Have We Hit The Top?

[TwoCitiesCapital]

PPI came in @ 0.1% YoY. 

 

Much of 2022 was spent w/ PPI above CPI which is what led margin contraction as companies couldn't pass through price increases that were quite as large. 

 

Now for much or 2023, we've had CPI above PPI which could point towards margin expansion as prior prices increases are outpacing current input prices. 

 

I still expect corporate earnings to contract, but it could be the weakening of the dollar and the flip in the PPI/CPI relationship gives us a small reprieve while we wait for drop in consumer spending. 

Edited July 13, 2023 by TwoCitiesCapital

[Spekulatius]

Some of the consumer good companies have lost a lot of unit volume and don't seem to give a damn. I read CAG earnings release and they mention pricing +17%, but revenue is only up 6.6%. This implies they have lost 9% ij volume YoY.

 

https://app.tikr.com/stock/transcript?cid=26893&tid=2602239&e=1841627946&ts=2850614&ref=o94y6y

 

 

 

 

Seem kind of scary though to lose 9% of the volume, but what do I know. I think Pepsi also lost unit volumes. Do People really eat less Slim Jim's or Doritos or do they buy store brands?

Edited July 13, 2023 by Spekulatius

[UK]

10 minutes ago, Spekulatius said:

Some of the consumer good companies have lost a lot of unit volume and don't seem to give a damn. I read CAG earnings release and they mention pricing +17%, but revenue is only up 6.6%. This implies they have lost 9% ij volume YoY.

 

https://app.tikr.com/stock/transcript?cid=26893&tid=2602239&e=1841627946&ts=2850614&ref=o94y6y

 

 

 

 

Seem kind of scary though to lose 9% of the volume, but what do I know. I think Pepsi also lost unit volumes. Do People really eat less Slim Jim's or Doritos or do they buy store brands?

 

https://www.wsj.com/articles/pepsi-pep-q2-earnings-report-2023-2f9d2b0

 

Pepsi said its companywide organic sales, which strip out currency and merger impacts, rose 13% from a year earlier in the second quarter—stronger than analyst expectations for a 10% rise, according to Visible Alpha. This was largely due to big, double-digit price increases, as underlying sales volumes fell slightly from a year earlier. But in the Frito-Lay North America division, maker of snacks like Cheetos and Doritos, volumes actually rose 1%, bringing organic sales growth in the division to 14%. 

 

Edited July 13, 2023 by UK

[Gregmal]

So sinister 

[brobro777]

Boy this calling the top business is tough. Thank goodness I've taken enough ass kickings over the years to stay away from shorting! 

[KCLarkin]

41 minutes ago, brobro777 said:

Boy this calling the top business is tough. Thank goodness I've taken enough ass kickings over the years to stay away from shorting! 

 

Just looked at the start and OP was actually pretty good at calling the top. Question is whether he got long again. Calling the top is only half the battle. Getting back in at or near the bottom is even harder. 

 

I have a simple rule: if Keynes couldn't time the market, I am not even going to try...

[brobro777]

12 minutes ago, KCLarkin said:

 

Just looked at the start and OP was actually pretty good at calling the top. Question is whether he got long again. Calling the top is only half the battle. Getting back in at or near the bottom is even harder. 

 

I have a simple rule: if Keynes couldn't time the market, I am not even going to try...

 

Absolutely, you don't want to be like that Hussman dude who's been "defensive" for over a decade after 2008. I think the average annual return for 10 years in one of his funds is like -3% or something, oof 

 

 

[UK]

https://www.bloomberg.com/news/articles/2023-07-13/top-tech-stocks-power-an-18-month-surge-from-bear-to-bull-market

 

Call it a bubble or an artificial-intelligence-driven hype cycle. But here’s another way of looking at the rally that sent the tech-heavy Nasdaq-100 to its best-ever first-half performance: a narrative round trip.

 

Only about a half-dozen companies are responsible for virtually all of the advance, leading to a lot of investor angst over how precarious the gains feel. But it’s possible to look at the same set of facts and conclude that nothing has changed in the market over the past 18 months. The clutch of technology giants that dominate the market got crushed when it seemed as if the US Federal Reserve would drive the economy into a recession, and in 2023 that view has been reconsidered.

...

“The problem with market timing is it’s inconsistent with the underlying philosophy of investing in stocks, which is that stocks really are for the long run,” says Ed Yardeni, founder of Yardeni Research Inc. “And if you get out, you have to be smart enough to get back in.”

[Gregmal]

24 minutes ago, UK said:

The problem with market timing is it’s inconsistent with the underlying philosophy of investing in stocks, which is that stocks really are for the long run,”

Exactly. That and two other things. Valuations aren’t very heavily influenced by one or two year periods despite what everyone thinks. The second issue is that it seems everyone sits here and makes up reasons for everything; why “the market is doing this or that”, which is entirely influenced by hindsight bs and short term stories. 
 

Last few years for instance, stocks go up and it’s because of money printing, then they go down and it’s because “rates are rising so investors are requiring higher discount rates” or whatever. Both probably play a part in the narratives but in general just seem to be fodder for folks who need to explain and micro analyze everything when really you don’t need to be doing that. If stocks were down this year we d be hearing clamoring and bragging about “higher rates, competition from bonds, and not fighting the Fed”….All those things STILL exist. But because the market is up, now it’s rate cut hopium(even though this hasn’t occurred and no one important is saying it will), tech bubbles, and easing inflation(except from change! J/k). 
 

Over the years I’ve gone from doing the mandatory finance shit like always having Bloomberg and CNBC on, reading every headline article about macro, scouring Wall Street Journal, and “watching the Fed/big hedge fund guys”…to literally paying zero attention to any of that stuff and just focusing on specific investment situations that I think are interesting. I’ve also started evaluating investments through the lens that they are private investments or businesses I wholly own. Anyone see Buffett, Prem or Flatt day trading their company stock price fluctuations? And that is not to say that each of those dudes and their businesses have not seen absolutely massive potential macro clouds here and there over the course of the past 5 years…sometimes you just have to realize stocks are businesses. You need to think like an owner and not a piker.

Edited July 14, 2023 by Gregmal

[UK]

3 hours ago, Gregmal said:

Over the years I’ve gone from doing the mandatory finance shit like always having Bloomberg and CNBC on, reading every headline article about macro, scouring Wall Street Journal, and “watching the Fed/big hedge fund guys”…to literally paying zero attention to any of that stuff and just focusing on specific investment situations that I think are interesting. I’ve also started evaluating investments through the lens that they are private investments or businesses I wholly own. Anyone see Buffett, Prem or Flatt day trading their company stock price fluctuations? And that is not to say that each of those dudes and their businesses have not seen absolutely massive potential macro clouds here and there over the course of the past 5 years…sometimes you just have to realize stocks are businesses. You need to think like an owner and not a piker.

 

Something to think about. Thanks for sharing!

[mattee2264]

Bloomberg article isn't quite correct IMO as it understates the importance of inflation which was devastating to long duration assets such as bonds and technology stocks. 

 

Big Tech bottomed around the time that CPI inflation peaked at around 9.1% end of June. Since then there have been 12 straight months of CPI declines and that resulted in a V shaped recovery. 

 

And actually it is quite typical for there to be V shaped recoveries when bear markets are a result of shocks rather than structural factors such as recessions. 

 

Earnings were a secondary factor. But AI has helped investors overlook declining near-term earnings in Big Tech and partly because the recession was postponed we saw more of a stabilisation of earnings rather than a collapse in earnings (the way earnings collapsed during the dot com bust). 

 

The problems for the future outlook are that:

 

1) We aren't yet out of the woods. So what so far looks like an immaculate disinflation could still turn into a hard landing accompanied by a new surge of inflation which would put the Fed in a very difficult position.

 

2) The AI hype is already starting to die down a little. And more balanced and more informed experts are going to start to pour a bit of cold water over it. 

 

3) Even if we avoid an economic recession there will be a continuing corporate earnings recession and while markets may look through the next few quarters of weak earnings we have still seen on a company by company basis that earnings disappointments especially for the market darlings can result in severe punishment. 

 

 

 

 

 

[UK]

Not much on the current market temperature, but otherwise quite good memo from Marks on this whole market calling/timing issue:

 

https://www.oaktreecapital.com/insights/memo/taking-the-temperature

 

While on the subject of buying too soon, I want to spend a minute on an interesting question: Which is worse, buying at the top or selling at the bottom?  For me the answer is easy: the latter.  If you buy at what later turns out to have been a market top, you’ll suffer a downward fluctuation.  But that isn’t cause for concern if the long-term thesis remains intact.  And, anyway, the next top is usually higher than the last top, meaning you’re likely to be ahead eventually.  But if you sell at a market bottom, you render that downward fluctuation permanent, and, even more importantly, you get off the escalator of a rising economy and rising markets that has made so many long-term investors rich.  This is why I describe selling at the bottom as the cardinal sin in investing.

[changegonnacome]

On 7/14/2023 at 5:49 AM, mattee2264 said:

So what so far looks like an immaculate disinflation could still turn into a hard landing accompanied by a new surge of inflation which would put the Fed in a very difficult position.

 

Continues to be my base case......the Fed has stripped out credit growth from the source of funds equation what remains is wages.....and they appear to be motoring along at an unsustainably high level relative to productivity growth.....not enough for 5% inflation, no.....but something that bakes in the cake ~3.5%..........if 2% inflation is the target.......and long bond certainly believes it is.......then we are 50-75% away from the target rate.

 

I remain convinced that we have seen the pain free inflation roll off and that head fake is now done with.....albeit it's been a slow roll.......the made in china/ukraine/covid inflation is now dead in the data......they are two things that are likely to occur next.......either:

 

(a) we bounce along at ~3.5% headline, ~4%+ supercore, the Fed chickens out kinda heading into an election year and the economy does fine but the poorest shoulder the negative effects 3-4% inflation....and Dollar General loses more customers. In this scenario we are always open to inflation round trips...if we get another oil shock for example

(b) the Fed does one more hike & then nothing, because nothing is all that's required now that the Fed funds rate is positive by ~250bps.....the economy slowly unravels, and slow is good....such that you can loosen against a negative force with not a whole load of momentum behind it

(c) the Fed gets impatient and starts leaning into more hikes, start jawboning the market down & talking tough

 

Option B is the most likely and my base case now.......you've got to go hit those wages in some respect.....the credit tightning and source of funds phase from everything i can see feels 'done' to me....you hit those wages by through wage moderation or less optimally job losses......QQQ ATH, SPY 4500, 3.6% unemployment just isn't the backdrop that secures that wage demand & employer non-acquiescence dynamic thats gonna pull down nominal wage growth and by extension nominal spending growth against a 1% productivity growth economy.

 

The best soft-ish landing scenario I can think of is the pace of economic detorition accelerates soon...such that Nov/Dec/Jan....are a winter of employee job insecurity & a weak christmas spend period....both inform the transmission of 2023 to 2024....and we get a further moderation in core inflation on the foot of the weakness.....not good for company earnings, not good of the economy.....who knows the markets could do OK, this is the most anticipated recession of all time...they've had time to baten down the hatches so to speak...but fundamentally is SPY taking out ATH before inflation hits 2%...my gut is absolutely no way but lets see.

 

If your a conspiracy theorist (I'm not) and what I'm about to say is the same thinking that leads people to believe that the election was stolen in 2020 as it requires you to believe that US institutions in this case Federal & state judges plus election officials are rotten to the core - is the Fed is a vipers nest of democrats pulling for Biden.....and they put the recession on hold by effectively threading water on further rate hikes after the next one and temporality accept elevated 3.5-4% inflation so as not to 'interfere' with the election. They might even ease up on QT too - kind of stealth interest rate cuts. Then after Nov 2024....they ratchet things up and induce a late 2024/early 2025 recession required to bring inflation back to 2%.

 

Things haven't gotten that bad in Washington....I think the Fed chair & committee members are in the main honorable people...they are gonna continue to press the economy in a prudent way till it weakens the labor market.....knowing its the only way to 2 is by hitting the labor market/wages.

 

Edited July 17, 2023 by changegonnacome

[mattee2264]

12m of straight CPI declines from a peak of 9.1% to the current 3.1% and it is understandable that markets are being a bit complacent especially as we are still at full employment and not in recession despite 500bps of rate increases. 

 

Agree that there is a possibility of a stagflationary recession that could catch markets by surprise and tie the Fed's hands so they can't bail markets out the way they usually do. 

 

Market is very much positioned for disinflation and lower rates favouring growth companies. 

 

 

Edited July 17, 2023 by mattee2264

[Parsad]

Very interesting Barron's article feeding into what Greg has been espousing that consumers and corporations are in better shape than markets/media are letting on.
 

https://www.barrons.com/articles/americans-have-quietly-deleveraged-it-may-explain-the-economys-resilience-1896f8e0?siteid=yhoof2

 

Let's see what happens in the next 12-24 months...market perception seems as divided as politics these days.  Cheers!

[Parsad]

Equally interesting story on what is happening to CRE prices and holdings.  Cheers!

 

https://finance.yahoo.com/news/definitely-think-office-sector-crashing-154940388.html

[Gregmal]

Yup. Office is fucked. Predictions like that are pointless because it’s like predicting whether or not the sun comes up. 

[Parsad]

Another interesting stat on borrower rejection rate being higher than application rate!  Cheers!

 

https://finance.yahoo.com/news/more-americans-getting-turned-down-175230617.html

[Gamecock-YT]

Buyout groups raise debt against portfolios to return cash as dealmaking slows

 

 

https://www.ft.com/content/f23d9cd9-2650-4943-a9ac-eb262414e772

 

 

Private equity fund managers are borrowing against asset portfolios to return cash to investors as they struggle to exit investments, adding another layer of debt to the loans financing their corporate buyouts. Firms are increasingly resorting to the technique, called net asset value financing, because rising debt costs and concern over the economy are making it difficult for them to sell or list the companies they own.

 

..

 

But some analysts have voiced concerns that such borrowing heaps extra debt on buyout portfolio companies that are already grappling with higher borrowing costs and a weakening economic outlook.

[dealraker]

Like most, but not Greg (LOL!) and a couple others here on COBF, I have been visiting all the local businessmen informing all that getting "out" is the key to their very survival, the only way to avoid inevitable ruin.  Sell now, buy back later?  It seems to be less than understood by these types, the ones we are superior of - those lesser of knowledge who stay the course.  

 

I mention Ben Graham and such, but one guy enlightened me (actually I already knew but didn't spill) that the legendary buy/sell (based on all those enless stats in Intelligent Investor) guru of the past actually made half his gains with the one business he didn't sell.  I slithered away into the alley to re-think my presentation with this one.

 

The business I own a part of locally, the one of my brother-in-law and cousins (me no kids thus "they" get it too soon unfortunately)...well, we just bought another warehouse.  The pressure on our warehouse collection?  Well, it is getting pretty serious guys.  So cramming down my throat that all is going to hell-in-a-handbasket is a tough sell to me too...as a businessman.

 

So back and forth I sway, like branches in the breeze.  As a stock investor, you know the part where I can sell and like online posters have been doing in excess since 2011...brag about my huge cash levels...that I am out or that I want out and I want out now.  But as a local businessman?  Hell, "in" seems more logical?  

 

New so-big-it-shocks-me plants from Simens, Nucor, Eggar, Norfolk is re-using the yard they had shut, Toyota Battery, Honda, ...all within a mile of our warehouses and 285 acres of creek-rail-road facing property?  The land we were willing to sell but now we've decided to hold out because we hear some big time stuff be coming our way and the offers are from those we know who are always in-the-know.

 

Just when I knew changewasgunnacome...it dawn't after all.  Everybody is certain, it is black and white driven by endless facts and stats - on my side or the opponents one.  50 years and running, all gray to me- I am just not sure of a damn thing.

 

You'all keep me posted.  

 

 

[Gregmal]

I think when we own real businesses we are always having to do something, so we dont really need to do the "do something" thing. When we own stocks, and dont really understand or appreciate what we own, we tend to think, since we arent really doing anything, that the whole buy/sell all the time thing, is how you do something. Its certainly one of those weird things people do. 

 

Me? IDK, I think its great I can choose my assets and business partners, have people way more qualified than me do all the work, and just participate without lifting a finger. 

[dealraker]

And it was just a few months ago I wrote Greg stating, "Well, I just made the largest investment I've ever made...into JOE."

The price was $36.5 or so.

 

Having read Cialdini's book INFLUENCE a few times I was at least aware that my own lamblasting of JOE through the years both in speech and in dictation had put me in the serious place of silly/stupid/ignorant bias and such.  So I grabbed my head with my hands and twisted it around a little - then actually began some reading including annual reports and Greg's posts.

 

 

Edited July 18, 2023 by dealraker

[SharperDingaan]

2 hours ago, Gregmal said:

The pressure on our warehouse collection?  Well, it is getting pretty serious guys. 

I think when we own real businesses we are always having to do something, so we don't really need to do the "do something" thing.

 

The great thing with running real businesses is the continuous rubbing your nose in the 'value-add'. Execute competently, and you will do very well; the market is currently throwing up some great opportunities.

 

Our buying group ( with the help (& grant $) of an agricultural university) has been able to execute an agreement to grow our own greenhouse hops, at cents in the dollar. Long-term off-take agreement, solar panel electrics, leased greenhouse space at a ridiculous price, and no employees. Secure source of fresh hops year round (higher potency), in multiple varieties, payback period < 2 years. Greater variety of beers, and higher margins.

 

High volume stainless steel tanks at < 35% of new, transported and installed. Payback period < 1 year, ability to extend shelf life (shared contract brews) by weeks, and/or store soft water for high-margin speciality brews. Value add.

 

And if you want our groups brews? Either come to our breweries or brew-pubs yourself, or we can ship it you (Ontario only) - same as any other parcel. Value add!

 

SD  

 

  

 

Edited July 18, 2023 by SharperDingaan

[Spooky]

1 hour ago, SharperDingaan said:

And if you want our groups brews? Either come to our breweries or brew-pubs yourself, or we can ship it you (Ontario only)

 

What's your brand SD? I'll give it a try.

 

[SharperDingaan]

Not us, but one of those in our group, and representative. https://www.smallponybarrelworks.com/pages/club

Our preference is sours; Pony also benefits from a soft water source, which further enhances the taste. You might want to try the Smuv, All the Best Hats, or Thunderscaps.

 

Pretty much hard-to-get boutique beer, at $7-11/bottle, delivered. $10-15/pour in the brewpub, and priced against high-end Belgian imports. Drink less, drink better, keep the weight off, and save money; very 'anti-Bud' 

 

SD