Have We Hit The Top?

[Gmthebeau]

It’s odd so many people feel like American dream is dead.  I feel like American work ethic is what’s dead in so many people.  Too many people want something for nothing.  You actually have to take responsibility for your life, educate yourself, work hard.  It’s not any difference than it ever was.  They just started giving trophies in school for participating and people were taught incorrectly to just get a handout.  A staggering number of Americans are on disability not cuz they can’t work but because they don’t want to.   Yet daily we see people lining up to buy the newest iPhones or $3500 Apple vision pro thing.   Americans are the fattest people on the face of the earth, but we need food banks?!?!?   

[Gamecock-YT]

4 hours ago, Gmthebeau said:

It’s odd so many people feel like American dream is dead.  I feel like American work ethic is what’s dead in so many people.  Too many people want something for nothing.  You actually have to take responsibility for your life, educate yourself, work hard.  It’s not any difference than it ever was.  They just started giving trophies in school for participating and people were taught incorrectly to just get a handout. 

 

 

[Blake Hampton]

Does this market not seem crazy speculative to anybody else? I almost feel stupid asking because I know how people say that trying to guess macro is dumb and all, but still.

 

I feel like I take a good amount of time to look at companies and review financial statements. For most, I do bare-bones simple analysis. I look at the income statement, balance sheet, and cash flow statement, as you do, and I also try to understand what business they provide, so that I can give myself an idea if and how growth could happen. I understand that there is always a deal to be found and that I should probably just shut up and go find one. I've also come to realize that there is a relatively decent amount located mainly in the smaller capitalization stocks. If I can own a decently diversified group of these where my conviction is high, I would buy them all in the next hour. But for the reason of my post. When I sometimes take a look at the larger companies, most of them seem very detached from reality in their valuations. Massive companies selling at huge multiples, in which are based on earnings that are influenced by incredible stimulus, low interest rates, and lower corporate taxes. How can this not be a bubble? I don't want to say that a future of higher rates is certain, but if I were to have to make a bet, I would say that rates going forward are certainly going to be higher than what we have seen in the past ten years. I also mention taxes because of the huge federal deficit in the U.S and the very high probability of higher corporate taxes in future, probably not under Trump though. What happens if these huge names ever stumble and people then take a look at their retirement accounts?

 

Thoughts?

[Blake Hampton]

14 hours ago, Gamecock-YT said:

 

 

Also this was great, thanks

[Gregmal]

What is “detached from reality” mean? For instance, with a 4% 10 year, to me this is equivalent to paying 25x for zero growth or inflation protection. I’d buy DEO all day at 17x or MSGE all day at 15-20x. I could justify paying 30-35x for double digit growth with a runway spanning a decade. If we re at 5% rates, that’s still 20x. So I guess that’s why I get confused at all the “expensive” talk, because it’s all relative. Some people still seem to live in a world where the overall market should trade at 15x, and I just don’t think that’s a realistic expectation.

[Blake Hampton]

27 minutes ago, Gregmal said:

What is “detached from reality” mean? For instance, with a 4% 10 year, to me this is equivalent to paying 25x for zero growth or inflation protection. I’d buy DEO all day at 17x or MSGE all day at 15-20x. I could justify paying 30-35x for double digit growth with a runway spanning a decade. If we re at 5% rates, that’s still 20x. So I guess that’s why I get confused at all the “expensive” talk, because it’s all relative. Some people still seem to live in a world where the overall market should trade at 15x, and I just don’t think that’s a realistic expectation.

I don't know who would buy 10 years at a 4% yield. It seems to be an exceptionally bad deal when you can easily get 5-5.5% on your money short-term. I do know that the Fed owns a shit ton of 10-years and it seems like they are manipulating the market downward, I don't think anybody knows how that situation will end. On your point of DEO and MSGE, I don't disagree that there are deals in larger capitalization stocks, it just seems to me that they are very rare. How do you know that earnings will be this high going forward and that there will continue to be double-digit growth? I'm quite skeptical.

 

Is what you're seeing rational? This is of course very general, but do you think that people will do well getting in at these prices?

Edited February 7 by blakehampton

[TwoCitiesCapital]

7 minutes ago, blakehampton said:

I don't know who would buy 10 years at a 4% yield. It seems to be an exceptionally bad deal when you can easily get 5-5.5% on your money short-term. I do know that the Fed owns a shit ton of 10-years and it seems like they are manipulating the market downward, I don't think anybody knows how that situation will end. On your point of DEO and MSGE, I don't disagree that there are deals in larger capitalization stocks, it just seems to me that they are very rare. How do you know that earnings will be this high going forward and that there will continue to be double-digit growth? I'm quite skeptical.

 

Is what you're seeing rational? This is of course very general, but do you think that people will do well getting in at these prices?

 

Why own the 10-year? Because a money market won't go up 10-15% if the Fed cuts to 2%. It's total actually falls as every day a portion of the money market resets to lower yields. 

 

Govt duration is a primary hedge in most risk-off environments. 2022 was an exception given that it was an inflation scare and yields started at 0% at the start of it. 

[Blake Hampton]

6 minutes ago, TwoCitiesCapital said:

 

Why own the 10-year? Because a money market won't go up 10-15% if the Fed cuts to 2%. It's total actually falls as every day a portion of the money market resets to lower yields. 

 

Govt duration is a primary hedge in most risk-off environments. 2022 was an exception given that it was an inflation scare and yields started at 0% at the start of it. 

Good point

[Blake Hampton]

What do you all think of the Shiller PE? Seems to be good metric.

[Gmthebeau]

21 hours ago, Gamecock-YT said:

 

 

At the time of his death, George Carlin's net worth was estimated to be $10 million. His wealth was accumulated through his successful career as a comedian, actor, and author.
 

Edited February 8 by Gmthebeau

[ArminvanBuyout]

8 hours ago, blakehampton said:

What do you all think of the Shiller PE? Seems to be good metric.

There's a lot of nuances with the data and context that make it not as useful if you just blindly look at it. Good article on some of the accounting nuances (beyond just the context of different rate regimes vs. history)

 

https://www.philosophicaleconomics.com/2013/12/shiller/

 

Doesn't mean I don't think multiples are high vs. history, though I don't think that's a reason as is to just not be in the market 

[Sweet]

15 hours ago, blakehampton said:

Does this market not seem crazy speculative to anybody else? I almost feel stupid asking because I know how people say that trying to guess macro is dumb and all, but still.

 

I feel like I take a good amount of time to look at companies and review financial statements. For most, I do bare-bones simple analysis. I look at the income statement, balance sheet, and cash flow statement, as you do, and I also try to understand what business they provide, so that I can give myself an idea if and how growth could happen. I understand that there is always a deal to be found and that I should probably just shut up and go find one. I've also come to realize that there is a relatively decent amount located mainly in the smaller capitalization stocks. If I can own a decently diversified group of these where my conviction is high, I would buy them all in the next hour. But for the reason of my post. When I sometimes take a look at the larger companies, most of them seem very detached from reality in their valuations. Massive companies selling at huge multiples, in which are based on earnings that are influenced by incredible stimulus, low interest rates, and lower corporate taxes. How can this not be a bubble? I don't want to say that a future of higher rates is certain, but if I were to have to make a bet, I would say that rates going forward are certainly going to be higher than what we have seen in the past ten years. I also mention taxes because of the huge federal deficit in the U.S and the very high probability of higher corporate taxes in future, probably not under Trump though. What happens if these huge names ever stumble and people then take a look at their retirement accounts?

 

Thoughts?

I haven’t crunched the numbers in this so it might be worth digging a little deeper for yourself:

 

”The S&P 500 has a forward price-to-earnings (P/E) ratio of about 15.5x excluding the Magnificent Seven, while the Magnificent Seven has a P/E of about 35x, according to data compiled by FactSet as of January 2, 2024.”

 

https://www.capitalgroup.com/institutional/insights/articles/magnificent-seven-chart-diversify.html#:~:text=The S%26P 500 has a,as of January 2%2C 2024.
 

It’s not hard to find sectors at single digit or low double digit PE’s if you go looking.

 

AI type stocks are a bit speculative however I’m not see a broad market bubble.

 

Edited February 8 by Sweet

[mattee2264]

Shiller PE has become less and less helpful over time. Perhaps if it was adjusted for interest rates and the long-run upward trend in valuations over time it would be more useful. But all it is really designed to do is give some indication of likely expected stock market returns over the next decade. 

 

Problem is that economic and market cycles are so protracted that it is little use as a timing indicator. Even if the basic concept that valuations eventually revert to the mean is true it makes a big difference whether they do so within 1 year, 5 years, 10 years because over that period earnings and stock prices will continue to grow. And over long periods the positive impact of period earnings growth increasingly dominates any negative impact from PE multiple compression. 

 

Are we in the late stages of a bull market? Or are we at the start of a new cycle powered by an investment boom resulting from AI advancements, onshoring etc? 

 

Has recession merely been delayed resulting in a major rug pull later this year or next year? Or have we already had the soft landing and starting to see grass shoots? 

 

Really tough to tell and that's why uncomfortable as it may be you have to accept that as a buy-and-hold investor (especially one concentrated in index funds) the long term market returns come from continuing to hold through periods of low valuations and high valuations and suffering through 50% market declines every decade or two. 

[Sweet]

1 hour ago, mattee2264 said:

And over long periods the positive impact of period earnings growth increasingly dominates any negative impact from PE multiple compression. 

 

What do you mean by this mattee?

 

I think it is possible we have a decade of sideways movement which is fine so long as you can pick your spots.

 

I do think we aren't going to get the 7-8% return buying at this level unless the economy kills it.

 

[mattee2264]

What I mean is that if you amortise the PE compression over a longer period its impact on your overall returns greatly diminish.

 

Over the next decade I do not think it is unreasonable to expect S&P 500 earnings to grow 10% per annum for the following reasons.

 

1) Inflation will probably be stuck in the 3-4% range and we've already seen companies in the S&P 500 can pass on cost increases fairly easily and the companies that dominate the indices can use their monopoly power to push through above inflationary price increases

2) There probably will be some productivity benefits from AI which could mean real GDP growth will be stronger over the next decade than the last decade. There will also be some support from much higher investment in areas such as AI, renewable energies, onshoring etc. 

3) The indices are dominated by quality growth companies and double digit earnings growth is easy for these kind of companies 

 

Even if you knock off a few percentage points to reflect earnings compression (to reflect the increasing maturity of tech companies and the likelihood interest rates will settle at a level higher than pre-COVID) you still could get 7-8% returns.

That is a lot better than the 4% you get on long bonds and you get more of an inflation hedge.

 

In real terms it would probably be only about 4-5% which is much less than the double digit real returns investors have been used to this cycle. But that is all the CAPE model really tells you. 

 

Whether there is any benefit from lightening up on equities at this point depends on how much volatility there is and whether the next bear market is a few years or ten years away. Very difficult to predict. A lot depends on whether we are entering into a new economic cycle or whether a recession is still in the pipeline over the next year or two. 

Also depends on whether AI lives up to its promise as that has extended the growth runway of market leaders and helping investors ignore the possibility of higher for longer and overlook that in recent years there have been some signs of incipient maturity 

 

 

 

[ValueArb]

On 11/6/2023 at 8:03 PM, Xerxes said:

From WeWork to WeBankrupt

 

 

Adam Neumann is the greatest fabulist of the century (so far). Now he's trying to buy back WeWork out of bankruptcy, and told the company he is ready to make an offer in partnership with Dan Loeb's Third Point LLC. Except that Dan is saying whaaaaaat?

 

The reason Adam is a billionaire and we are not, is that he sees a vision and convinces others to make it happen, even if its not really true at the moment. Because just believing and saying it will make it happen!

 

Quote

We talked yesterday about Adam Neumann’s apparent desire to buy WeWork Inc. out of bankruptcy. Neumann’s lawyer6 sent WeWork’s lawyers a letter on Monday “to express our dismay with WeWork's lack of engagement even to provide information to my clients in what is intended to be a value-maximizing transaction for all stakeholders”: WeWork does not seem to be talking constructively with Neumann, even though he “consistently expressed [his] sincere interest in purchasing WeWork or its assets out of bankruptcy, and/or providing the Debtors with DIP financing.” The letter also notes that Neumann is “partnering with well-known capital sources including Dan Loeb's Third Point LLC and others” to try to buy or finance WeWork. 

 

Here is an amazing fact about that partnership:

Third Point told the Financial Times it had held “only preliminary conversations with Flow [Neumann’s property company] and Adam Neumann about their ideas for WeWork, and has not made a commitment to participate in any transaction”.

Executives from Third Point, Japanese conglomerate SoftBank and Neumann last held an official meeting to discuss a potential bid for the company in October, people familiar with the process said.

It’s February! If you are dropping Third Point’s name now, and you last had “preliminary conversations” with them in October, that suggests that your bid is not all that real. If you had any better meetings with anyone else since October, you’d be dropping their name rather than Third Point’s.

 

 

Edited February 8 by ValueArb

[ValueArb]

5 hours ago, mattee2264 said:

Shiller PE has become less and less helpful over time. Perhaps if it was adjusted for interest rates and the long-run upward trend in valuations over time it would be more useful. But all it is really designed to do is give some indication of likely expected stock market returns over the next decade. 

 

Also adjusted for tax rates!  Beating my dead horse here;)

 

I've always wanted to put in the time to make interest rate and tax rate adjustments to CAPE (Shiller PE), but the reason I don't is everything you wrote here. Making it "more accurate" isn't going to magically turn it into a market timing tool, the market and economy are both too random and mysterious to be easily predictable. So in the end all you get is a tool that claims the market is overvalued for a decade+, far more than enough time to kill any fund that relies on it for investment decisions.

[Red Lion]

23 hours ago, blakehampton said:

Does this market not seem crazy speculative to anybody else? I almost feel stupid asking because I know how people say that trying to guess macro is dumb and all, but still.

My biggest holding is Apollo. Pretty large company although it still hasn’t joined the s&p500 yet. We are up 250% in the last 5 years. Trades at 12x trailing gaap earnings. This doesn’t seem crazy speculative to me. There are tons of other great companies trading at totally reasonable valuations. I wouldn’t be buying the index here, but I wouldn’t bet against it either. 

[mattee2264]

I think the bottom line is that:

 

-Mag7 are distorting market valuations. So to say the S&P 500 is overvalued you need to be able to say with confidence that Mag7 are overvalued

-Mag7 are what Benjamin Graham would call speculative growth stocks. Speculative not because of their quality as most of them are incredibly high quality and have very strong financial positions. But speculative because they are selling at double the market multiple which implies a lot of confidence in future growth. 

If that confidence is warranted then is hard to say that they are overvalued. 

-Outside Mag7 valuations are fairly average by historical standards. Perhaps slightly above because if you took out 7 of the top 10 companies out of historical indices it would have lowered the resulting average valuation. And the winner takes all dynamic makes many old economy stocks less valuable and there is a

greater obsolescence risk which is a negative valuation factor. Also over the last decade economic growth has been anaemic and companies have relied on financial engineering taking advantage of ZIRP to grow EPS faster than earnings. Economic growth should be better over the next decade especially if AI fulfils its promise but markets seem too ready to assume that interest rates will return to very low levels. They may do in the short run if the economy slows down but over the economic cycle I would expect interest rates to be around neutral which is usually proxied at nominal GDP growth or around 4-6% and I don't think the rest of the market (or Mag7)are priced for that). 

-The outlook for economic growth and interest rates is very uncertain especially over the next decade but I suspect they will have a big influence as to whether the next decade is good or bad for stocks. Probably you are counting on a fairly benign outlook of low-to-moderate inflation and healthy economic growth but so far betting against the US economy has been a mistake. 

 

In other words we are probably in what Buffett called "a zone of reasonableness". Perhaps at the upper end of that zone. 

 

There is an interesting asset allocation debate over whether the high concentration of the top 10 firms in the S&P 500 and of the USA in global indices warrants some attempt to rebalance either by shifting some funds to an equal weighted S&P 500 index or to small caps and shifting some funds to say an EAFE or EM index. There would be a diversification benefit but the risk is that in doing so you are reducing expected returns. Also a top heavy S&P 500 is nothing new and part of its design and with a S&P 500 you are getting a lot of global exposure anyway as well as owning most of the world's best companies. There is a continuity between the past and the future and over the long past a market-cap weighted S&P 500 index has been the winning strategy. That has been true in spite of its greater propensity for bubbles and painful 50% market declines or maybe because of it because those things are inevitable features of a capitalist economy and capitalism is still the best of the many imperfect economic systems out there.

 

 

 

 

[brobro777]

Well one place where we haven't hit the top is the homeless population in LA - 80% increase since 2015, new highs!

 

https://www.latimes.com/california/story/2023-06-29/la-county-homelessness-unhoused-population-count-jumps-increase

 

I remember years ago a friend came out from NJ on business and I took him on a stroll through Skid Row. Haha that was hilarious 

 

 

[Blake Hampton]

3 hours ago, mattee2264 said:

I think the bottom line is that:

 

-Mag7 are distorting market valuations. So to say the S&P 500 is overvalued you need to be able to say with confidence that Mag7 are overvalued

-Mag7 are what Benjamin Graham would call speculative growth stocks. Speculative not because of their quality as most of them are incredibly high quality and have very strong financial positions. But speculative because they are selling at double the market multiple which implies a lot of confidence in future growth. 

If that confidence is warranted then is hard to say that they are overvalued. 

-Outside Mag7 valuations are fairly average by historical standards. Perhaps slightly above because if you took out 7 of the top 10 companies out of historical indices it would have lowered the resulting average valuation. And the winner takes all dynamic makes many old economy stocks less valuable and there is a

greater obsolescence risk which is a negative valuation factor. Also over the last decade economic growth has been anaemic and companies have relied on financial engineering taking advantage of ZIRP to grow EPS faster than earnings. Economic growth should be better over the next decade especially if AI fulfils its promise but markets seem too ready to assume that interest rates will return to very low levels. They may do in the short run if the economy slows down but over the economic cycle I would expect interest rates to be around neutral which is usually proxied at nominal GDP growth or around 4-6% and I don't think the rest of the market (or Mag7)are priced for that). 

-The outlook for economic growth and interest rates is very uncertain especially over the next decade but I suspect they will have a big influence as to whether the next decade is good or bad for stocks. Probably you are counting on a fairly benign outlook of low-to-moderate inflation and healthy economic growth but so far betting against the US economy has been a mistake. 

 

In other words we are probably in what Buffett called "a zone of reasonableness". Perhaps at the upper end of that zone. 

 

There is an interesting asset allocation debate over whether the high concentration of the top 10 firms in the S&P 500 and of the USA in global indices warrants some attempt to rebalance either by shifting some funds to an equal weighted S&P 500 index or to small caps and shifting some funds to say an EAFE or EM index. There would be a diversification benefit but the risk is that in doing so you are reducing expected returns. Also a top heavy S&P 500 is nothing new and part of its design and with a S&P 500 you are getting a lot of global exposure anyway as well as owning most of the world's best companies. There is a continuity between the past and the future and over the long past a market-cap weighted S&P 500 index has been the winning strategy. That has been true in spite of its greater propensity for bubbles and painful 50% market declines or maybe because of it because those things are inevitable features of a capitalist economy and capitalism is still the best of the many imperfect economic systems out there.

 

 

 

 

Thanks for the great response. I have this feeling that the repercussions from government stimulus are somehow lurking in the underbelly of the economy. I don't know how to explain it so it's probably speculative, and it has been nearly 4 years since the onset of COVID, you would think that any argument would be a wash. Curious what you think.

[mattee2264]

Oh I know how you feel. 

 

Q4 GDP growth for USA came in at 3.3%. 2023 GDP growth was therefore a very healthy looking 2.5%. CPI inflation for 2023 is 3.4%. USA economy is at full employment. It is picture perfect until you remember that government ran a deficit of $1.7TR in fiscal year 2023. And is on course to run a $2TR deficit in 2024. And most of the hiring in 2023 has been by government while left right and centre big companies are laying off workers. 

 

High GDP growth rates can be achieved if the government spends a lot of money. But if it was that simple then socialism and communism would have succeeded and the richest countries in the world would be Russia and China. 

 

And it is not just government. Consumer debt has reached all time highs when you would think that with higher interest rates consumers would be trying to pay down debt. Consumer spending has contributed to the strength of the US economy but they also seem to be spending beyond their means. 

 

And both the government and the consumer are desperately hoping for lower interest rates to make their debt more affordable and easier to roll-over/refinance and although that is probably what they will get it does not feel like a healthy situation. 

 

Perhaps the AI productivity miracle will save the day and result in high growth and low inflation which will allow interest rates to stay low and for the US to ease its debt burden through economic growth the same way it did post WW2. But that seems a lot to ask for when the current AI offerings just seem to be glorified chat-bots and search engines that spout a fair amount of nonsense.

 

Or maybe the wave of immigration will achieve a similar effect. Although there does seem to be a paradox in welcoming mass immigration at a time when a lot of jobs are supposedly about to be displaced by AI and if we are running $2TR a year deficits at full employment how big are deficits going to get when AI results in mass layoffs and the economy eventually succumbs to recession? 

 

So I am also very cynical about the health and strength of the post-COVID economy. 

 

But the stock market is not the economy and so long as America's strongest companies can continue to grow earnings and investors are still enthusiastic about their prospects then stocks will continue to go up. 

 

At some point there probably will be some kind of reckoning and the good times will end. But who knows when that will be and if the market can double again before that happens then even a severe 30-40% bear market isn't going to allow you to buy at lower prices. 

[Blake Hampton]

32 minutes ago, mattee2264 said:

Oh I know how you feel. 

 

Q4 GDP growth for USA came in at 3.3%. 2023 GDP growth was therefore a very healthy looking 2.5%. CPI inflation for 2023 is 3.4%. USA economy is at full employment. It is picture perfect until you remember that government ran a deficit of $1.7TR in fiscal year 2023. And is on course to run a $2TR deficit in 2024. And most of the hiring in 2023 has been by government while left right and centre big companies are laying off workers. 

 

High GDP growth rates can be achieved if the government spends a lot of money. But if it was that simple then socialism and communism would have succeeded and the richest countries in the world would be Russia and China. 

 

And it is not just government. Consumer debt has reached all time highs when you would think that with higher interest rates consumers would be trying to pay down debt. Consumer spending has contributed to the strength of the US economy but they also seem to be spending beyond their means. 

 

And both the government and the consumer are desperately hoping for lower interest rates to make their debt more affordable and easier to roll-over/refinance and although that is probably what they will get it does not feel like a healthy situation. 

 

Perhaps the AI productivity miracle will save the day and result in high growth and low inflation which will allow interest rates to stay low and for the US to ease its debt burden through economic growth the same way it did post WW2. But that seems a lot to ask for when the current AI offerings just seem to be glorified chat-bots and search engines that spout a fair amount of nonsense.

 

Or maybe the wave of immigration will achieve a similar effect. Although there does seem to be a paradox in welcoming mass immigration at a time when a lot of jobs are supposedly about to be displaced by AI and if we are running $2TR a year deficits at full employment how big are deficits going to get when AI results in mass layoffs and the economy eventually succumbs to recession? 

 

So I am also very cynical about the health and strength of the post-COVID economy. 

 

But the stock market is not the economy and so long as America's strongest companies can continue to grow earnings and investors are still enthusiastic about their prospects then stocks will continue to go up. 

 

At some point there probably will be some kind of reckoning and the good times will end. But who knows when that will be and if the market can double again before that happens then even a severe 30-40% bear market isn't going to allow you to buy at lower prices. 

So I have seen "the stock market is not the economy" a couple of times and I have to say I don't understand. Wouldn't the stock market essentially be a delayed representation of the economy?

[Red Lion]

2 minutes ago, blakehampton said:

So I have seen "the stock market is not the economy" a couple of times and I have to say I don't understand. Wouldn't the stock market essentially be a delayed representation of the economy?

Look at the s&p500. The average ROIC and ROE and profit margins are way higher than the average publicly traded company. Public companies often have better metrics than small  private companies. So that index certainly isn’t a representation of the economy, it’s a representation of the biggest most popular (and mostly the most profitable) companies. 

[changegonnacome]

7 minutes ago, RedLion said:

Look at the s&p500. The average ROIC and ROE and profit margins are way higher than the average publicly traded company

 

Yep - and when you look at SPY - your looking in a very large way at the Mag6.......where one could argue that these companies represent monopolies or duopolies operating product monopolies that are capital light with the product distributed digitally........that just makes them amongst the greatest business that have ever existed in history period.....in terms of their moat and their ability to grow sales without consuming capital to do so