Have We Hit The Top?

[changegonnacome]

17 minutes ago, Gmthebeau said:

I don't think all of what you have described is AI, some of this is just software automation

 

Thanks for proving my point.

 

Automation is AI that works, AI is automation that doesn't work.......yet.

[Gmthebeau]

1 minute ago, changegonnacome said:

 

Thanks for proving my point.

 

Automation is AI that works, AI is automation that doesn't work.......yet.

 

I guess if you classify all software automation is AI, but I don't think thats true.  AI is supposed to be the computer writing the code.  Much of the automation you described is a guy who sat at his desk and banged out the code.  I dont call that AI.

[changegonnacome]

10 minutes ago, Gmthebeau said:

I guess if you classify all software automation is AI, but I don't think thats true.  AI is supposed to be the computer writing the code.  Much of the automation you described is a guy who sat at his desk and banged out the code.  I dont call that AI.

 

Again you've basically proved my point.......when AI 'works' it ceases to be called AI.

 

11 minutes ago, Gmthebeau said:

Much of the automation you described is a guy who sat at his desk and banged out the code.  I dont call that AI.

 

"a guy who say at his desk and banged out the code" = biological intelligence

 

Automation that replaced "a guy" sitting at a desk = artificial intelligence 

[Gmthebeau]

3 minutes ago, changegonnacome said:

 

Again you've basically proved my point.......when AI 'works' it ceases to be called AI.

 

 

"a guy who say at his desk and banged out the code" = biological intelligence

 

Automation that replaced "a guy" sitting at a desk = artificial intelligence 

 

I have proven your definition.  I just don't agree with it that all completed software implementation is AI.   

[brobro777]

$3Tril AAPL here, $2.5Tril MSFT there, all at 30X plus and NVDA at $1Tril...

 

Boy that's rich baby, really rich, when it's not 2016 with 0% rates! 

 

 

 

 

[Gmthebeau]

6 minutes ago, brobro777 said:

$3Tril AAPL here, $2.5Tril MSFT there, all at 30X plus and NVDA at $1Tril...

 

Boy that's rich baby, really rich, when it's not 2016 with 0% rates! 

 

 

 

 

 

NVDA is approaching the same P/S ratio that CSCO peaked at in 1999.   Took CSCO decades to recover once it rolled over.

[brobro777]

25 minutes ago, Gmthebeau said:

 

NVDA is approaching the same P/S ratio that CSCO peaked at in 1999.   Took CSCO decades to recover once it rolled over.

 

Oh yea but this time around it's the sheer size of these companies that makes me scared. I own everything Apple and love their products and order from Amazon constantly but you need a lot of money to push multiple Tril companies up and where is that money going to come from when you can get 5% risk free? It doesn't take much to pop 20% a $2.8Bil company like JOE but multiple Trillions? 

 

Hoo boy I don't know... 

[Gmthebeau]

8 minutes ago, brobro777 said:

 

Oh yea but this time around it's the sheer size of these companies that makes me scared. I own everything Apple and love their products and order from Amazon constantly but you need a lot of money to push multiple Tril companies up and where is that money going to come from when you can get 5% risk free? It doesn't take much to pop 20% a $2.8Bil company like JOE but multiple Trillions? 

 

Hoo boy I don't know... 

 

All of them are overvalued.  It won't end well.  Apple has been using 90% of the GAAP profits to buyback stock.  At higher and higher valuations it has less and less an impact.   Nobody is going to buy a $3000 headset or whatever they came up with.  They can sell more watches and services but it barely moves the needle at this size.

[changegonnacome]

54 minutes ago, brobro777 said:

$3Tril AAPL here, $2.5Tril MSFT there, all at 30X plus and NVDA at $1Tril...

 

Boy that's rich baby, really rich, when it's not 2016 with 0% rates! 

 

 

I'm not claiming this for a second.....so take what I'm about to say with a pinch of salt -as I'm about to present a kind of counter view to my own personal opinion.......but.......and its a big but AAPL at 30 times earnings....might not be crazy at all:

 

There is one way to explain super high valuations in the Mega8...but lets call them what they are the Monopoly8.. in the context of Fed funds & bond yields being 5%++ which the 'book' says doesnt make sense- but perhaps it does make sense in a world where Central Banks are having trouble taming inflation...........and in a world where fiscal authorities are up to their tonsils in historical debt...are running annual fiscal deficits in the good times that are unprecenteted and are therefore likely to blow out in a recession....and then you've got POPULISM of the left and the right......which has shown almost ZERO interest in any kind of fiscal restraint.....such that its hard to see either US political party run a balanced budget any time soon if they get into power....and then to top it all off......you've looming and ballooning off-balance sheet entitlements of promises made in the past that not a single political has the kahunas to tackle even though they are crazy.....i.e. even more guaranteed fiscal deficits on top of the ones we are running today in a 3.5% unemployment economy are coming.

 

Put it altogether you've got something akin to slow rolling currency crisis that one might see in South America/Turkey......what happens in those countries might be occurring in US markets.....which is to say nobody wants to own the currency or indeed sovereigns debt......as both are going to be killed.....you want to own hard assets or inflation protected assets such as stocks....as protection against purchasing power destruction.......AAPL might be 30x times earnings..........but its likely a better vehicle to preserve purchasing power than the dollar and/or 10yr/30yr treasury bills.......if and its a big if.......we are staring down the barrel of some kind of come to Jesus moment for the US in terms of monetary & fiscal stuff.

 

Like I said I dont beleive this idea.......I think that there's enough, just enough ADULTS in the room down in D.C still.....to see some modicum of fiscal & monetary policy restraint......however........AAPL mooning to 40 times earnings etc. is exactly what you would expect to see in a world that had lost confidence in the dollar & US fiscal authorities. Its the stuff of crypto, gold bug & doomsday preppers wet dreams.....but you have to ask yourself sometimes when you see something that on surface looks a little nuts how it might not be that nuts after all.

Edited July 5, 2023 by changegonnacome

[brobro777]

1 minute ago, changegonnacome said:

 

I'm not claiming this for a second.....so take what I'm about to say with a pinch of salt -as I'm about to present a kind of counter view to my own personal opinion.......but.......and its a big but AAPL at 30 times earnings....might not be crazy at all:

 

There is one way to explain super high valuations in the Mega8...but lets call them what they are the Monopoly8.. in the context of Fed funds & bond yields being 5%++ which the 'book' says doesnt make sense- but perhaps it does make sense in a world where Central Banks are having trouble taming inflation...........and in a world where fiscal authorities are up to their tonsils in historical debt...are running annual fiscal deficits in the good times that are unprecenteted and are therefore likely to blow out if a recession....and they've you've got POPULISM of the left and the right......which has shown almost ZERO interest in any kind of fiscal restraint.....such that its hard to see either US political party run a balanced budget....and then to top it all off......you've looming and ballooning offbalance sheet entitlements of promises made in the past that not a single politican has the kahunas to tackle.....i.e. even more guaranteed fiscal deficits on top of the ones we are running today in a 3.5% unemployment economy.

 

Put it altogether you've got something akin to slow rolling currency crisis that one might see in South America/Turkey......what happens in those countries might be occurring in US markets.....which is to say nobody wants to own the currency or indeed sovereigns debt......as both are going to be killed.....you want to own hard assets or inflation protected assets such as stocks....as protection against purchasing power destruction.......AAPL might be 30x times earnings..........but its likely a better vehicle to preserve purchasing power than the dollar and/or 10yr/30yr treasury bills.......if and its a big if.......we are staring down the barrel of some kind of come to jesus moment for the US monetary/fiscal.

 

Like I said I dont beleive this idea.......I think that there's enough, just enough ADULTS in the room down in D.C still.....to see some modicum of fiscal & monetary policy restraint......however........AAPL mooning to 40 times earnings etc. is exactly what you would expect to see in a world that had lost confidence in the dollar & US fiscal authorities.

 

Oh yea I wouldn't be surprised if these big cap tech companies continue to grind higher. Why not 40X? 

 

But over the long term like a decade.... One guy I've been reading for years has an interesting thought experiment - will AAPL bonds maturing in 2033 with yield of 4.35% produce higher returns than the AAPL stock in the coming decade? https://divestor.com/?p=11763. Maybe! 

 

 

[changegonnacome]

Just now, brobro777 said:

AAPL bonds maturing in 2033 with yield of 4.35% produce higher returns than the AAPL stock in the coming decade? https://divestor.com/?p=11763.

 

Not if US fiscal keeps ballooning deficits.......driving inflation up.....and forcing the Fed to hold rates at ever higher and higher levels.

 

In that scenario.........where the dollar in your pocket is shrinking in value.....and where bonds issued in 2020 arent trading at par.......Apple, with their monopoly ecosystem, can sit there and potentially push through with perfect pricing power each inflation tick up......means that Apple at 30x times could be a bargain as mechanism by which you get to PRESERVE purchasing power..

 

Like I said....I don't believe this......I see just about enough sensible people in D.C. to ensure the US doesn't go banana republic this go round........but my god its getting close.

[Gregmal]

14 minutes ago, changegonnacome said:

 

I'm not claiming this for a second.....so take what I'm about to say with a pinch of salt -as I'm about to present a kind of counter view to my own personal opinion.......but.......and its a big but AAPL at 30 times earnings....might not be crazy at all:

 

There is one way to explain super high valuations in the Mega8...but lets call them what they are the Monopoly8.. in the context of Fed funds & bond yields being 5%++ which the 'book' says doesnt make sense- but perhaps it does make sense in a world where Central Banks are having trouble taming inflation...........and in a world where fiscal authorities are up to their tonsils in historical debt...are running annual fiscal deficits in the good times that are unprecenteted and are therefore likely to blow out in a recession....and then you've got POPULISM of the left and the right......which has shown almost ZERO interest in any kind of fiscal restraint.....such that its hard to see either US political party run a balanced budget any time soon if they get into power....and then to top it all off......you've looming and ballooning off-balance sheet entitlements of promises made in the past that not a single political has the kahunas to tackle even though they are crazy.....i.e. even more guaranteed fiscal deficits on top of the ones we are running today in a 3.5% unemployment economy are coming.

 

Put it altogether you've got something akin to slow rolling currency crisis that one might see in South America/Turkey......what happens in those countries might be occurring in US markets.....which is to say nobody wants to own the currency or indeed sovereigns debt......as both are going to be killed.....you want to own hard assets or inflation protected assets such as stocks....as protection against purchasing power destruction.......AAPL might be 30x times earnings..........but its likely a better vehicle to preserve purchasing power than the dollar and/or 10yr/30yr treasury bills.......if and its a big if.......we are staring down the barrel of some kind of come to Jesus moment for the US in terms of monetary & fiscal stuff.

 

Like I said I dont beleive this idea.......I think that there's enough, just enough ADULTS in the room down in D.C still.....to see some modicum of fiscal & monetary policy restraint......however........AAPL mooning to 40 times earnings etc. is exactly what you would expect to see in a world that had lost confidence in the dollar & US fiscal authorities. Its the stuff of crypto, gold bug & doomsday preppers wet dreams.....but you have to ask yourself sometimes when you see something that on surface looks a little nuts how it might not be that nuts after all.

I think the general idea you’re onto is exactly how one wants to view this. The best part is that no one is forced to own Aapl at 30x. Also, no one is forced to short it either. But once you realize that stocks represent businesses and not just paper, the attractiveness of selective exposure to certain types is greatly amplified. Cash is and has been junk. Bonds are not much better. A business that can adapt to the environment and pass on inflation/currency issues to the consumer is very much what you want to own. Those $40 vodka sodas will still sell when they’re $45. So do the $30k court side seats to Spike Lee.

[changegonnacome]

Yeah I wanna be careful here - what I'm outlining is the US becoming something akin to a banana republic such that AAPL at 40 times earnings makes total sense....which I don't believe.....however owning AAPL even at 30x earnings.....is not a mechanism by which you grow your purchasing power.....and to me in some respects AAPL at 30x represents something more akin to an insurance product....a wealth protection insurance product.......... if held for a five year plus duration untouched.

 

The trick as you and I agree on @Gregmal is to find Apple-esque businesses with the same pricing power/inflation hedge dynamics that are trading at much much lower valuations than AAPL such that they provide purchasing power insurance while at the same time providing the opportunity to expand ones purchasing power over time too.

 

I've seen them referred to as 'secret moat' companies and I think thats exactly right.

[Gregmal]

Yup. And that’s why 3-5% inflation is pretty cool. These sort of companies can pass that on and then some, all day. As long as it’s there, people expect it. The vodka sodas don’t go from $40 to $42. They go to $45. Year after $50. Club seats go up 5% but have almost zero incremental maintenance cost so that 5% is pure profit. Same sorta thing is what makes the 30 year fixed so great. Taxes and insurance can increase, but with those inflationary increases, the outstanding principle gets devalued further. Rental income spikes the whole number, more than negating the other, smaller component increases. 

[changegonnacome]

16 minutes ago, Gregmal said:

And that’s why 3-5% inflation is pretty cool.

 

For some.......the Dollar General customers (or are they food bank customers now?  ) would disagree of course........and 5% inflation is a pretty cool way to introduce instability into your society with all the inherent unpredictable results that can ensue.......AOC for President anyone?........5% inflation might be a good way for MSGE to compound at a double digit CAGR (I'm all for it)......but what good is winning that battle.......if you lose the war.......President Bernie Sanders thinks 5% inflation is pretty cool too. Get me?

Edited July 5, 2023 by changegonnacome

[UK]

4 hours ago, Gregmal said:

If nothing else, wouldnt somewhat of a contrarian approach be to get long-ish the non supercap tech and even short the index? Bet that beats bonds over the next 6-12 months as well.

 

Yes, I think moving to something more reasonably priced or even what could still be considered cheap (or even some cash) is a logical thing to do, especially if market keeps doing in 2H, what it did in the 1H. I already moved maybe about halfway this direction Vs start of the year, by reducing leverage and adding somewhat to non big tech (mostly FFH and also some JOE). But timing this right is very difficult and tiring and I still own 2 of these 8 darlings.

[UK]

4 hours ago, Gmthebeau said:

 

I traded TSLA, AAPL, GOOG, MSFT, and AMZN off the bottom but sold all of them recently.  I think they are all back to too expensive.  Doesn't mean they won't go higher but they are likely to give it all back and then some at some point.  Buffett also held Coke in 1998 at a PE of nearly 50.  He later admitted he should have sold it.

 

Interesting. May I ask what have you bought instead of these:)?

 

[Parsad]

On 7/4/2023 at 12:19 AM, Monsieur_dee said:

Did you set up the HELOC specifically for that opportunity?

 

Yes.  I don't use it for anything, but I thought if a great opportunity came my way...and the HELOC is only about 15% of my entire portfolio.  So it was minimal leverage, but still the first time I used leverage...probably the last time as well!  Just don't need it.  Cheers!

[Parsad]

On 7/4/2023 at 6:54 AM, MikeL said:

we all know how hard it is to call the exact top, it seems like you did it. May I ask what make you identify it in late 2007 rather than earlier, a lot of people would have sold out prior to that time.

 

Just reading about crazy mortgage loans being granted got me scared...then I started to get all this information from Fairfax on what they were doing with CDS...and just from my own analysis, banks were at 18-1, 20-1 asset to equity leverage and you knew there was at least some more shit on their books.  No idea some exposure at brokers, mortgage companies were closer to 80-100 to 1 until the dominoes slowly started falling in very early 2008...and then I started reading stuff about Fannie and Freddie, as well as mortgage insurers like PMI, etc. 

 

There was no way you could have missed it...as plain as it was in 1999, but this time much scarier since these were huge institutions with massive leverage.  If you weren't starting to get worried in 2007, you should have been by early-2008.  For those that remember and went through it, we were as close as we've ever been to the Great Depression.  Without government intervention, it really would have been right up there...maybe even worse on a global basis!  Pandemic was financially painful and unusual for business operators, but nothing like the GFC.  Cheap valuations during the Pandemic were a gift...during GFC...you were really betting on government intervention and thankfully it came!  Cheers!

[Parsad]

3 hours ago, Gmthebeau said:

 

All of them are overvalued.  It won't end well.  Apple has been using 90% of the GAAP profits to buyback stock.  At higher and higher valuations it has less and less an impact.   Nobody is going to buy a $3000 headset or whatever they came up with.  They can sell more watches and services but it barely moves the needle at this size.

 

Yup, and they've delayed the amount of the headsets due to production issues...now only planning 400,000 units through 2023.  All of the big tech stocks are expensive...GOOGL might be the cheapest actually now.  At 5% risk free rate...30 times earnings or more for these stocks...hmmm!  Cheers!

[Gmthebeau]

1 hour ago, UK said:

 

Interesting. May I ask what have you bought instead of these:)?

 

I have gotten more defensive.  The easy money has been made from last fall.  I think the market may grind higher from here but I don’t have a lot of conviction here.  That said the most recent things I bought are PYPL, UL, HEINY, SR, DEO

[mattee2264]

I think certainly for the higher quality names within the Enormous Eight you are trading off valuation risk for the other types of risk which are far lower for them than the run-of-the-mill S&P 500 company. 

 

For example:

-Inflation risk: well they have fantastic pricing power

-Recession risk: they provide essential products and services people cannot live without

-technology risk: they are innovators at the forefront of emerging developments 

-competitive risk: they completely dominate their markets and can simply buy up any emerging competitors 

-financial risk: they generate huge amounts of cash, have huge amounts of cash on their balance sheet and little need for debt and higher interest rates actually benefit them to the extent they can earn more money on their cash

 

So little wonder they are seen as a safe haven in an increasingly uncertain and fast changing world. 

 

But of course the reason high valuations are dangerous is because they are largely psychological and reliant on investors willingness to pay a 50-100% premium to the market multiple (and a much higher premium if you take the market multiple ex Enormous Eight) because of their desirable qualities. 

 

I think a particular challenge to watch out for is how they'll do if we do go into recession. They are cyclical to some degree and investors have been used to their earnings going up every year at a rapid clip and while that hasn't been the case over the last few years they've at least managed to maintain their earnings. But if earnings start to decline then that could spook investors. 

 

 

 

[UK]

12 hours ago, Parsad said:

 

Yup, and they've delayed the amount of the headsets due to production issues...now only planning 400,000 units through 2023.  All of the big tech stocks are expensive...GOOGL might be the cheapest actually now.  At 5% risk free rate...30 times earnings or more for these stocks...hmmm!  Cheers!

 

I think maybe 10-year yield is more appropriate for risk free rate measure and currently it is at ~4 per cent. So bonds trade at like 25x multiple with no growth, but more importantly for the longer term, with no inflation protection.  So assuming business such as Apple is as safe as heaven (lets trust WB here:)), global, with a strong pricing power and still growing, it is easy to rationalize choosing such business over bonds at the same or even somewhat higher multiple as it trades currently (25 vs 30). What would be your choice if you had to make a decision and lock it in for the next 10 or more years (and maybe this is the thinking of BRK)? However you have to draw a line somewhere, because at very low or zero yields this kind of math will lead you to the moon:). And in reality I am not sure at all that all of these big tech companies are completely risk free from some disruption risk (including AI) in the next 10 years, or even geopolitical (Apple and China?) or other risks (regulatory etc). So maybe for me anything of such size trading above 25x or 30x makes me very uncomfortable. Especially after seeing were those same, very special, companies (and I would definitely would not put all 8 in that category), were trading just some 6-8 month ago:). GOOGL and META both still trades at estimated 20x for the next year, almost in line/not much above the market, maybe still nothing to worry about, especially if you are sure AI will not disrupt search in any negative way and META will not fall into some another, real or imaginary, crisis:). And the sentiment around them is completely different from the last year, but maybe it will last much longer and gets even more positive (as we also seen before). So again I could rationalize to continue owning some of these big tech. But on the other hand the interesting exercise to contemplate: if and how much of these big tech companies I would put in the portfolio today if by some accident I was about to start with 100 per cent cash? 

 

Edited July 6, 2023 by UK

[Spekulatius]

Looks like the top is in for ChatGPT. In any case, some of the initial excitement seems to wear off:

 

[UK]

53 minutes ago, Spekulatius said:

Looks like the top is in for ChatGPT. In any case, some of the initial excitement seems to wear off:

 

 

https://www.wsj.com/articles/ai-boom-stems-techs-downturn-a669b4a3?mod=hp_lead_pos1

 

SoftBank Group Chief Executive Masayoshi Son said last month that he plans to end a lull in investing and focus on AI after the ChatGPT chatbot rekindled his excitement about the future. “The time is approaching for us to go on the counteroffensive,” Son said at the annual meeting of the Japanese technology-investment company. “I want SoftBank to lead the AI revolution.”