Have We Hit The Top?

[Spekulatius]

I wonder if we have seen the top for retail sales. I know Yoda says "A month a trend does not make" but still.

https://www.cnbc.com/2022/01/14/retail-sales-december-2021.html

 

We have got 7% inflation and I am willing to bet that most people do not get a 7% salary increase, unless you are a in low payer job. Stimmies are gone too.

[james22]

8 hours ago, kab60 said:

But, for the first time since I started investing, this time does feel different (don't say the words!).

 

When people say things are different, 20 percent of the time they are right. John Templeton

[Gregmal]

21 minutes ago, Spekulatius said:

I wonder if we have seen the top for retail sales. I know Yoda says "A month a trend does not make" but still.

https://www.cnbc.com/2022/01/14/retail-sales-december-2021.html

 

We have got 7% inflation and I am willing to bet that most people do not get a 7% salary increase, unless you are a in low payer job. Stimmies are gone too.

I had that thought enter my mind too. I think the childcare credits are potentially bigger than people think. 
 

that said I also wouldn’t be shocked if all these stupid boys crying wolf with the COVID hysteria had an impact in December. 

[Spekulatius]

I bought my first stock in 1982 (underaged). Every decade felt different. The 2020's decade certainly feels different.

 

Except for a brief period in 1999, I have never seen so many idiotic things and idiots in the stock market than there are now. I sort of feel i can take advantage here and there, or at least stay clear. However, I am also aware that too many of them can stink up the whole joint when they all take a dump at the same time.

 

I am not sure where I should go from here quite honestly.

 

 

[TwoCitiesCapital]

25 minutes ago, Aurel said:

It kinda makes sense, because the E of the P/E was down because of that COVID-thing.

 

Good thing that chart is price to sales and not earnings. And sales went through the roof due to stimmies but not as through the roof as equity prices. 

 

22 minutes ago, Spekulatius said:

I wonder if we have seen the top for retail sales. I know Yoda says "A month a trend does not make" but still.

https://www.cnbc.com/2022/01/14/retail-sales-december-2021.html

 

We have got 7% inflation and I am willing to bet that most people do not get a 7% salary increase, unless you are a in low payer job. Stimmies are gone too.

 

I can't speak for everyone, but I work in finance for a company that's making record profits. My "merit" based raise for exceeding expectations was ~4% despite our profitability. 

 

 

[Spekulatius]

7 minutes ago, TwoCitiesCapital said:

 

Good thing that chart is price to sales and not earnings. And sales went through the roof due to stimmies but not as through the roof as equity prices. 

 

 

I can't speak for everyone, but I work in finance for a company that's making record profits. My "merit" based raise for exceeding expectations was ~4% despite our profitability. 

 

 

I work in manufacturing and I expect a similar result. I am definitely taking a hit on purchasing power from my salary this year. My wife is nurse and is raking it it with her bonuses just for showing up.

[Aurel]

11 minutes ago, TwoCitiesCapital said:

 

Good thing that chart is price to sales and not earnings. And sales went through the roof due to stimmies but not as through the roof as equity prices. 

 

oh, my fault.

[Gregmal]

p/s is irrelevant in the grander scheme and especially on an adjusted historical basis because the reality is that e-commerce has different characteristics than brick and mortar. You dont need to think too hard to expect on an adjusted basis that 1950 p/s would be significantly lower than 2015. As e-commerce continues to be relevant in the world(and grow its reach) this should continue and by itself isnt anything to be alarmed by. 

 

[Thrifty3000]

4 hours ago, Gregmal said:

p/s is irrelevant in the grander scheme and especially on an adjusted historical basis because the reality is that e-commerce has different characteristics than brick and mortar. You dont need to think too hard to expect on an adjusted basis that 1950 p/s would be significantly lower than 2015. As e-commerce continues to be relevant in the world(and grow its reach) this should continue and by itself isnt anything to be alarmed by. 

 

 

You're right, there's a big difference between the WeWorks of the world and a unicorn SaaS company doubling revenues every year with a gigantic untapped TAM. And, as long as more of the 10x revenue companies are unicorns than WeWorks then it shouldn't be a big concern.

 

I do like this quote regarding 10x revenue valuations from the co-founder of Sun Microsystems from back in 2002:

 

"Two years ago, we were selling at 10 times revenues when we were at $64 [a share]. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. 

 

And that assumes with zero research and development for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?"

 

(Source: I pulled the chart and quote from an Almost Daily Grant's email)

[james22]

1 hour ago, Thrifty3000 said:

I do like this quote regarding 10x revenue valuations from the co-founder of Sun Microsystems from back in 2002:

 

"Two years ago, we were selling at 10 times revenues when we were at $64 [a share]. ... What were you thinking?"

 

That I could sell it to a greater fool for $247/share?

Edited January 14, 2022 by james22

[Spekulatius]

McNealy’s quote regarding 10x revenues valuation is misleading. Sun back then was selling fairly low margin hardware. So SUN trading at 10 x revenue made Little sense. Todays best in class SAAS companies have 80-90% gross margins and can probably get 30-40% EBIT margins at scale.

so if you buy these at 10x revenues, you could get a 3-4% pre-tax FCF yield that still grows at a healthy clip in the best case. This could mean that 10x revenue for such a business is actually quite cheap.

Edited January 15, 2022 by Spekulatius

[Thrifty3000]

13 hours ago, Spekulatius said:

McNealy’s quote regarding 10x revenues valuation is misleading. Sun back then was selling fairly low margin hardware. So SUN trading at 10 x revenue made Little sense. Todays best in class SAAS companies have 80-90% gross margins and can probably get 30-40% EBIT margins at scale.

so if you buy these at 10x revenues, you could get a 3-4% pre-tax FCF yield that still grows at a healthy clip in the best case. This could mean that 10x revenue for such a business is actually quite cheap.

Yes, it’s easy to get distracted by S&P 500 fun facts - like the percentage of zombie companies (that couldn’t survive if interest rates returned to long term averages).

 

Ultimately if you invest in the S&P 500 it comes down to:

 

- dividend yield

- growth rate

- multiple at time of purchase and time of sell

 

Over the next 10 (or even 20) years it’s very hard to predict what return an investor could expect. But, over the next 40 or 50 years the compounding of low fees and deferred taxes becomes pretty formidable.

[Thrifty3000]

Oh! Another fun fact to spook your friends with! When you have a minute check out the US’s total market cap as a percentage of worldwide market cap over time.

 

Then check out Japan’s total market cap as a percentage of worldwide market cap over time.

 

Something has probably gone a bit haywire when a country has less than 5% of the world’s population and produces a quarter or less of the world’s GDP, yet accounts for over half the world’s market cap. (Lets just say a healthy amount of optimism has probably been baked in to some prices.)

 

 

[Spekulatius]

1 hour ago, Thrifty3000 said:

Oh! Another fun fact to spook your friends with! When you have a minute check out the US’s total market cap as a percentage of worldwide market cap over time.

 

Then check out Japan’s total market cap as a percentage of worldwide market cap over time.

 

Something has probably gone a bit haywire when a country has less than 5% of the world’s population and produces a quarter or less of the world’s GDP, yet accounts for over half the world’s market cap. (Lets just say a healthy amount of optimism has probably been baked in to some prices.)

 

 

Market cap/ GDP is flawed because this metric depends on how many companies are public versus private. You could have a very expensive stock market with low Market cap/ GDP ratio if most of the companies in this country are private for example.

The US tend to have less private companies than most other markets, Why not just use the Shiller or the market PE ratio Instead? It’s a much better indicator. Of course the US is also expensive based on these metrics right now.

[Thrifty3000]

1 hour ago, Spekulatius said:

Market cap/ GDP is flawed because this metric depends on how many companies are public versus private. You could have a very expensive stock market with low Market cap/ GDP ratio if most of the companies in this country are private for example.

The US tend to have less private companies than most other markets, Why not just use the Shiller or the market PE ratio Instead? It’s a much better indicator. Of course the US is also expensive based on these metrics right now.

Yup. Agree with everything you’re saying. 
 

Comes down to those earnings, margins, growth rates, and multiples. Influenced heavily by interest rates, taxes, etc.

 

We know what the earnings are.

 

No one can convince me they have any clue what interest rates, taxes, profit margins or multiples will look like 10 or 20 years from now.

 

All we can really do is look back at a hundred years of data and come up with a range based on long term averages. So if earnings will be around $220 this year, will grow 6% annually (being optimistic), and will be worth a 20 multiple in 10 years we’re looking at an S&P worth $7,879 in a decade. That’s about a 5% annualized return from today’s price (not counting dividends).

 

Just gotta keep those fingers crossed that government won’t raise taxes, competition won’t create downward pricing pressures, productivity growth doesn’t remain as low as it has the last decade, and most importantly, that interest rates are permanently on the mat.

 

If you look back at the last time interest rates were this low - in the 1940s - people believed rates had permanently reset to the near zero bound. Little did they know, the rates climbed and climbed for the next 4 decades.

 

But, hey, let’s all say it together now, this time is different. Haha

 

 

 

Edited January 15, 2022 by Thrifty3000

[Cigarbutt]

On 1/15/2022 at 2:32 PM, Spekulatius said:

Market cap/ GDP is flawed because this metric depends on how many companies are public versus private. You could have a very expensive stock market with low Market cap/ GDP ratio if most of the companies in this country are private for example.

There are many reasons why this measure may be flawed.

Do you refer to any hard evidence versus the trend in share of corporate public or private ownership in the US, in the last 20 years or so?

[Spekulatius]

 Mortgage rate going up: 

[Spekulatius]

14 hours ago, Cigarbutt said:

There are many reasons why this measure may be flawed.

Do you refer to any hard evidence versus the trend in share of corporate public or private ownership in the US, in the last 20 years or so?

No I don't think the trend in public vs private ownership has changed much in the US, but it is a factor if you compare different countries.

[Cigarbutt]

56 minutes ago, Spekulatius said:

No I don't think the trend in public vs private ownership has changed much in the US, but it is a factor if you compare different countries.

Thank you for the answer. The cross-country comparison adjustment makes sense.

i'm still looking for the best answer for the public-private question in the US and it seems that the public-private ratio has gone up some in the last 20 years which is interesting if the GDP-public-market thing is not completely flawed.

-----

Added for perspective:

Is the last spike a factor behind the notion that 50-70 % of people are living paycheck-to-paycheck?

Disclosure: rhetorical question; no need to answer.

[Spekulatius]

7 minutes ago, Cigarbutt said:

Thank you for the answer. The cross-country comparison adjustment makes sense.

i'm still looking for the best answer for the public-private question in the US and it seems that the public-private ratio has gone up some in the last 20 years which is interesting if the GDP-public-market thing is not completely flawed.

-----

Added for perspective:

Is the last spike a factor behind the notion that 50-70 % of people are living paycheck-to-paycheck?

Disclosure: rhetorical question; no need to answer.

Yes, the mortgage chart gives alot of perspective. Yet again , once you approach zero, even small changes in the divisor create a very different result. That's something some growth stock investors are learning right now. Then there is the whole reflexivity thing (Who stole my cheese???) on top of this.

[Cigarbutt]

1 hour ago, Spekulatius said:

Yes, the mortgage chart gives alot of perspective. Yet again , once you approach zero, even small changes in the divisor create a very different result. That's something some growth stock investors are learning right now. Then there is the whole reflexivity thing (Who stole my cheese???) on top of this.

The title of this thread is a Top is Coming but it could be a Bottom has been Reached (rates). Rates (including mortgage rates; isn't it bizarre that the tax payer is almost guaranteed to participate over the duration of the fixed social contract?) will eventually go up, perhaps big time but when? In the 1970s when inflation became embedded in expectations, it felt like a self-fulfilling prophecy, but, despite real noise, wage inflation was ahead of consumer inflation:

And for the last 12 to 18 months, it's the opposite trend:

In today's inflation, there seems to be an unusually high number of people (mainly at the bottom) who wonder who took the cheese. Some say necessity is the mother of creative destruction.

[meiroy]

Very interesting am/FX by Brent Donnelly today. I think his letters are worth reading. Keep in mind he's a trader, not an investor. Meaning he's agnostic about everything.

 

"Something weird is going on"

 

 

[Gamecock-YT]

5 hours ago, meiroy said:

Very interesting am/FX by Brent Donnelly today. I think his letters are worth reading. Keep in mind he's a trader, not an investor. Meaning he's agnostic about everything.

 

"Something weird is going on"

 

 

 

 

Iraq invasion of Kuwait

 

Dotcom bubble bursting

 

"Bear market declared" / GFC

 

Interesting...thanks for the chart.

[Ulti]

yes could be the old "the only cure for high prices is high prices" .. high oil leads to falling demand and higher interest rates which leads to lower oil. I like this tweet from Brent Donnelly

[meiroy]

5 hours ago, Gamecock-YT said:

 

 

Iraq invasion of Kuwait

 

Dotcom bubble bursting

 

"Bear market declared" / GFC

 

Interesting...thanks for the chart.

 

about that 1990

https://en.wikipedia.org/wiki/Early_1990s_recession

 

"Primary factors believed to have led to the recession include the following: restrictive monetary policy enacted by central banks, primarily in response to inflation concerns, the loss of consumer and business confidence as a result of the 1990 oil price shock,^[1] the end of the Cold War and the subsequent decrease in defense spending,^[2] the savings and loan crisis and a slump in office construction resulting from overbuilding during the 1980s.^[3] The US economy returned to 1980s level growth by 1993^[4] and global GDP growth by 1994.^[5]"

 

But yea, also the invasion of Iraq. https://en.wikipedia.org/wiki/1990#:~:text=Important events of 1990 include,independence from the Soviet Union

 

"Important events of 1990 include the Reunification of Germany and the unification of Yemen,^[1] the formal beginning of the Human Genome Project (finished in 2003), the launch of the Hubble Space Telescope, the separation of Namibia from South Africa, and the Baltic states declaring independence from the Soviet Union amidst Perestroika. Yugoslavia's communist regime collapses amidst increasing internal tensions and multiparty elections held within its constituent republics result in separatist governments being elected in most of the republics marking the beginning of the breakup of Yugoslavia. Also in this year began the crisis that would lead to the Gulf War in 1991 following the Iraq invasion and the largely internationally unrecognized annexation of Kuwait. "