hard to wrap my head around but I feel like appreciation in stocks generally would then show up in the earnings of companies.

 

Edit: The change was ASU 2016-01

Interesting.

In Japan (see below), during a certain period, there was a growing trend (increasing corporate cross-holdings in a rising market):

For the US, this time is different because the level of corporate cross-holdings is low. In your great country, the trend is for the rising market to be held by the top 1% and "foreigners".

[Luca]

Microsoft and Alphabet are up 4% and 13% each after Q1 reports, I guess the rally can and will continue! 

Edited April 25 by Luca

[Sweet]

Lot of volatility out there.  Drop might not be over.

[mattee2264]

I think Google and Microsoft results have done a lot to soothe investor concerns. Even Meta results were good and it was only the guidance that spooked investors a bit.

 

We all know that Big Tech are investing heavily in AI. And the payoffs from those investments are uncertain and could be far down the line. But so long as the core businesses continue to grow strongly and there are some signs of incremental earnings growth from AI offerings then investors will be patient and continue to load up on Big Tech stocks. And it is a virtuous cycle (that could turn vicious)-the capex of companies like Microsoft, Google, Meta is the operating cash flows of NVIDIA and other hardware companies.

 

For now the operating cash flow growth of chip companies gets rewarded by markets who extrapolate it far into the future (with no consideration over the fact that eventually capex spend will moderate or will get in-sourced to some degree). And the heavy capex spend (and resulting deterioration in FCF) of Big Tech is ignored or even welcomed by the market because optimism over AI means the expected payoff is supposed to be both imminent and high and the core businesses are still growing fast. 

 

And with Big Tech representing 1/3 of the market the considerations above are going to dominate the macro even if below the surface for the average stock the combination of stagflation and higher for longer interest rates and geopolitical tensions is a major headwind. The Mag7 index has gone up about 150% since the nadir in autumn 2022. The rest of the S&P 500 and other global stock markets have only started to see a meaningful recovery over the last six months as a result of central banks teasing a pivot and the emergence of some grass shoots in Europe and general optimism over AI. 

 

 

 

 

[Sweet]

Kinda feels like a bit of a top here.  As pointless as it is thinking about all this.  

[Sweet]

I really dislike that the Fed is what’s moving this market.  All that seems to matter is read the inflation tea leaves, or rate cuts signals from powell, or market responding to a 9,871st fed speech of the week.  And it will end up being a sell the first rate cut bs too.

[Gregmal]

Too many monkeys in the market. Frankly I have no idea who in their right mind would be fretting a rate hike here. Inflation is nowhere near the FF rate. 

[Spooky]

5 hours ago, Sweet said:

I really dislike that the Fed is what’s moving this market.  All that seems to matter is read the inflation tea leaves, or rate cuts signals from powell, or market responding to a 9,871st fed speech of the week.  And it will end up being a sell the first rate cut bs too.

 

Market movements seem to be based a lot more on vibes these days. People have become so short term focused, trading zero day options. There is a lot more volatility day to day. However, this gives those of us with a longer term perspective an opportunity to exploit the volatility they create.

[Gregmal]

This inflation fear IMO is kinda easy to write off. First, $75-100 oil really isnt anything special now going back almost 20 years. However every time oil prices fluctuate up 10%, a whole crowd of folks start raging on about it being proof of inflation. I think not. 

 

Otherwise, used cars prices seem to keep coming down. Ive noticed a TON of stuff at the grocery store, including the bellwether Pepsi products, all seeing price cuts. My insurance policies haven't shown more than 5% increases. Just not seeing much of anything to write home about. Housing seems stable. Inventory creeping up a bit should quell prices accelerating. Some people still getting raises? Good LOL. Seems about time people get on with their lives. 

[Santayana]

11 hours ago, Gregmal said:

Some people still getting raises? Good LOL.

Given how I interpret your general worldview, I'm really surprised that you're not someone who sees the wage increases as leading to ongoing inflation.  I'll agree that it's good for a lot of people getting the raises, but it's just classical economics, more money chasing the goods and services will always result in price increases. 

 

I know a number of restaurant owners who have significantly increased prices over the past few years, and yet they're still not making nearly as much as they were due to all the wage increases and wholesale food price increases.   Which means more price hikes still to come.

 

When you mention the grocery store, I do see the prices there have finally stabilized, but just because someone can substitute eating at home vs. going out doesn't mean their cost of living hasn't gone up.  Sure I can eat more cheaply if I spend an hour cooking at home vs. having an after work cocktail at the bar, but that's assuming my time is worth 0.  I've always thought substitution effects and hedonic adjustments are just BS that lets the government get away with understating the real inflation that so many people feel.

[Gregmal]

24 minutes ago, Santayana said:

Given how I interpret your general worldview, I'm really surprised that you're not someone who sees the wage increases as leading to ongoing inflation.  I'll agree that it's good for a lot of people getting the raises, but it's just classical economics, more money chasing the goods and services will always result in price increases. 

 

I know a number of restaurant owners who have significantly increased prices over the past few years, and yet they're still not making nearly as much as they were due to all the wage increases and wholesale food price increases.   Which means more price hikes still to come.

 

When you mention the grocery store, I do see the prices there have finally stabilized, but just because someone can substitute eating at home vs. going out doesn't mean their cost of living hasn't gone up.  Sure I can eat more cheaply if I spend an hour cooking at home vs. having an after work cocktail at the bar, but that's assuming my time is worth 0.  I've always thought substitution effects and hedonic adjustments are just BS that lets the government get away with understating the real inflation that so many people feel.

Because workers have been getting screwed on wages for decades. Wages have not kept up with anything. So I think its total BS that a bunch of elitists now view wage grow as bad because god forbid its more expensive to enjoy the luxury of going to a restaurant or a bar...yeah, lets tank the economy to stop it...absurd. Its up there with them blocking the CPRI acquisition on the basis of people being entitled to $300 bags...where does it end?

[cubsfan]

^^^ Agree - and these widening income gaps certainly impact social unrest as well. Destruction of the American dream.

[Santayana]

15 minutes ago, Gregmal said:

Because workers have been getting screwed on wages for decades. Wages have not kept up with anything. So I think its total BS that a bunch of elitists now view wage grow as bad because god forbid its more expensive to enjoy the luxury of going to a restaurant or a bar...yeah, lets tank the economy to stop it...absurd. Its up there with them blocking the CPRI acquisition on the basis of people being entitled to $300 bags...where does it end?

I completely agree, but it *is* inflationary.  Plenty of middle class people who used to enjoy a weekly dinner out at a restaurant are being priced out of that small luxury.

[Gregmal]

Uh huh. I mean its plain old manipulation and outright fixing the game by the ruling class when you get down to what it is at its core. Because who does what during the downturns? The lower end people have to complete for fewer jobs and often work multiple jobs. The middle class aspirer who's just able to afford the house or the car no longer can, and the rich people buy vacation homes and distressed assets like its Christmas...

[Gregmal]

2 minutes ago, Santayana said:

I completely agree, but it *is* inflationary.  Plenty of middle class people who used to enjoy a weekly dinner out at a restaurant are being priced out of that small luxury.

And thats fine. They've created certain words, like inflation, that people are conditioned to just accept. They say inflation, and people immediately think "ooh, bad"...If "inflation" is largely driven by expensive restaurants...so friggin what? No one is forced to eat out...I mean we act like its something that everyone is entitled to...but what about the people working at the restaurant? Theyre just trying to make a living. Theyre probably not going out to eat 2x a week. Its nonsense. 

 

The majority of the wage price spiral theory is invalid because as we got more industrialized, especially at scale, you can pump out as many of most goods as you want for little incremental cost. Obviously you cant produce more chefs and bartenders like that, but again, employment is good, not bad. 

[Santayana]

Right, but arguing whether the inflation exists, or whether it's inherently bad are two different things.  Maybe no one is *entitled* to eat out, but if they're used to doing it and it's effectively taken away from them, they're going to be disgruntled about it and be looking for someone to blame.

 

[Gregmal]

The Fed and many elitists will argue that the answer to that person being disgruntled about not being able to eat out, or it being more expensive to do so, would be to make it so that more people cant eat out and less people work at those restaurants. I dont even know how this shit flies. Well, I do, and again its because they can just say "inflation" and 90% of people dont question it or dig any deeper. But its crazy. As Ive argued before, by far, the biggest and most problematic inflationary impact on everyday people is housing being so expensive, and that is entirely because of the Fed and their interest rate crusade. If the Fed dropped rates back to 2-3% you'd see so many houses built that we'd probably have a sizable housing market correction in the next 3-5 years. 

[mattee2264]

Shiller-CASE house price index peaked at 184 in 2006 and got back to that level by 2017 and then went to 215 before COVID hit. Currently stands at 312. 

 

So no evidence of massive building resulting from ZIRP post-GFC. But plenty of evidence that zero interest rates by increasing affordability resulted in house price inflation that took house prices well above the 2006 bubble peak even before COVID and that was during a period in which there was very little inflation or wages growth and that is clear if you look at house price to average earnings ratios which have been increasing throughout the post-GFC era.

 

Lower interest rates would cause even higher house prices and even more positive wealth effects which is the opposite of what the Fed is trying to achieve even if it might massage the inflation figures to make them look better. 

 

There are vested interests that want house prices to stay high and therefore the housing shortage is unlikely to go away and with inelastic supply demand is going to drive house prices and lower interest rates increase housing demand. That is economics 101. 

 

And there is a problem if we are in a world where the middle classes can no longer afford holidays, nice restaurants, nice housing and all the other things that used to be part of a middle class lifestyle. And if the middle classes are struggling to get by then the working classes are in an even worse position. But the people living off government handouts are doing just fine. The tax burden is also a lot higher as a result of fiscal drag. And all the asset price inflation is massively increasing wealth inequality and also intergenerational equality. 

 

Edited Thursday at 02:39 PM by mattee2264

[Gregmal]

The pre COVID and post COVID housing markets are two totally different things. The fact that builders didn’t built and younger people put off homeownership is why we’re in a market where the only way out is incentivizing building. Builders aren’t building more than they need to right now, because of rates. If rates drop and demand spikes they’ll lose all discipline 

[mattee2264]

Fed could easily cut rates if the US government stopped printing multi-trillion dollar annual fiscal deficits. That is the real problem. But unfortunately there isn't an easy solution. Lower rates might massage the inflation figures temporarily but it would also trigger a spending splurge as people try to maintain a lifestyle via credit card debt that they can no longer afford as everything is so much more expensive post-COVID. 

[Spooky]

1 hour ago, Gregmal said:

The Fed and many elitists will argue that the answer to that person being disgruntled about not being able to eat out, or it being more expensive to do so, would be to make it so that more people cant eat out and less people work at those restaurants. I dont even know how this shit flies. Well, I do, and again its because they can just say "inflation" and 90% of people dont question it or dig any deeper. But its crazy. As Ive argued before, by far, the biggest and most problematic inflationary impact on everyday people is housing being so expensive, and that is entirely because of the Fed and their interest rate crusade. If the Fed dropped rates back to 2-3% you'd see so many houses built that we'd probably have a sizable housing market correction in the next 3-5 years. 

 

[Jaygo]

On 5/2/2024 at 9:56 AM, Santayana said:

Right, but arguing whether the inflation exists, or whether it's inherently bad are two different things.  Maybe no one is *entitled* to eat out, but if they're used to doing it and it's effectively taken away from them, they're going to be disgruntled about it and be looking for someone to blame.

 

Food costs rising is more related to carbon taxes, food regulation, subsidies and transportation. North America should be able to produce everything in abundance, imo the government plays a larger role in the costs rising than labour cost just trying to keep up.

 

How bout JD or Cummins makes some cheaper tractors ( manufacturing gets in nuts squeezed with regulation and unions)

how bout some cheaper fuel for them tractors (  global warming bs carbon taxes )

How bout we grow food for food ( na lets make fuel out of it too then stop a pipeline from canada, oil is dirty )

 

Lots more reasons but american ingenuity can surpass any challenge but themselves.

 

 

[Spekulatius]

On 5/1/2024 at 8:45 PM, Spooky said:

 

Market movements seem to be based a lot more on vibes these days. People have become so short term focused, trading zero day options. There is a lot more volatility day to day. However, this gives those of us with a longer term perspective an opportunity to exploit the volatility they create.

The tool market volatility is extremely low (VIX is at 13.5 and had been low for a while) , but the volatility in individual names can be very high as earnings misses get punished harshly and earnings beats rewarded handsomely. I think the latter may be a result of option activity.