Have We Hit The Top?

[Gregmal]

I hopped off the high multiple train awhile ago, but stuff like WM, AAPL and COST still kind of disprove the notion that those are the things that’ll get whacked.

[maxthetrade]

3 hours ago, Gregmal said:

Well, theres also the notion that people become accustomed to just throwing around terms such as "money printing" when they dont even really understand it or its perceived impacts.

 

All this macro stuff is way too hard for me. Just look at Japan, I'd never had guessed that they can do what they have done without serious consequences. I'd have lost my shirt if I had bet on what I thought would happen. So much easier to buy cheap companies unless you are Wabuffo.

The one macro bet I really nailed is betting against the EUR, perhaps I'm biased because I see all the crap happening here but I think the eurozone is doomed, a complete dysfunctinal disaster.

 

[changegonnacome]

 

7 hours ago, TwoCitiesCapital said:

That being said, I've regularly made the argument equities are not an inflation hedge. They do terribly in periods of elevated inflation. 

 

Equity market performance through inflation/stagflation is usually terrible.........we've already seen part one of the stagflation movie which is the no FCF, high growth companies get killed first for obvious reasons............but what comes next IMO and I'm positioned for it....so I'm unashamedly talking my book here for transparency.........is that the stuff that actually has FCF but very high multiples on that FCF will get killed the worst next (think Apple at 3% FCF yield @ $170 a share or Costco @ 2.8% yield).......why.....cause their FCF yield has been driven down so low through investors bidding up their price........that the higher multiple has made it so the earnings yield actually dips below the rate of inflation. So much so that if you think of it Apple offers an inflation adjusted negative FCF yield in the next 12 months.

 

$APPL: 3% FCF yield in a 6% inflation world....think about that for a second.....inflation adjusted thats a negative next twelve month 3% FCF financial instrument people are holding (relative to the $170 price ). These people have unwittingly become growth investors....because you absolutely have to have Apple deliver FCF per share growth in excess of inflation (or inflation reverts to 2%) to get back to in-the-money positive FCF relative to what you paid. The problem for the behemoths is it's hard to meaningfully grow FCF at 9% into a weakening consumer/economy with higher rates (especially if you over-earned during COVID like Apple).. So IMO they are going to get slaughtered in the next 12 months, because right now they are wolfs (growth companies) in sheep's clothes. You can talk about other stuff too...like owning a name like Apple is just safe bet so you've career risk and institutional biases bidding it up to 30 times earnings..........the other issues for these companies is just competition....from the 10/30yr.....one can argue some names like Apple became bond subs when bonds got too expensive. If bond rates go higher & stay higher...well you don't need the substitute anymore, you buy the real thing. Not good for these types of low FCF yield names.

 

I've mentioned this before but equities as inflation hedges have to meet two criteria to "work" right now IMO - they need to have a robust sustainable LTM P/FCF yield above the inflation rate AND ideally they should have reasonable prospects of growing underlying nominal FCF in the next twelve months at or above the NTM expected inflation rate. They need robust balance sheets and no requirements for access to the capital markets. Stick to this philosophy and you'll come out the other side with your portfolios purchasing power intact I think.

 

Exit multiples you can't be sure of......that is out of your control Mr.Market will decide that.......you though are purchasing cash flows and what you are in control of is putting money to work today that delivers an inflation adjusted REAL return  & that those cash flows have a reasonable prospect of continuing in the next twelve months time to grow above or equal to the inflation rate...............which today puts you in ~11 x P/FCF stocks or below.....and the beauty of these of course is there's just less multiple to contract vs. the ones at 30 ......which your chart  @TwoCitiesCapital kind of speaks too.

[changegonnacome]

7 hours ago, Gregmal said:

I hopped off the high multiple train awhile ago, but stuff like WM, AAPL and COST still kind of disprove the notion that those are the things that’ll get whacked.

 

As per my post above - that day is coming for AAPL et al i think

[TwoCitiesCapital]

1 hour ago, changegonnacome said:

 

 

Equity market performance through inflation/stagflation is usually terrible.........we've already seen part one of the stagflation movie which is the no FCF, high growth companies get killed first for obvious reasons............but what comes next IMO and I'm positioned for it....so I'm unashamedly talking my book here for transparency.........is that the stuff that actually has FCF but very high multiples on that FCF will get killed the worst next (think Apple at 3% FCF yield @ $170 a share or Costco @ 2.8% yield).......why.....cause their FCF yield has been driven down so low through investors bidding up their price........that the higher multiple has made it so the earnings yield actually dips below the rate of inflation. So much so that if you think of it Apple offers an inflation adjusted negative FCF yield in the next 12 months.

 

$APPL: 3% FCF yield in a 6% inflation world....think about that for a second.....inflation adjusted thats a negative next twelve month 3% FCF financial instrument people are holding (relative to the $170 price ). These people have unwittingly become growth investors....because you absolutely have to have Apple deliver FCF per share growth in excess of inflation (or inflation reverts to 2%) to get back to in-the-money positive FCF relative to what you paid. The problem for the behemoths is it's hard to meaningfully grow FCF at 9% into a weakening consumer/economy with higher rates (especially if you over-earned during COVID like Apple).. So IMO they are going to get slaughtered in the next 12 months, because right now they are wolfs (growth companies) in sheep's clothes. You can talk about other stuff too...like owning a name like Apple is just safe bet so you've career risk and institutional biases bidding it up to 30 times earnings..........the other issues for these companies is just competition....from the 10/30yr.....one can argue some names like Apple became bond subs when bonds got too expensive. If bond rates go higher & stay higher...well you don't need the substitute anymore, you buy the real thing. Not good for these types of low FCF yield names.

 

I've mentioned this before but equities as inflation hedges have to meet two criteria to "work" right now IMO - they need to have a robust sustainable LTM P/FCF yield above the inflation rate AND ideally they should have reasonable prospects of growing underlying nominal FCF in the next twelve months at or above the NTM expected inflation rate. They need robust balance sheets and no requirements for access to the capital markets. Stick to this philosophy and you'll come out the other side with your portfolios purchasing power intact I think.

 

Exit multiples you can't be sure of......that is out of your control Mr.Market will decide that.......you though are purchasing cash flows and what you are in control of is putting money to work today that delivers an inflation adjusted REAL return  & that those cash flows have a reasonable prospect of continuing in the next twelve months time to grow above or equal to the inflation rate...............which today puts you in ~11 x P/FCF stocks or below.....and the beauty of these of course is there's just less multiple to contract vs. the ones at 30 ......which your chart  @TwoCitiesCapital kind of speaks too.

 

I don't disagree. I'm not "selling everything"

 Own fair chunks of Fairfax and Exor and a bunch of commodity plays. Some cheap European stuff like Porsche and Eurobank and plenty of EM exposure. 

 

But am still about 40% short/intermediate bonds (which is crazy for my age) and haven't been adding to 401ks/IRAs etc this year but have been building cash, prioritizing debt reduction, and buying iBonds (ready for another 10k slug in January). 

 

Investing through 2008 and 2020 taught me cheap gets cheaper. Just in case that's wrong, I still have appreciable exposure, but nothing works quite as well as cash and shorts. I was previously short AAL and AAPL via options. AAL I did well with and have since closed.

 

Apple wouldve done well, but a few weeks back IB exercised my short puts in the middle of the night. Since the long puts I held against it couldn't be sold, they liquidated a bunch of my overseas holdings AND then owned long puts at the open when it was 2% higher. Didn't realize options could be exercised in the middle of the night, but now I do. Am hesitant to risk reopening the short again since prices are higher for options and I ultimately lost about 2-3k on what was a winning trade due to the inopportune exercise time. 

 

Edited September 2, 2022 by TwoCitiesCapital

[changegonnacome]

11 minutes ago, TwoCitiesCapital said:

I'm not "selling everything"

 

For sure - would never advocate that.....but i think you've got to underwrite your portfolio such that it can do well if inflation just disappears before Christmas & we get back to low rates, so yeah dont sell everything and miss the rally........but I think you've got to underwrite it too for stagflation, sustained Fed Funds at 4-5% and inflation persistently above 4% well into next year.....they aren't mutually exclusive and there's no in and out here....people waffle on about stock pickers markets etc. well this one.....as I've said before the beta in US markets is gonna suck yet I hold US stuff.....but ive an international bias now, short SPY/AAPL puts, probably gonna sell OTM index calls as SPY is not going back 4,800 in the next 12 months with Powell's foot on its neck, then basket of fallen angels that easily can fall 80% more and still be expensive...... and if/when the time comes with VIX at 40, I'm happy to be selling OTM puts on BRK, MSGE, ESRT like I did back in COVID-y times.

 

I use IB.....Interesting that they exercised options like that...didnt think that would happen outside market hours.....their rates are cheap, but man are they ruthless when their mark to model tells them too......I play it very conservatively with them for that reason and never push margin too far......& just generally I've found anytime your babysitting positions & opening your IB app more than 3 times a day to 'peek'....its the surest sign that your little out on a limb and you know it.

[TwoCitiesCapital]

11 hours ago, changegonnacome said:

 

For sure - would never advocate that.....but i think you've got to underwrite your portfolio such that it can do well if inflation just disappears before Christmas & we get back to low rates, so yeah dont sell everything and miss the rally........but I think you've got to underwrite it too for stagflation, sustained Fed Funds at 4-5% and inflation persistently above 4% well into next year.....they aren't mutually exclusive and there's no in and out here....people waffle on about stock pickers markets etc. well this one.....as I've said before the beta in US markets is gonna suck yet I hold US stuff.....but ive an international bias now, short SPY/AAPL puts, probably gonna sell OTM index calls as SPY is not going back 4,800 in the next 12 months with Powell's foot on its neck, then basket of fallen angels that easily can fall 80% more and still be expensive...... and if/when the time comes with VIX at 40, I'm happy to be selling OTM puts on BRK, MSGE, ESRT like I did back in COVID-y times.

 

I use IB.....Interesting that they exercised options like that...didnt think that would happen outside market hours.....their rates are cheap, but man are they ruthless when their mark to model tells them too......I play it very conservatively with them for that reason and never push margin too far......& just generally I've found anytime your babysitting positions & opening your IB app more than 3 times a day to 'peek'....its the surest sign that your little out on a limb and you know it.

 

Yea, this wasn't even margin as it's a retirement account. 

 

Had just structured the trade as selling short one ATM put and using proceeds to buy 2 OTM puts. Meant I could short it without upfront cash, wouldn't be on the hook if it kept rising (as it did for the first year I had the trade on), and would still be present for any drop over 10-15%. Trade is off that I was on the hook for falls smaller than 10-15% which were covered by cash held on the account.  

 

But in exercising the short and NOT selling the longs, there wasn't enough cash in the account to buy the 100 shares for all the contracts so they sold all of my Alibaba in HK and some of my Exor in Europe to convert to USD to cover the trade. Wouldn't have happened during daytime hours when the long puts could've been sold OR the underlying AAPL shares I was forced into buying could just be sold.

 

All just a f*ck up in the timing of the exercise which I didn't realize could happen when exchanges were closed overnight. Now I'm a little more cautious about the strategy and vol has exploded since I initially bought the position so would be more expensive to put on now (i.e. the loss I'm potentially on the hook for larger before my gains would offset it). 

[changegonnacome]

16 minutes ago, TwoCitiesCapital said:

But in exercising the short and NOT selling the longs, there wasn't enough cash in the account to buy the 100 shares for all the contracts so they sold all of my Alibaba in HK and some of my Exor in Europe to convert to USD to cover the trade.

 

Ruthless stuff by IB.. & a good reminder to me seen as I'm a customer too......selling stuff in foreign markets while you are asleep 

[Gregmal]

Yea I think that’s one of the problems with the automation systems that IB uses. I’ve been exercised on stuff at 11pm when there’s still weeks or months left til expiry. 

[changegonnacome]

Yeah no free lunch ever I guess - it's the quid pro quo for the margin rates they offer without the begging you need to do with Schwab.

 

Its also a reminder why IB will be the last broker standing in the zombie apocalypse just given their shareholder equity & mark to model margin systems they use which are ruthless!

Edited September 2, 2022 by changegonnacome

[Xerxes]

Mark Mobius is making the rounds on CNBC and Bloomberg, talking about Fed raising interest rate by 2% in one shot !!

And the nominal rate reaching 9%

 

 

 

[Spekulatius]

Maybe time to revive this thread here.

I am thinking it may be good to make a directional bet against tech stocks here. My thinking is to use puts on QQQ because index options are the most liquid and QQQ is a decent large tech proxy. VIX is low currently which ought to mean that option premiums shouldn't  be too onerous. 

 

Thinking about Oct/Nov/Dec 2023 30 strike QQQ puts ~$4.7. I haven't used puts much, so what do people here tend to use in terms of duration or strike price. $300 strike is ~15% down from current levels of $355 currently which maybe is a bit much.

 

I welcome all input here.

 

 

[brobro777]

13 minutes ago, Spekulatius said:

Maybe time to revive this thread here.

I am thinking it may be good to make a directional bet against tech stocks here. My thinking is to use puts on QQQ because index options are the most liquid and QQQ is a decent large tech proxy. VIX is low currently which ought to mean that option premiums shouldn't  be too onerous. 

 

Thinking about Oct/Nov/Dec 2023 30 strike QQQ puts ~$4.7. I haven't used puts much, so what do people here tend to use in terms of duration or strike price. $300 strike is ~15% down from current levels of $355 currently which maybe is a bit much.

 

I welcome all input here.

 

 

 

 

I tend to agree. I get that these tech companies are great and like everyone I've made good returns on them over the years (Apple, Google, etc) but $trillion+ market cap at 30X earnings? And despite the recent layoffs, it seems like these companies are still giving away stock based comp like candy

 

I'm too much of a wuss to short (see NVDA recently) so I did the next best thing I could think of and bought tobacco stocks. Hopefully things will turn out like 1999/2000!

 

 

[Red Lion]

32 minutes ago, Spekulatius said:

Maybe time to revive this thread here.

I am thinking it may be good to make a directional bet against tech stocks here. My thinking is to use puts on QQQ because index options are the most liquid and QQQ is a decent large tech proxy. VIX is low currently which ought to mean that option premiums shouldn't  be too onerous. 

 

Thinking about Oct/Nov/Dec 2023 30 strike QQQ puts ~$4.7. I haven't used puts much, so what do people here tend to use in terms of duration or strike price. $300 strike is ~15% down from current levels of $355 currently which maybe is a bit much.

 

I welcome all input here.

 

 

I’m looking at some options here, consider a bear spread. Eg long the 345 pits and short the 340 puts or lower strike prices for a higher but less likely payoff. Unless we have a huge move down the bear spread should outperform. 

[brobro777]

I think tech companies in 1999/2000 hit the top due to valuations (Cisco at 150PE I think). This time around I think the top will be in due to sheer size - $2.8Trillion for Apple, $2.4Tril for MSFT seems just too big. 

 

Maybe these big techs will just go sideways for 10 plus years - while I collect fat tobacco stock dividends!

[Parsad]

2 hours ago, Spekulatius said:

Maybe time to revive this thread here.

I am thinking it may be good to make a directional bet against tech stocks here. My thinking is to use puts on QQQ because index options are the most liquid and QQQ is a decent large tech proxy. VIX is low currently which ought to mean that option premiums shouldn't  be too onerous. 

 

Thinking about Oct/Nov/Dec 2023 30 strike QQQ puts ~$4.7. I haven't used puts much, so what do people here tend to use in terms of duration or strike price. $300 strike is ~15% down from current levels of $355 currently which maybe is a bit much.

 

I welcome all input here.

 

 

 

Yup, pretty much all really large cap tech is around 25 times normalized earnings or higher.  In non-taxable accounts I'm back up to 50% cash (thanks to FFH, META and SHOP) and I've even taken a little in profits in my taxable accounts.  

 

I can never get the timing right when I think markets are starting to get a bit expensive, so I just hold more cash.  Also, certain sectors like retail/travel remain in damaged mode and are still under 12 times normalized earnings for many companies.  Consumers are still spending...so the correction could be out some ways still.

 

Cheers!

[Parsad]

https://www.cnn.com/2023/06/08/investing/bull-market-story/index.html

 

Cheers!

[Gregmal]

Well we haven’t gotten back to the old top. Maybe the thread should be “what’s next? All time highs or 3000”. 

[changegonnacome]

Isnt the puzzle we are all grappling with more akin to the below title:

 

“New secular bull market- 2023 to 20xx?…or the last thrashes of the 2009 to 2022 bull market?

 

I tend to start at the start - that market cycles are dominated by the credit & economic cycle…..and so I’m interested have we reset such that the median household (Joe Sixpack) has incrementally more money to spend moving forward than they did in the past (more precisely, given inflation, is the basket of goods and services Joe can command increasing relative to the year before)

 

My conclusion is that median US/EU household has both a dis-improving balance sheet & income statement (as measured in purchasing power)…..which is not the base recipe required for a new secular bull market in equities.

 

An improving balance sheet & household income statement - comes after inflation has been brought down below nominal wage increases……and when the yield curve steepens encouraging growing credit…when those two conditions are met Joe Sixpack gets to expand the basket of goods and services he consumes…….as opposed to the contracting or at best stagnant basket of goods and services Joe is getting now. Simples  

 

 

Edited June 9, 2023 by changegonnacome

[adesigar]

Costco thinks a recession is coming.
 

 

https://finance.yahoo.com/news/costco-execs-warn-looming-recession-175906184.html
 

 

[Spekulatius]

4 minutes ago, adesigar said:

Costco thinks a recession is coming.
 

 

https://finance.yahoo.com/news/costco-execs-warn-looming-recession-175906184.html
 

 

Oh my -this is seeping up from $DG  to $WMT to $TGT to $COST.... What's next - LVMH?

[Gregmal]

Recessions happen. We've had em before and will have em again. Costco still trades north of $500 a share. That was another one that supposed to be eaten alive on "valuation concerns"....folks should really just stop trying to be smarter than the market and just invest with a longer horizon. 

[throw123]

10 minutes ago, Gregmal said:

Recessions happen. We've had em before and will have em again. Costco still trades north of $500 a share. That was another one that supposed to be eaten alive on "valuation concerns"....folks should really just stop trying to be smarter than the market and just invest with a longer horizon. 

couldnt agree more, not that i am able to bring myself to buy costco but the rest of what you are saying...

[Gregmal]

13 minutes ago, throw123 said:

couldnt agree more, not that i am able to bring myself to buy costco but the rest of what you are saying...

Yea I actually did sell Costco around 560 but its a great example of the overblown nature of the fear mongering. Theres more attractive stuff out there, but even if its Costco, just DCA over time and you'll be fine. This had a few panic dips to low 400s last year. The only argument, which is the one we see regularly is...if you ignore all the good stuff and only bought Costco at the all time highs, you've lost 20% of something which pales in compassion to 5% treasuries. The truth is thats not how it works and even if you buy the top it certainly doesnt have to be your only buy. And over time this stuff works itself out. Just like...if you ignore all the benefits people got during covid, they were eaten alive by inflation in 2022. Or if you ignore the years stocks did well with inflation, theyre terrible inflation assets. Just make the time horizon longer and you won't fall for all this cherry picked nonsense. 

[mattee2264]

It is starting to rhyme a little of summer 2020. 

 

Big Tech is melting up because

a) Excitement about new technologies (back then cloud, now it is AI)

b) It is seen as a safe haven compared to cyclicals more exposed to the economy 

 

Also I am not convinced we are in a new cycle. Last year's bear market was mostly due to an inflation shock which hammered long duration assets such as bonds and big Tech. Once inflation started declining it set the stage for a V shaped recovery (in big Tech at least). 

 

And when it is so narrow based I do not know whether you can call it a new bull market. Narrowing leadership is very consistent with the final stages of a long bull market. Early stages of a new bull market generally have much wider participation and have legs because they usually coincide with a new economic cycle. 

 

Usually economic cycles are more or less synchronized with market cycles with market cycles slightly ahead due to their forward looking nature. So cyclicals are already pricing in some kind of recession later this year. And recessions usually last a year or so. So a recovery that sets the stage for a broad based bull market probably won't begin until the second half of this decade. 

 

As for what happens over the next year or two. I think it depends on a variety of interrelated factors:

 

a) Whether we have a hard or soft landing and the timing thereof. 

b) How well Big Tech do in hyping up AI growth opportunities and whether that can support or even elevate valuations that look quite rich compared to interest rates 

c) How much liquidity gets drained out of the economy by QT (or whether there will continue to be stealth QE under the guise of supporting the banking sector and government deficits)

d) How serious central banks are about getting inflation back to trend and whether they feel the relative insensitivity of the economy and markets to rate increases gives them room to go another 100-200bps higher before reaching the terminal rate

e) How all of the above affect market sentiment which at the moment seems pretty sanguine when you consider how many uncertainties there are at the moment