Have We Hit The Top?

[maplevalue]

Here is a selection of threads posted on General in the past several months (some of them by you):

 

 

 

 

All of these threads, and this one, have the same theme of "the market is too high", "rates are too low", "what we have now cannot last". That is, all of these threads represent the consensus fear among investors that the market is overvalued.

 

Markets time and time again tend to have price action which moves exactly opposite to what consensus opinion is, and we have seen it again this year as in the midst of huge levels of uncertainty the SP500 is at an all time high. I truly believe the pain trade is for the market, expensive as it is, is for it to continue becoming more expensive. Since the pain train often is the direction of travel, we are likely to go higher!

 

 

[Gregmal]

Does anyone remember back in school how randomly it would be announced "we're having a fire drill today"? And Let's say the fire drill was set for 11:30, from 11 on, no one would work. They'd all just sit around, wasting time, just hanging out, getting ready to exit the building when the alarm went off....well investors do the same thing except theres no announcement of the fire drill nor a time that the bell goes off. Yet they sit around doing nothing and wasting time fixated with the drill. What a waste!

 

Personally, Ive found its far better to just invest normally, while having contingency plans for a variety of possible events, however low probability they may be than wasting precious time preparing for something that many not come or prove actionable to a worthwhile degree. Best example was GOOG last year. I remember there was specific debate here in February about how it "wasn't" cheap. And I simply said that given the profile, when you back out the cash, low 20-something times(its then current price) is a reasonable and that a decent pullback is probably a great point to start taking hacks if you didnt own it(this was largely before the market started blowing up, GOOG was at like $1400 a share or so, and myself I even trimmed a bit of my GOOG there to "prepare" for the possible covid craziness)... well when GOOG traded down to 1100 everyone knew their advertising business was busted and many folks who were tepid at 1400 but had previously said they'd buy on a 20% pullback all of a sudden changed their minds and thought it was overvalued at $1100. So the point? Dont let your own psychology get the best of you. You can plan for the pullback but unless you are semi autistic or running pre programmed buy/sell decisions, its often easy to let sentiment ruin you and then all that preparation is for naught....every pullback I've seen in my life has a similar feature...90% of the people who were bearish and waiting for it remained bearish or got more bearish into the teeth of it rather than execute the second leg of the investment process which is to buy. And thats why its so hard to play that game. 

[james22]

My guess? Financial repression juicing equity returns for several years before stagflation.

 

https://themarket.ch/interview/russell-napier-we-are-entering-a-time-of-financial-repression-ld.4628

[ERICOPOLY]

Warren Buffett says stocks are ‘ridiculously cheap’ if interest rates stay at these levels

 

https://www.cnbc.com/2019/05/06/warren-buffett-says-stocks-are-ridiculously-cheap-if-interest-rates-stay-at-these-levels.html

[ERICOPOLY]

Look at Japan's debt.  Look at interest rates over the past 25 years in Japan.

Edited August 9, 2021 by ERICOPOLY

[adesigar]

37 minutes ago, ERICOPOLY said:

Warren Buffett says stocks are ‘ridiculously cheap’ if interest rates stay at these levels

 

https://www.cnbc.com/2019/05/06/warren-buffett-says-stocks-are-ridiculously-cheap-if-interest-rates-stay-at-these-levels.html

 

Thats what he says but his actions are that he has been a net seller of stocks. Why does BRK have a 6 billion quarterly dividend in the form of buybacks and $140 Billion in Cash? He cant find anything to buy and hasn't been able to for a while.

[james22]

WRT overvaluation, no one is more pessimistic than GMO. Yet:

 

While our glass-is-half-empty view on Growth is sobering, there is a very different way to look at today’s environment. Indeed, relative to traditional equity benchmarks, we think it is one of the best opportunity sets in over 20 years, as in one of the best times to look different and take active risk.

 

https://www.gmo.com/americas/research-library/2021-mid-year-letter-equity-allocation-strategies/

[james22]

50 minutes ago, ERICOPOLY said:

Warren Buffett says stocks are ‘ridiculously cheap’ if interest rates stay at these levels

 

https://www.cnbc.com/2019/05/06/warren-buffett-says-stocks-are-ridiculously-cheap-if-interest-rates-stay-at-these-levels.html

 

MAY 6 2019: “I think stocks are ridiculously cheap if you believe ... that 3% on the 30-year bonds makes sense,” Buffett says.

 

AUG 9, 2021: 30-year bonds <2%

[Gregmal]

The rate thing is one of those market aspects that is so simple that many smart people just cant help but complicate for the sake of giving themselves extra "smart guy" work. But Buffett is right. I have income from my job. I can 1) put it in the bank...0.05% 2) buy bonds ranging from investment grade, to junk...1.5%-4%, or 3) invest in the highest quality basket of equities at a 4% earnings yield with a 2.2% dividend yield and modest growth....hmmm. durrrr.

 

Theres of course a bit more to it, but thats basically the scenario most people face. Bonds and cash are garbage. Especially when you can buy substitutes like Berkshire or JPM and get way more for your money. Or get "speculative" and buy the C/WFC of the world which aint all that much more risky than those bonds but offer much superior return profiles. 

 

 

[ERICOPOLY]

The point of my stirring the pot with the Buffett citation is that nobody knows whether or not the market is expensive.  So just admit that you don't know what you don't know, and don't let yourself get caught pounding the table that it is a bubble or something.  It's only a display of arrogance to do so.

[fareastwarriors]

2 hours ago, Gregmal said:

every pullback I've seen in my life has a similar feature...90% of the people who were bearish and waiting for it remained bearish or got more bearish into the teeth of it rather than execute the second leg of the investment process which is to buy. And thats why its so hard to play that game. 

This is key. People focus on being "right" too much. Unless you're one of the very few people who can swing trade into millions, your best bet is just buy, hold, and buy more. You don't have to precisely time the market to do really well in the market. 

[james22]

1 hour ago, Gregmal said:

The rate thing is one of those market aspects that is so simple that many smart people just cant help but complicate for the sake of giving themselves extra "smart guy" work. But Buffett is right. I have income from my job. I can 1) put it in the bank...0.05% 2) buy bonds ranging from investment grade, to junk...1.5%-4%, or 3) invest in the highest quality basket of equities at a 4% earnings yield with a 2.2% dividend yield and modest growth....hmmm. durrrr.

 

Theres of course a bit more to it, but thats basically the scenario most people face. Bonds and cash are garbage. Especially when you can buy substitutes like Berkshire or JPM and get way more for your money. Or get "speculative" and buy the C/WFC of the world which aint all that much more risky than those bonds but offer much superior return profiles. 

 

 

 

Sure, but I'm newly retired and dealing with sequence of return risk. 

 

Hoping my small value, emerging markets, financials, infrastructure, and energy won't fall as much as growth in any correction/crash, but they'll still likely fall.

 

I've a cash bucket of several year's expenses, but it can take up to ten years for markets to recover. 

 

I don't see any "durrrr" options to derisk today.

 

Might add long-term treasuries as a diversifier, but dunno.

[rkbabang]

2 hours ago, fareastwarriors said:

This is key. People focus on being "right" too much. Unless you're one of the very few people who can swing trade into millions, your best bet is just buy, hold, and buy more. You don't have to precisely time the market to do really well in the market. 

 

 

Exactly.  I've been investing since 1996 or so, and in all that time my mistakes have fallen into three categories.  1) Holding tech stocks in 2000 with P/Es over 800.  2) Not buying enough of a stock when I knew it was a great company at a great price.  And 3) Selling way too early.

 

[TwoCitiesCapital]

3 hours ago, james22 said:

 

MAY 6 2019: “I think stocks are ridiculously cheap if you believe ... that 3% on the 30-year bonds makes sense,” Buffett says.

 

AUG 9, 2021: 30-year bonds <2%

 

...and broad markets are up ~50% over the same period of time. So are we still "cheap"...or was that 50% jump the jump that takes the cheapness out of it? 

[muscleman]

1 hour ago, TwoCitiesCapital said:

 

...and broad markets are up ~50% over the same period of time. So are we still "cheap"...or was that 50% jump the jump that takes the cheapness out of it? 

 

And what if the 30 year bond yield starts to go back to 3%?

[Sunrider]

It seems to me that statements about expensive or cheap/ attractive or not all come back to a relative assessment, which is inherently subjective. Sure, if the alternative is 2% treasuries, then equities look attractive if there's growth for pretty much everyone. Then you get into arguments as to whether the rate can stay that low, and we can go around in circles for a long time on that one, and inevitably one ends up in the inflation debate (as Fed+Treasury can set whatever rate they want, if you ignore other macro concern.

 

Personally, I've ended up with the view that it will go on until it stops. That's not particularly useful so let me expand it to say that it will go on for as long as people believe it can go on. Once people get spooked, there will be a decline that will probably be faster than people think and feed on itself. What is holding this market up are (i) the relative valuation arguments from above, (ii) people's faith in there being no significant downside (or their ability to get out first). So once people say 'Hmm, maybe buying a part of this business at a price which implies 4% return if they deliver on their plan is being seen as more risky by everyone else than before' we'll correct.

 

Can I predict that with any accuracy? Hell no. I've been waiting for a material correction for the last five years and failed to put significant capital to work in March last year!

 

[muscleman]

On 8/12/2021 at 4:02 AM, Sunrider said:

It seems to me that statements about expensive or cheap/ attractive or not all come back to a relative assessment, which is inherently subjective. Sure, if the alternative is 2% treasuries, then equities look attractive if there's growth for pretty much everyone. Then you get into arguments as to whether the rate can stay that low, and we can go around in circles for a long time on that one, and inevitably one ends up in the inflation debate (as Fed+Treasury can set whatever rate they want, if you ignore other macro concern.

 

Personally, I've ended up with the view that it will go on until it stops. That's not particularly useful so let me expand it to say that it will go on for as long as people believe it can go on. Once people get spooked, there will be a decline that will probably be faster than people think and feed on itself. What is holding this market up are (i) the relative valuation arguments from above, (ii) people's faith in there being no significant downside (or their ability to get out first). So once people say 'Hmm, maybe buying a part of this business at a price which implies 4% return if they deliver on their plan is being seen as more risky by everyone else than before' we'll correct.

 

Can I predict that with any accuracy? Hell no. I've been waiting for a material correction for the last five years and failed to put significant capital to work in March last year!

 

 

This reminds me of citibank's CEO in 2007. "As long as the music is playing, you've got to get up and dance."

I think this is the dot com bubble top 2.0. TSLA, AMZN and related stocks have burned a lot of short sellers over the years. I think it will work this time.

 

[Gregmal]

I agree with @musclemanto a certain extent. There is no better example of the cycle playing out than AMZN. Every last incremental buyer now thinks its consensus. However that is not to say the whole market needs to implode. I think its possible but more likely we just keep seeing rolling bear markets within sectors like we've seen for the past decade. 

[Sunrider]

I agree too … I’ve just come to accept that I have no ability to call the top … having been successful in 5 out of the last 0 cases !!

[rkbabang]

18 minutes ago, Sunrider said:

I agree too … I’ve just come to accept that I have no ability to call the top … having been successful in 5 out of the last 0 cases !!

 

Keep calling the top, eventually you'll be right.

[Spekulatius]

5 hours ago, Gregmal said:

I agree with @musclemanto a certain extent. There is no better example of the cycle playing out than AMZN. Every last incremental buyer now thinks its consensus. However that is not to say the whole market needs to implode. I think its possible but more likely we just keep seeing rolling bear markets within sectors like we've seen for the past decade. 

AMZN stock hasn’t moved for one year, so it’s a bit of a stretch to call it a consensus pick. I actually think it is quite attractive.

 

If I had to mention one thing everyone is bullish (including pretty much everyone on this forum), it is housing. Nary a bear to be seen, but what if this was just a COVID-19 surge that is already over?

Could we’ll be that the millennials return to the cities to their apartments, because there is no Peet’s coffee within 20 miles, the diner in town doesn’t have a decent Avocado toast and the Uber drivers don’t even to bother to go that far?

 

[Gregmal]

22 minutes ago, Spekulatius said:

AMZN stock hasn’t moved for one year, so it’s a bit of a stretch to call it a consensus pick. I actually think it is quite attractive.

 

If I had to mention one thing everyone is bullish (including pretty much everyone on this forum), it is housing. Nary a bear to be seen, but what if this was just a COVID-19 surge that is already over?

Could we’ll be that the millennials return to the cities to their apartments, because there is no Peet’s coffee within 20 miles, the diner in town doesn’t have a decent Avocado toast and the Uber drivers don’t even to bother to go that far?

 

Just as far as a trading pattern would go, the not moving for a year thing within the context of a multi decade run to one of the most valuable companies in its space(or the world) is probably consistent with what I'd expect with a so called "top". The long haulers passing the baton to all the geniuses on Sum Zero and VIC who now(after 20 years) "get it"...I think the same is even more true for NFLX. Classic case of the last remaining incremental buyers stepping in..whether its the top, who knows? Could also just be a long period of underperformance which would probably be more in line with what I'd expect of this market cycle and massive liquidity in the system. 

 

Housing I would kind of agree. Seems like just yesterday, although it was 6-12 months ago now where myself and maybe a small handful of others were pounding the table on housing and RE, amongst a sea of negativity and naysayers. Now its much different and probably more specific in terms of where you have to be. But housing in itself is unique and has a lot of secular tailwinds. A 30 year mortgage, a decade of vacuum in terms of building, and for god knows how long, lack of foreclosure/evictions will act like a boa constrictor for new supply. Especially in desirable areas. There's definitely a lot of areas that got a covid boost, pretty much across the board in commodities, but there's also market specific setups that can buck the trend of "temporary" for far longer than most think, steel is a good example of this. With the housing boom a solid example Ive used is CLPR vs APTS ytd performance wise. Or for RE in general retail vs office. There's plenty of markets within markets, which I guess was my original point...I dont really expect the entire market to melt down the way a lot of folks do. Just a stock pickers market.

[Gregmal]

One of the exercises I often try to do that Ive found helpful is to place things in the context of what the history books will say 10 years from now. As everyone above had already said, its easy to end up calling 10 out of the last 1 recessions over the past 3 years. You kind of want to avoid doing that or at least acting on it. However when within the moment you can extrapolate data and event sets in enough situations, sometimes the bells start ringing loudly and your trading sense begins to kick in. A great example of that was December-February of this past year. You had ETFS like ARKG gapping up 5% a day, spacs IPO-ing +20% and deal announcements doing 50-100%, you had short sellers crying mommy, and those short sellers brave enough to hang on got hung, drawn, and quartered in late January and February...enough for me to have as bearish a positioning as Ive ever had and its worked for a little bit. A lot of times it doesnt. I dont get a crazy sense of any sort of earth shattering event being at our doorstep, but if we get one... 5-10 years from now the stalling out of bull market darlings like AMZN, TSLA, NFLX, etc will certainly be pointed out by some as the writing having been on the wall. All are fine companies and I'm short TSLA and NFLX, but I wouldnt go crazy because you still need to respect the last 10 years of ass raping these things put on naysayers.

[nafregnum]

I've been stewing on this question and following threads like this with interest.  Thanks to everyone for your thoughts here.  Below I probably sound pretty bearish, but there's a big difference for me between feeling worried and feeling certain enough to take action.  I'm currently at 9% cash...  Whatever happens this year and next, I wish everyone here good success.

 

Recently I listened to a very interesting book called "I am a Strange Loop" which focuses on feedback loops like when a microphone and speaker are too close to each other and they generate that horrible high pitch screech because the two are "feeding into" each other.

 

Another feedback loop mentioned by the author is the idea of a best seller list for books.  Many people buy books on the NYT Bestseller list simply because the book is on the list, which helps fuel the book to climb higher in the rankings.  Publishers know this, and will spend a lot of upfront money to promote a promising title, hoping to get onto the list and ride the inevitable wave of popularity.

 

Looking at the last few months and my own thinking, I'm finding reasons to worry ... just thinking about other things I've read by people like Buffett & Munger, Howard Marks (in The Most Important Thing), and Jason Zweig (his chapter commentaries in The Intelligent Investor) ...

 

Buffett: "The future is never clear; you pay a very high price in the stock market for a cheery consensus." also "Be fearful when others are greedy, and greedy when others are fearful."

 

https://money.cnn.com/data/fear-and-greed/

 

I keep telling myself I'll wait until people are feeling especially greedy to sell out of some of my most overvalued positions, but when they get up again I keep feeling too greedy, thinking "I'll wait until tomorrow or the next day to sell it." and then they move down 5% or more and I go back to "waiting" trying to catch a top that eludes me yet again...  so my own behavior is starting to make me think I'm too optimistic.  

 

Marks said somewhere that if he could know just one thing about a stock before he buys it, he'd like to know precisely how much optimism is already priced into it.  I can't find the sentence now, but a lot of similar sentiment is in this memo: https://www.oaktreecapital.com/docs/default-source/memos/2015-09-09-its-not-easy.pdf 

 

Chris Bloomstran just took a close look at the ARK fund's components: 

 

 

 

Jeremy Grantham gives interesting details about how some previous tops died, not like a balloon popping but like air leaking out of a balloon.  He called it "confidence termites" in this recent podcast interview (from Aug 5th)

 

https://moneyweek.com/investments/investment-strategy/603678/jeremy-grantham-podcast

 

[ below is what I found interesting from Grantham -- he describes how the risky junk loses the most value first, and then you may see "confidence termites" eat away at sentiment like a feedback loop ]

 

Grantham: The history books are pretty clear, there doesn’t have to be a pin. No one can tell you what the pin was in 1929. We’re not even certain in 2000. It’s more like air leaking out of a balloon. You get to a point of maximum confidence, of maximum leverage, maximum debt, and then the air begins to leak. 

 

And I like to say, the bubble doesn’t reach its maximum and then get frightened to death, what happens is the air starts to leak out slowly because tomorrow is a little less optimistic than yesterday. And gradually, people begin to pull back. And the process is very interesting, in that before the end of the great bubbles, and there’s only been a handful, so we can get carried away with over-analysis. 

 

But before the great bubbles ended in 1929, 1972, and in 2000 in the US, the three great events of the 20th century, there was a very strange period in which, on the upside, the super-risk, super-speculative stocks started to underperform. They never do that in between, ever. And then suddenly, it starts. So, you go back to 1928, the JACI Index, the low-price index, and the S&P were up 80% in 1928, and then the S&P was up, say, 40%. That’s what it’s meant to do. 

 

And then in 1929, the S&P went up another 40% before crashing. The low-price index started early in the year to go down. It couldn’t even get the sign right. It had a beta of about two, and started to go down, and the day before the crash it was down over 30%. Nothing like that happens again until 1972. And let me point out that 73/74 is still the biggest decline, adjusted for inflation, since the Great Depression. It was 62% in real terms. 

And in 1972, the last up year, the S&P outperformed the average Big Board stock by 35%, approximately plus and minus 17 points. The average stock was going down steadily all year, and the S&P was going up. Nothing like that happens again until 2000. In 2000, in March, the great TMT bubble starts to peak, and Pet.coms get taken out and shut. 

 

And then in April and May, the junior growth. May/June, the middle growth. June, July, August, the Ciscos. Cisco was the biggest company in the world for eight minutes, I like to say. And the whole TMT block, that was 30% of the market cap, was down about 50% by September. 

The S&P was unchanged. Unchanged. Which meant that the remaining 70% was up 17%. That is an amazing deviation. So, bang, bang, bang. It’s only happened three times. It happened leading into the great air leaking out. And finally in September, the confidence termites, as I like to think of them, reached the broad market, and the entire 70% rolled over like a giant iceberg, and down it went, 50% over two years. 

 

And so, where are we today? Those three deviations, by the way, 1929 was eight months, 1972 was 11 months, and 2000 was six or seven months. And on February 9th, the Russell 2000, which had had a crushingly good year, wiped out way ahead of the S&P from March of 2000 until February 9th, way ahead of the NASDAQ. And the S&P has continued on its merry way, having a nice bull market. 

 

Even after yesterday’s great rally, the Russell 2000 was decently down since February 9th, the NASDAQ is five points ahead of it, and the S&P is ten points ahead. This is getting to be a pretty good down payment. It’s February, March, April, May, June, July. It’s five months. I would say this is tracking quite nicely. 

 

And the confidence termites started, once again, exactly where you would expect, they started with my favourite biggest holding, personal holding, QuantumScape. QuantumScape, a solid-state lithium-ion battery company I bought into eight years ago, as a green venture capital. They came as a SPAC, came at ten, went to 130.

 

At 130, it was 52 times my investment, which is pretty nice. It was also $55 billion, bigger than GM, bigger than Panasonic, if you want to think batteries. There’s nothing like that to compare to in 1929, by the way. The scale of that. They’re a brilliant research outfit, and I’m happy to still hold a quarter of my… But they don’t have a product for four years, and they have no trouble telling you that. 

So, here is a research lab that will have no profits, no revenue for almost four years, selling more than GM. $55 billion, give me a break. Anyway, that started down. It’s now down 80%. The SPAC Index is down 30%. The SPACs have started to dry up. Bitcoin, 62,000 to today’s, after a nice rally, 31,000, half price. Tesla, 900. Down to 650. 

 

This is the classic pattern of start with the most speculative, the most heroic, and work your way down carefully until finally you’ve reached the market. I would say it’s lasted longer than I thought. Why? Two reasons. One, the vaccine was simply bigger and better than anyone expected, and we produced it quicker, it was more effective, particularly Moderna, Pfizer, than anyone had ever hoped possible, really for any vaccine of that kind. 

And the other reason was the speed and size of President Biden’s stimulus package. He came in with such a roar, and bang, you’re suddenly talking trillions of dollars of stimulus. Those two things, of course, were bound to increase confidence, bound to increase the money in the hands of individuals. Individuals, because of Trump’s stimulus and because of Biden’s stimulus, have been dripping in resources, and they have bought into every setback. 

 

And they’re buying all the crazy stuff, the meme stocks that are just jokes, where they’re whipped up into a frenzy, and they’re buying them just for fun, it seems, ten times more than any underlying value. 

 

And, by the way, every indicator of that craziness, this is a record, this is more impressive even than 2000, and that was more impressive than anything that had preceded it. But the craziness that we have seen in the meme stock, companies being bought on no earnings potential, on no underlying reality, is just amazing. 

 

[changegonnacome]

Tesla/Elon's dancing AI 'robot' in a leotard last night & the stock rising today was the top signal for me........when Elon himself has jumped the shark so badly with stock promotion antics that beggar belief its a top signal for me. I mean I wondered if this was a sketch from SNL that didn't make the cut or something it was so ridiculous.

 

If this isnt the canary robot in the coal mine not sure what is:

 

Edited August 20, 2021 by changegonnacome