Have We Hit The Top?

[Gregmal]

45 minutes ago, TwoCitiesCapital said:

I dunno - real returns are still negative. Even after returning to bubble-like valuations to pull indices higher on declining earnings, you're still -7 or -8% in real terms for the last 24 months.

We keep coming back to this but inflation didnt start 12-24 months ago. Theres plenty thats done well over 1/2/3 year time horizons dating back to the start of the inflation which was summer 2020. If we redefine holding periods constantly of course they'll arrive at the desired conclusion but I think it simply makes sense to start the goalposts where inflation starting spiking them and bring them to current day. 

 

Not every single year, or every single TTM holding period, in every asset class, all the time, will be positive or "the best" asset allocation decision, however its very clear what has durability and resiliency and what doesnt. 

Edited July 27, 2023 by Gregmal

[mattee2264]

US GDP 2.4% in Q2. CPI inflation latest reading 3.1%. Still at pretty much full employment. Fed supposedly near the end of their rate hiking cycle and saying they could decrease rates before inflation returns to target. AI promising improved productivity and an extended growth runway for Big Tech. 

 

No wonder sentiment is pretty bullish right now and we are not that far off all time highs. 

 

 

[changegonnacome]

9 minutes ago, mattee2264 said:

saying they could decrease rates before inflation returns to target.

Well what they said is that the nature of disinflation on core would be such that once it began to move down it would have a certain momentum to it…..therefore waiting to hit 2% before cutting isn’t necessary if enough downward momentum & progress was observed.

 

The nature of Fed induced disinflationary cycles…..is that they always end up behind the curve…..which is to say the Sahm rule comes into play…..once you push unemployment 0.5% above the previous 12m low….whether you like it or not…..or you cut or not…unemployment is gonna make another undesired incremental 1.5% move up.

 

Trust me on this one - the Fed cutting rates is on the balance of probabilities not going to be something to look forward too…..it would be sign that the macro is deteriorating in a way that is making the Fed uncomfortable and they are trying to rescue the situation.

[Sweet]

9 hours ago, Spooky said:

I'm in the other camp, mainly just due to the reality that home prices where I live in Toronto are out of reach for most people and some differences between the US and Canada (average price in the Greater Toronto Area is $1,182,000). However, I think there are real advantages to renting over owning and investing the difference in the market.

 

The first is that here my rent increase is capped at 2.5% per year - my landlord is taking all of the interest rate risk (in Canada you can only get a fixed rate mortgage for 5 years).

 

Also, maintenance expenses are all borne by the landlord and included in my rent. The washer and dryer needed to be replaced and the landlord replaced it.

 

But the key thing is really flexibility. If I lose my job tomorrow I just need to give 60 days notice and I am out of here. There is also no idiosyncratic risk of having a majority of wealth tied up in a single somewhat illiquid / immovable asset.

 

Also, in Canada you can't write off your mortgage interest from your taxes on your principal residence but you can if you borrow for investment purposes. I haven't been using any debt but this could be a huge tax benefit.

 

Lastly, when I back tested the results of the TSX with dividends re-invested versus the growth in the average home value in Toronto, the TSX outperformed by 4X (and this doesn't take into account maintenance costs on a house). So there is the opportunity cost of tying up a good chunk of capital in a house.

 

My results have been very good and I haven't even used any leverage, building my net worth from negative to over the price of an average home in 7 years. I also think the longer the time horizon the more this strategy will outperform as dividends get reinvested and the higher rate of compounding works its magic (i'm actually generating significantly positive dividend and interest income every month / quarter). The beautiful thing too is that in the long run at the end of the day I will have a portfolio / income stream that is not tied to any specific physical location giving me the flexibility to move or travel anywhere I like.

 

 

Lol, if it’s Canada you’re just F’d

[Spooky]

14 hours ago, Sweet said:

Lol, if it’s Canada you’re just F’d

 

Hahaha agreed.

[dealraker]

As far as economics, forecasting, and blunt plain simple common sense Greg has stomped the competiton to smitherines here now for some time.  I'm polar opposite of someone like many here who is always certain, I'm "Mr. Everything's Gray" so I'm more of a reader and observer.  But the in-your-face obvious winners/losers is in-your-face shouting at you.  Greg 100; competition 0.  

 

Equities and inflation?  The real question is "How old are you and how often are you mandated to keep score?"   If I could describe online forums in a short paragraph I'd surely mention that all are intense/obsessive short term competition from those claiming a long term focus.  So when inflation swings ahead of equities, or when equities simply aren't popular and are the dominant part of the portfolio, then the obsession with finite score keeping is going to drive unsure-of-themselves stock holding investors who read forums into insanity.

 

Businesses, especially pretty good businesses, are over time much more predictable than is inflation or the market itself.  A few of us just stay with business and read the rising and falling emotions.  Isn't long until you can't even remember how many cycles of such you've lived through.  

 

 

 

 

 

 

[changegonnacome]

https://www.bloomberg.com/news/articles/2023-07-28/us-employment-costs-rise-at-slowest-quarterly-pace-in-two-years?srnd=premium&sref=7zqHEcxJ

 

This is important - and consistent with what I'm watching.......and hell you know it points to a soft landing.....its one reading.....so doesn't make a soft landing.....but wages cooling and moderating like is how 'made in America' inflation gets solved.

 

The Fed should be very pleased with this reading

Edited July 28, 2023 by changegonnacome

[Gregmal]

1 hour ago, dealraker said:

As far as economics, forecasting, and blunt plain simple common sense Greg has stomped the competiton to smitherines here now for some time.  I'm polar opposite of someone like many here who is always certain, I'm "Mr. Everything's Gray" so I'm more of a reader and observer.  But the in-your-face obvious winners/losers is in-your-face shouting at you.  Greg 100; competition 0.  

 

Equities and inflation?  The real question is "How old are you and how often are you mandated to keep score?"   If I could describe online forums in a short paragraph I'd surely mention that all are intense/obsessive short term competition from those claiming a long term focus.  So when inflation swings ahead of equities, or when equities simply aren't popular and are the dominant part of the portfolio, then the obsession with finite score keeping is going to drive unsure-of-themselves stock holding investors who read forums into insanity.

 

Businesses, especially pretty good businesses, are over time much more predictable than is inflation or the market itself.  A few of us just stay with business and read the rising and falling emotions.  Isn't long until you can't even remember how many cycles of such you've lived through.  

 

 

 

 

 

 

I had the same problem in 7th grade Trig as I did when working with people managing money. It often goes as follows...

 

holy shit, how did you arrive at that answer so quickly?

 

Me? IDK, just kinda made sense to me. Did it in my head.

 

Show your work!

 

Why?

 

Cuz, you have to or it doesnt count!

 

Me? Nah...its a waste of time. 

 

 

I got a C in Trig and had to retake it in 8th grade because the teacher insisted showing your work was 50% of the credit. I just kinda cared about being in the right place at the end of the problem. To my knowledge he's still working....

Edited July 28, 2023 by Gregmal

[james22]

"Who asked you to do that?" is the "Show your work!" of the working world. 

[Saluki]

Maybe because I was a M&A lawyer, I'm programmed to look for things that can go wrong, but lately I've had a feeling that we're due for a correction.  "The market" which mostly index funds buying the magnificient 7 is doing well, but when I look at my portfolio of individual stocks, which is doing well, I can't think of anything cheap enough to buy more of. I see a lot of okays, but nothing really says "cheap," except for Televisa, but I don't see a catalyst there yet to make it not cheap.  Of course, because I didn't buy it, it went up 10% in the last couple of days.  But, if I had bought it, it would be down because the ancient curse is relentless and unforgiving.  This morning I decided to buy some BTI if it was still under $34 today, so the curse made it $34.08.  Damn you, curse! 

 

If the index funds are all cap weighted and fund flows are driving the momentum, then a few layoffs (or fear of them), or some inflation could make people contribute less and then the big run up will be a big run down.  Last year I saw so many people asking on Facebook (in forums like ChooseFI) whether they should go to cash because "higher interest rates will make the market go down" and buy back cheaper later. These are people who are no where near retirement age. How much did they miss out on?  It doesn't take much to cause a stampede. 

 

My thought is that if I happen to have cash when a crash hits, great. If not, just stick to the process and the guard rails I set in place for myself :  sell only after earnings release (data point vs noise) or price target is reached.  If I have a certain % in mind for a stock, but something else I own is better buy, buy the better deal. If I buy, don't sell for 3 years, unless something in your thesis is proven wrong. Do your due diligence for every purchase (10k, investor presentation, CEO interviews, COBF Forum) before buying. 

[Gregmal]

Don’t worry though, because when the next 5-10% down move occurs, the guys who missed everything will have called it, will scream and tweet SUPER loudly and proudly, and be totally vindicated. Lol

Edited July 28, 2023 by Gregmal

[brobro777]

Oh man I want to short the market so bad

 

I guess I have no choice but to add to my position in Philip Morris 

[UK]

 

[UK]

https://www.bloomberg.com/news/articles/2023-07-28/-dangerous-consensus-has-investors-betting-it-all-on-buoyant-markets?srnd=premium-europe#xj4y7vzkg

 

What once was a posture of skepticism has morphed into something approaching investor euphoria. Cash and hedges are out, replaced by demand for everything from small caps to meme stocks. Fueling the surge is data showing the US economy is thriving amid mounting evidence the Federal Reserve is beating inflation. All the optimism has sent the S&P 500 to the brink of its sixth advance in seven months and pushed prices in the Nasdaq 100 to almost 35 times profit. It’s manna for bulls — even as it leaves them with precious little wiggle room should anything in the economy or monetary policy not unfold as hoped. “It’s dangerous and consensus, but it’s late July, so who feels like fighting it?” said Peter Tchir, head of macro strategy at Academy Securities. “We are now at stage where people feel obligated to fully commit capital. Hawkish Fed not an excuse right now, and claiming recession is hard to justify as well.”

 

Good news on the economy is sucking more and more investors into risky assets. A steady expansion in speculative spirits has pushed equity positioning to the highest level since January 2022. Investors have a clear overweight exposure to stocks after long refusing to budge off their underweight positioning, according to Deutsche Bank AG. At the same time, a wide array of hedging metrics is showing low demand for downside protection. Put premiums for both Invesco QQQ Trust Series 1 (QQQ) and the SPDR S&P 500 ETF Trust (SPY) are hovering around the lowest levels in at least a decade, according to RBC Capital Markets. Additionally, investors are buying more calls to chase the rally while spending less to protect their gains. “The market is just not ready to let go of the positive narrative. Hedging is outrageously cheap,” said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. “There’s more driving of demand of calls from folks who are underperforming than those who have done well and need to hedge.”

 

 

[Libs]

20 hours ago, brobro777 said:

Oh man I want to short the market so bad

 

I guess I have no choice but to add to my position in Philip Morris 

 

That Bloomberg article is eye-opening. QQQ puts ARE cheap. ATM (385) December 2025's are at $35. So if QQQ drops from 380 to 345 you break even. That's just a 10% drop. And you have ~28 months!

 

If QQQ retraces to where it started 2023- at 260- you make 2.8 to 1 at expiry.

 

Meanwhile the ATM Dec 2025 calls cost twice as much: $70. Yikes!

 

I may dabble in this.

 

Anyone have other hedging ideas?

 

P.S. Not experienced in this. Do your own math

 

https://www.optionsprofitcalculator.com/calculator/long-call.html

 

 

Edited July 29, 2023 by Libs

[Spooky]

12 hours ago, UK said:

What once was a posture of skepticism has morphed into something approaching investor euphoria. Cash and hedges are out, replaced by demand for everything from small caps to meme stocks

 

This was all so predictable. FOMO rules the markets now.

 

[Jaygo]

3 hours ago, Spooky said:

 

This was all so predictable. FOMO rules the markets now.

 

Its was predictable but also pretty tough to act on. My macro feels have been damn good the last few years, My equity picks not so much.

 

I think we are in a period of perfect harmony between some consumer money still available for use, plus were lubed up and ready for higher prices so we are overjoyed to get some 2x4's at 3 bucks a pop again, ribeye's at 13 a lbs ect.. Now most companies are still making excess profits off the continued spend. Graco is a bellwether for me and their contractor segment has sucked for 6months. Pepsi the behemoth has grown revenue but not volume. I phone sales down 6% y/y.  

 

That tells me that some of us have cash and are doing well, lots of us in the middle class are starting to tighten our belts but its summer so f..k it!  And im guessing a whole bunch are actively trying to cut spending and this is why volumes are down in many segments. 

 

Time will tell, id say the fall will bring back the vol and scary headlines.

[Gregmal]

Think folks are also underestimating the ability for companies to be flexible. Everyone reporting this Q is boasting about their pricing power. They won’t outwardly use the word margin…like look at Pepsi earnings, they go out of their way to avoid saying it, but all that “inflation”, at least in many of the consumer product segments, was basically price gauging. If things weaken they’ll give some of that back in return for volume.

Edited July 30, 2023 by Gregmal

[brobro777]

10 hours ago, Libs said:

 

That Bloomberg article is eye-opening. QQQ puts ARE cheap. ATM (385) December 2025's are at $35. So if QQQ drops from 380 to 345 you break even. That's just a 10% drop. And you have ~28 months!

 

If QQQ retraces to where it started 2023- at 260- you make 2.8 to 1 at expiry.

 

Meanwhile the ATM Dec 2025 calls cost twice as much: $70. Yikes!

 

I may dabble in this.

 

Anyone have other hedging ideas?

 

P.S. Not experienced in this. Do your own math

 

https://www.optionsprofitcalculator.com/calculator/long-call.html

 

 

 

I think you're probably right about those options and plays like that could pay off but things now feel like 2006 when I kept shorting just to get my ass kicked over and over

 

And the nagging question remains - Damnit why didn't I just 10X my money in 6 months with Carvana this year...

[Spooky]

2 hours ago, Jaygo said:

Its was predictable but also pretty tough to act on. My macro feels have been damn good the last few years, My equity picks not so much.

 

Ya, definitely a few lessons to take away. I think the key is to gauge market psychology / sentiment and see if it lines up with reality. At one point sentiment reached lows that had not been seen since the financial crisis based just on fears of a potential recession happening with the WSJ running scary headlines each day although the conditions were nowhere near as dire as the crisis. This is the time when you have to be determined and brave and buy. Luckily I was able to allocate a lot of my salary to equities over the period.

 

 

2 hours ago, Jaygo said:

Time will tell, id say the fall will bring back the vol and scary headlines.

 

I agree with this, a lot of economic data is starting to deteriorate but the market is just gaining momentum. Saw an article that IPOs might be in the cards soon which is always a good indicator to be more cautious. Definitely feels like there will be some more volatility in the near future. Who knows, I'm just going to patient, build up some more spare capital and see if I can find some good opportunities.

[brobro777]

Maybe markets will keep running to SPX 5000 to end of year. Huge $3Tril companies at 30X with risk free rates at 5% probably means mediocre returns over the next 10 years but it can just keep going for now and hey, maybe the stranglehold AAPL has the younger people means 30X is justified

 

Perhaps it's not late to make a shotgun bet on a basket of beaten down garbage - Carvana makes me mad jelly

 

[UK]

One more: 

 

https://www.bloomberg.com/news/articles/2023-07-29/stocks-crush-year-of-bond-in-biggest-market-sentiment-shift-since-99?srnd=premium

 

“What’s happened, particularly in the US stock market, has taken a lot of people by surprise,” he said.
SentimenTrader suggests the shift may endure. Unlike in the past, corporate insiders are big buyers, while technicals like subdued volatility and bullish options are keeping equity sentiment elevated. The only other two instances when stocks versus bond sentiment were so wide apart were in 2003 and 2009 “both coming out of protracted bear markets and indicating a dramatic shift in investor expectations,” said Jason Goepfert, director of research at Sundial Capital Research and SentimenTrader, which analyzes futures positioning, surveys, options activity and fund flows. “Both preceded new bull markets.”

[Gregmal]

If the recession doesn’t unfold, what’s the backdrop? An environment where the consumer is healthy, prices still steadily declining, employment strong and wages moving up, along with rate cuts probably 6-12 months out. That seems bullish to potentially wildly bullish.
 

Rates went up to “fight inflation” and as inflation is done you better believe the Fed will acknowledge the harm it’s doing to the average citizen as far as housing goes so you won’t need “something really, really bad” to occur for rate cuts, which is what the academics are preaching…frankly I think they start cutting q1/2 2024 which will tank mortgage rates. 
 

Many of the negatives and naysayers are wayyy too academically oriented and relying on first level logic such as “every time this has happened, such and such has happened”(which totally ignores what is happening in the real world in favor of the textbooks) but this is plainly poor logic simply because markets do evolve and especially in todays era of information, much more quickly than folks think. Like everyone was and has been prepared for higher rates since what? 12-18 months ago? Corporations already wisely termed out debt. We were assured inflation would cripple profits and instead they are now expending margins. Think we just need to be flexible mentality and eb and flow with how things unfold. 

[rohitc99]

48 minutes ago, Gregmal said:

If the recession doesn’t unfold, what’s the backdrop? An environment where the consumer is healthy, prices still steadily declining, employment strong and wages moving up, along with rate cuts probably 6-12 months out. That seems bullish to potentially wildly bullish.
 

Rates went up to “fight inflation” and as inflation is done you better believe the Fed will acknowledge the harm it’s doing to the average citizen as far as housing goes so you won’t need “something really, really bad” to occur for rate cuts, which is what the academics are preaching…frankly I think they start cutting q1/2 2024 which will tank mortgage rates. 
 

Many of the negatives and naysayers are wayyy too academically oriented and relying on first level logic such as “every time this has happened, such and such has happened”(which totally ignores what is happening in the real world in favor of the textbooks) but this is plainly poor logic simply because markets do evolve and especially in todays era of information, much more quickly than folks think. Like everyone was and has been prepared for higher rates since what? 12-18 months ago? Corporations already wisely termed out debt. We were assured inflation would cripple profits and instead they are now expending margins. Think we just need to be flexible mentality and eb and flow with how things unfold. 

+1

[Gregmal]

I think some of this just highlights the biggest problem that many otherwise rational and intelligent market participants have…they are fully convinced that being a good investor is about “not losing money” and they quote and misquote guys like Buffett all the time and totally misread everything because they’re chickenshit scared or paralyzed by fear or search endlessly til they find a reason to convince themselves that it’s tough sledding out there. It’s masked under the guise of “risk management” but it’s stupid. You don’t go to a BBQ or buffet and then sit around trying to find excuses and reasons not to eat. Same way you don’t go to the stock market and try to find reasons not to invest. Rather you go to the stock market to make money. So priority one should not be all that other bullshit. It should be finding ways to make money. Then once you have them, you approach the risk mitigation strategies and positioning and integrate them into your overall game plan. If you can’t find ideas consistently you just shouldn’t be in the stock market. Winning isn’t for everyone.