Have We Hit The Top?

[ArminvanBuyout]

Or, maybe the market is forward looking enough to see that as long as government continues to spend, a lot of the positives can offset the negatives too.

 

Manufacturing recession, but we've been in one for a while now, and cyclically, odds are, manufacturing will probably be better in 18 months vs. worse. And we still have hundreds of billions of dollars in stimulus that will hit the industry every year

 

Real wages are actually higher than pre-COVID levels, and while they're below, combination of still excess savings + falling inflation probably means consumers aren't in as much trouble as the bears think. And while we probably don't have accelerating economy, it certainly won't be the collapse that bears are playing for

 

And with rates falling (not because things are in trouble, but because inflation has stabilized, and we need to get real rates down to normal level), that's a big sign of change in sentiment and business environment that can drive business growth again. 

 

I guess the point is that there's a lot of positives in the economy as well. The market is certainly extrapolating that positivity, but to ignore all of those points and that path is just overly bearish

Edited February 1 by ArminvanBuyout

[Sweet]

There is something else too.  In years gone by the US stock market was closely aligned to the US economy.  The largest US companies are now truly global and it isn’t tethered to the US economy like it once was.

[ArminvanBuyout]

Hah well, the US is currently the shining light in an otherwise dismal global world economy, though again, argument is that if results are this good with rest of world being in the dumps, imagine if we see cyclical recovery. Earnings will probably go through the roof!

[TwoCitiesCapital]

7 minutes ago, Sweet said:

There is something else too.  In years gone by the US stock market was closely aligned to the US economy.  The largest US companies are now truly global and it isn’t tethered to the US economy like it once was.

 

The US is one of the better economies globally.

 

Eurozone basically in contraction and its stocks are basically as cheap as they e ever been relative to the US.

 

China not doing so hot. P/E of 12 on the A-shares index. Hong Kong index hitting  levels first touched in 2000.

Japan also in contraction judging by PMIs.

 

What are these global economies lifting the Mag7, and others, if not the US? 

[gfp]

Yeah, the Eurozone is now 5 consecutive quarters of essentially zero economic growth.  But it's not a recession.  Technically

[Sweet]

15 minutes ago, TwoCitiesCapital said:

 

The US is one of the better economies globally.

 

Eurozone basically in contraction and its stocks are basically as cheap as they e ever been relative to the US.

 

China not doing so hot. P/E of 12 on the A-shares index. Hong Kong index hitting  levels first touched in 2000.

Japan also in contraction judging by PMIs.

 

What are these global economies lifting the Mag7, and others, if not the US? 

What has the stock market valuations in those countries got to do with US companies?

 

Global GDP is growing despite the problems in Europe and China.

 

My only point is that yes the US economy is still the most important but the biggest companies are global in their footprint and that matters.

 

Name another country with the equivalent to the so called Mag7.

[TwoCitiesCapital]

44 minutes ago, Sweet said:

What has the stock market valuations in those countries got to do with US companies?

 

Global GDP is growing despite the problems in Europe and China.

 

My only point is that yes the US economy is still the most important but the biggest companies are global in their footprint and that matters.

 

Name another country with the equivalent to the so called Mag7.

 

You said they weren't tethered to the US economy, but rather the the global economy, as an explanation for why the stocks might be doing well while the US economy overall wasn't. 

 

I was just pointing out that they appear untethered from ANY economy seeing most of them aren't doing hot. 

[mattee2264]

Well yeah so long as Big Tech can continue eating the world then it doesn't really matter that much whether US or global GDP growth is sluggish. And arguably sluggish growth is a good thing if it keeps inflation down and allows interest rates to come back down to a more neutral range. 

 

Over last 5 years CAGR EPS growth rate for Mag7 was over 30%. Many multiples of global GDP growth over the same period. 

 

Agree that you aren't getting a hard landing so long as the US government keeps spending like crazy and the underlying weaknesses in the economy are bullish to the extent there is room for improvement and it would be far more dangerous if things were as good as they can get (meaning they can only get worse). 

 

The market has also correctly sussed out that resumption of issues in the banking sector are going to force the Fed to halt QT and probably provide more bailouts and last year that stealth QE was pretty bullish for markets. 

 

Also investors are pretty inoculated against bad news and have seen the stock market recover from a global pandemic, the Ukraine war, double digit inflation, a profits recession and surpass all time highs. So it will take a lot more than a mild slowdown or a modest reacceleration of inflation or later than expected interest rate cuts to shake their confidence. We've had 2 V shaped recoveries now and you'd need something far more scary than a run of the mill short lived cyclical slowdown (or even recession) to cause anything more than a mild correction. 

 

It would also be highly unusual for there to be another bear market so soon after having had 2 already this decade. 10-20% correction quite possible and par the course. But with most of the Mag7 firing on all cylinders and Fed and US government motivated to juice the economy ahead of the elections direction of travel at least for the next year or so seems to be firmly upwards. 

 

[Sweet]

9 hours ago, TwoCitiesCapital said:

 

You said they weren't tethered to the US economy, but rather the the global economy, as an explanation for why the stocks might be doing well while the US economy overall wasn't. 

 

I said "it isn’t tethered to the US economy like it once was" and that "largest US companies are now truly global".

 

I'm really trying to say that the so called Buffett rule, which Buffet used as a crude estimate of where valuations of US stocks lay, is probably less relevant now than when he first uttered it.

 

9 hours ago, TwoCitiesCapital said:

I was just pointing out that they appear untethered from ANY economy seeing most of them aren't doing hot. 

 

Maybe, I'm really not sure.  It all depends on future growth of the companies, interest rates etc.

 

Edited February 2 by Sweet

[mattee2264]

It is simple valuation math. You cannot assume a long term growth rate much more than GDP because to do so would result in ridiculous valuations. 

 

Mag7 are growing a lot faster because:

a) they are growing at the expense of old economy stocks

b) they are benefiting from changes in consumer and corporate spending patterns with an ever increasing wallet share being allocated to Big Tech products

c) they have powerful network effects that allow them to benefit from increasing returns so earnings can grow even faster than revenues

d) some of them took advantage of cheap debt to buy back shares so financial engineering has also resulted in EPS growing faster than earnings

e) they are taking advantage of untapped pricing power and as most of them are monopolies providing essential products/services with inelastic demand the market is able to bear them 

 

Eventually growth rates will slow and be more in line with global GDP growth. But their growth runway has been a lot lot longer than most anticipated and betting against Big Tech has been a losing bet over the last decade. 

 

I think the main risk at the moment is they are exceeding their remit and trying to act more like venture capitalists in their greed to make sure they reap all the benefits of advancement in AI technology. Previously most of them had a low capital intensity and gushed free cash flows. Now free cash flow is being diverted to investment in AI. Even if you call it growth capex I am sceptical that the returns will be as good as their core businesses and whether they'll be able to recapture enough of their spend through pricing increases for AI upgrades to their existing product suite. It is probably more of a medium term risk because in the short term AI markets itself and people will pay whatever it takes to get their hands on fancy new AI bells and whistles fearing that if they don't their competitors will and get an edge. 

[Gregmal]

Inflation done with jobs plentiful and wages actually outstripping cost of living increases.....clearly a recession is imminent. Thank god for the global macro guys.....

[Red Lion]

24 minutes ago, Gregmal said:

Inflation done with jobs plentiful and wages actually outstripping cost of living increases.....clearly a recession is imminent. Thank god for the global macro guys.....

Not to sound like a global macro guy, but isn’t this exactly what has to happen for the USA to outgrow its debt:gdp problem? It seems like the same thing happened the last time our national debt was this high. 

[Gregmal]

1 minute ago, RedLion said:

Not to sound like a global macro guy, but isn’t this exactly what has to happen for the USA to outgrow its debt:gdp problem? It seems like the same thing happened the last time our national debt was this high. 

Nah, the global macro guy would say "wages up means wage price spiral"...then look to cherry pick a tenth of one percents monthly fluctuation on some dataset and raise a textbook to support that claim.

[Red Lion]

19 minutes ago, Gregmal said:

Nah, the global macro guy would say "wages up means wage price spiral"...then look to cherry pick a tenth of one percents monthly fluctuation on some dataset and raise a textbook to support that claim.

 
 

I feel like everything is so hard to predict. When you only need to predict a few things that no one else cares about, that’s when I take my swing. 

[Gregmal]

The general concept is that the more things you need to correctly predict for an investment to work, the higher the payoff should be; obviously accounting for the complexity involved in predicting more and more variables. Much like a parlay in gambling. The issue with much of this scammy macro crap, is that people spend loads of times contriving these mega theories, often getting paid for content or seeking freeloading subscriptions, or whatever. The main thing is that they are benefitting from something not tied to the actual results of “the idea”. Even more perplexing, is the ones that do make their forecasts actionable, go through all that work, and often arrive at some simple, low payoff crap like “I’m short Amazon” or “long t-bills”…and it’s just laughable cuz it’s like what’s the friggin point? 
 

The solution in my eyes is to just focus on attractive and reasonably priced businesses that are durable and some combination of iconic, well capitalized, or structurally significant to some kind of tailwind driven theme. Then just stick with it and prudently invest through the cycle. The less complex you can make complex things, the greater the advantage you have.  
 

 

[Gregmal]

The simplest example of simplification is with Berkshire…

 

I know Berkshire will exist.

 

I know they will be profitable through the cycle.
 

I know they will survive the cycle.

 

My yearly earnings will vary but almost always be positive

 

Capital allocation will be rational

 

 

Thats it. WTF do I need to give two hoots about whether we get a rate cut in March or June for if I’m comfortable with the above? Lol it’s so dumb these games some people play.

 

 

[Mick92]

..

 

There's always a reason to be bearish if that's your outlook or what you're selling. Case in point Rosie, he sees nothing but bad news and he's basically been wrong forever at this point.

 

Of course eventually there'll be a recession or some kind of crisis and him and the rest of them will look like the smartest guys in the room for a period.

 

But buy and hold is the way to success for the vast majority. Understand what you own, don't own shit, don't worry if your stocks go down, the business cycle always comes back. Not everything will work but so long as you don't own total garbage, enough will work that you'll do just fine so long as you don't sell in a panic or blow yourself up with too much leverage.

 

One caveat is if things were to get really insane valuation wise, like Japan prior to their crash levels. Before it reaches that point, you have to cash in your chips and go elsewhere. Otherwise, chill out and enjoy the ride.

[rkbabang]

2 hours ago, Mick92 said:

 

 

Of course eventually there'll be a recession or some kind of crisis and him and the rest of them will look like the smartest guys in the room for a period.

 

 

 

I love when you see "predicted the last 3 market crashes" or something like that when people describe themselves.  Of course they will predict the next 3 market crashes too.  If you're always bearish 100% of the time you will have predicted all of the market downturns.

 

[Sweet]

3 hours ago, Gregmal said:

The general concept is that the more things you need to correctly predict for an investment to work, the higher the payoff should be; obviously accounting for the complexity involved in predicting more and more variables. Much like a parlay in gambling. The issue with much of this scammy macro crap, is that people spend loads of times contriving these mega theories, often getting paid for content or seeking freeloading subscriptions, or whatever. The main thing is that they are benefitting from something not tied to the actual results of “the idea”. Even more perplexing, is the ones that do make their forecasts actionable, go through all that work, and often arrive at some simple, low payoff crap like “I’m short Amazon” or “long t-bills”…and it’s just laughable cuz it’s like what’s the friggin point? 
 

The solution in my eyes is to just focus on attractive and reasonably priced businesses that are durable and some combination of iconic, well capitalized, or structurally significant to some kind of tailwind driven theme. Then just stick with it and prudently invest through the cycle. The less complex you can make complex things, the greater the advantage you have.  
 

 

So you aren’t a John Maudlin subscriber then?  

[Gregmal]

LOL yea I ran into a guy once who was pompously boasting about how "I got fired for being too bearish" a couple years before the GFC. And all I could think was "weird thing to be boasting about. And obviously you got fired for not making money, which was the purpose of your job"....There's some bizarre bravado with the bear crowds. Never quite understood it. Then theres also this whole thing where you look at a lot of them, at least the ones who actually do manage money, and you find out that during the down years they didnt even make money, in many cases they lost just as much as the people who just did their normal investing thing...and its just like wow, WTF is the point of playing this game? If you cant handle the stock market, dont play in it. Plain and simple. 

[james22]

Has the Great Upshift arrived?

 

Another strong quarter for US productivity growth is far from conclusive. But it's also a super encouraging sign. Let's enjoy it.

 

https://fasterplease.substack.com/p/has-the-great-upshift-arrived

[mattee2264]

Also interesting is that after the corporate profits recession in 2022 and 1H2023 the last few quarters have been very strong with 7.5% EPS growth in Q3 and with 80% of S&P 500 companies reporting Q4 is lining up to come in a little higher than that. 

 

Along with the strong GDP figures looks more like an economic take-off than an economic landing. Although of course the caveat is that most of that earnings growth is probably coming from Big Tech. 

 

 

[TwoCitiesCapital]

9 hours ago, mattee2264 said:

Also interesting is that after the corporate profits recession in 2022 and 1H2023 the last few quarters have been very strong with 7.5% EPS growth in Q3 and with 80% of S&P 500 companies reporting Q4 is lining up to come in a little higher than that. 

 

Along with the strong GDP figures looks more like an economic take-off than an economic landing. Although of course the caveat is that most of that earnings growth is probably coming from Big Tech. 

 

 

 

This. Overall earnings growth is still not great for most other companies, even with easy comparables from the prior year contraction. 

 

And it's all quite a bit worse when you adjust for inflation over the last 2-3 years to gauge the real earnings growth/contraction. 

Edited February 3 by TwoCitiesCapital

[mattee2264]

A little more colour coming out of the latest round of tech earnings calls on the AI breakthroughs will play out.

 

First area seems to be AI model as a service giving clients access to a variety of AI models they can customize while not having to worry about maintaining the infrastructure. 

 

Second area seems to be AI agents which can improve productivity by assisting with simple tasks. 

 

Already have a customer list that is hooked on their existing products/services and the seductive qualities of AI are such that they'd probably happily pay over an extra chunk of money to get AI add-ons or upgrades and the same powerful network effects and ability to spread investment in AI over hundreds of millions of users. 

 

Potential issues might be: 

-It will require a lot of investment. All the CEOs touting further cost cuts and efficiency gains but those won't be alone to fund it and the risk is that research will eventually hit a dead end and it will become a black hole in a quest for artificial general intelligence when the history of the development of AI shows that progress eventually stalls and you then get an AI winter and only many many years later is the next breakthrough made 

-Even if the revenue opportunity is tens of billions that doesn't really move the needle when these are trillion dollar companies already generating over $100b revenue a year and market caps already anticipate double digit earnings growth 

[ValueArb]

1 hour ago, mattee2264 said:

A little more colour coming out of the latest round of tech earnings calls on the AI breakthroughs will play out.

 

First area seems to be AI model as a service giving clients access to a variety of AI models they can customize while not having to worry about maintaining the infrastructure. 

 

Second area seems to be AI agents which can improve productivity by assisting with simple tasks. 

 

Already have a customer list that is hooked on their existing products/services and the seductive qualities of AI are such that they'd probably happily pay over an extra chunk of money to get AI add-ons or upgrades and the same powerful network effects and ability to spread investment in AI over hundreds of millions of users. 

 

Potential issues might be: 

-It will require a lot of investment. All the CEOs touting further cost cuts and efficiency gains but those won't be alone to fund it and the risk is that research will eventually hit a dead end and it will become a black hole in a quest for artificial general intelligence when the history of the development of AI shows that progress eventually stalls and you then get an AI winter and only many many years later is the next breakthrough made 

-Even if the revenue opportunity is tens of billions that doesn't really move the needle when these are trillion dollar companies already generating over $100b revenue a year and market caps already anticipate double digit earnings growth 

 

I agree with a lot of this. I think general purpose pattern matching models (colloquially called "AI" now) are terrible, we've all see their rough edges and hallucinations. My example is asking ChatGPT for legal advice and it confidently tells you terribly incorrect things about the laws in your state. But I think if you can create smaller models focused in your area of expertise and do a lot of testing/QA to validate their answers, you can create some powerful tools out of them. 

 

Getting back to my legal example, feed your model all of the laws of your state, case histories, common law, precedents, etc, but don't let anything else contaminate it from the world wide web, then work with a team of paralegals and lawyers to come up with a strong testing regime to find and fix any mistakes, and maybe you have something that works as well as asking any lawyer who passed the bar. That would be hugely valuable product for the average joe in your state.