Have We Hit The Top?

[Dinar]

18 minutes ago, Parsad said:

 

Stocks generally should be trading at a price that gives you a return equivalent to the risk-free rate.

 

Risk free rate is going to be around 4.5% for the 30 year treasury. 

 

At a P/E of 16, stocks earnings yield is 4.5%.  Add growth in GDP (historically will be around 5%) minus 2% inflation, which equals 3%.  At a P/E of 16, stocks will give a 7.5% annualized return after inflation.

 

Cheers!

Parsad, I am sorry, but I do not follow.  At a p/e = 16, earnings yield = 6.5% (free cash flow yield is less), add in your 3% real GDP growth, you get 9.5% annualized post inflation.  Meanwhile, 30 year TIP are at 2.1%, and 30 year Treasury is at 4.27%, so you think that stocks should have an 7.4% risk premium over 30 year treasury?  Thank you.

 

I remember reading somewhere that Buffet used to discount company earnings (assuming a high quality business) by a rate on a ten year treasury.  T

[Parsad]

3 hours ago, Dinar said:

Parsad, I am sorry, but I do not follow.  At a p/e = 16, earnings yield = 6.5% (free cash flow yield is less), add in your 3% real GDP growth, you get 9.5% annualized post inflation.  Meanwhile, 30 year TIP are at 2.1%, and 30 year Treasury is at 4.27%, so you think that stocks should have an 7.4% risk premium over 30 year treasury?  Thank you.

 

I remember reading somewhere that Buffet used to discount company earnings (assuming a high quality business) by a rate on a ten year treasury.  T

 

Sorry, let me make this clearer:

 

30-Year Treasury yield is going to be at 4.5% soon.  

 

Present earnings yield on S&P500 is 4%.

 

At 4.5% earnings yield, S&P500 P/E should be at 22...high-end, not conservative, no risk-premium.

 

Add in 3% net from growth in GDP minus inflation...you get a 7.5% current yield for investors...again, high-end, not conservative, no risk premium or margin of safety.

 

If an investor is aiming for a 12% return on equities, in lieu of risk with a margin of safety, then you would need an earnings yield for the S&P500 of 9% (12%-3%).

 

9% earnings yield is a P/E of 11 for the S&P500.  

 

Thus the median of those two (P/E 22 and P/E 11) would be relative fair value with some margin of safety...P/E of 16.  Current S&P500 P/E is 25.

 

So I could see markets correcting from 12% (P/E 22) to an extreme of 44% (P/E 11)...at a P/E of 16 you would see a 36% correction.  

 

Unless GDP is growing at a rate higher than average, I can't see how a P/E of 25 can be sustained...or interest rates fall significantly, which also seems unlikely presently.

 

Cheers!

 

[changegonnacome]

3 hours ago, Parsad said:

So I could see markets correcting from 12% (P/E 22) to an extreme of 44% (P/E 11)...at a P/E of 16 you would see a 36% correction.  

Yeah such a large cohort of retirees or close to retirees who’ve got to be looking at fixed income alternatives to equites….and figuring out the above math….totally get the superiority of equites over the long pull…..but certainly a certain age cohort (not the peeps on here) get to a point where they want a smooth ride, they wanna reduce the potential brain damage to return ratio of their financial life and are happy to give up a few points of performance. Current math points to very little points been given up! 

 

Like I said not the COBF crowd who wanna squeeze all the juice out of the returns orange….but this isn’t a normal gang of people…normal people wanna do what’s easy , with the lowest friction and risk…..the bond market is calling them.

[Paarslaars]

Not sure about that one. Many boomers will be transferring part of their wealth to their kids who in turn will be looking for the returns of stocks.

[changegonnacome]

1 hour ago, Paarslaars said:

Not sure about that one. Many boomers will be transferring part of their wealth to their kids who in turn will be looking for the returns of stocks.

Not suggesting you’re looking at some wholesale exit from equities…..but remember stock prices get set at the margins of supply and demand for that paper…….flows……even marginal flows (as a % of total US wealth) can matter…..TINA……turning to inverse-TINA……creates an interesting dynamic……rising bond yields are kind of screaming at equites that they may need to do offer a better ERP in the future if they want to keep bums on seats.

 

Look at the 30yr….what a magical time to hold equites it has been….the longer duration the better…..i was very lucky to have this tailwind in the 2010’s to build the economic base I have. I’ll take some credit for suerpior decision making ….but no man is an island……and the wind at my back helped a lot especially when my decision making wasn’t so superior.

 

 

[Libs]

Are you guys sure about the market multiples you're throwing out there? I'm seeing RSP, the S & P equal weight, at 16X. Below that, mid and small cap value ETF's are around 12X. These are forward earnings, but I don't think that reflects expectations of a big jump in earnings next year.

 

My point is, there are reasonable multiples available outside tech / the magnificent 7 via ETF's, not to mention many of the individual names discussed on hits board. IMO. 

[Gregmal]

I think the market gives everyone what they want. Todays "long bonds" fear is a few weeks ago's recession fear and a few months ago banking crisis and the year befores sticky inflation, and the prior years covid variant.....

 

If you're looking for ways to make money, the market will give you that. If you're looking for things to be afraid of the market will give you that too. The market basically gives everyone what they want. 

[hasilp89]

2 minutes ago, Gregmal said:

I think the market gives everyone what they want. Todays "long bonds" fear is a few weeks ago's recession fear and a few months ago banking crisis and the year befores sticky inflation, and the prior years covid variant.....

 

If you're looking for ways to make money, the market will give you that. If you're looking for things to be afraid of the market will give you that too. The market basically gives everyone what they want. 

+1

 

[thepupil]

40 minutes ago, Libs said:

Are you guys sure about the market multiples you're throwing out there? I'm seeing RSP, the S & P equal weight, at 16X. Below that, mid and small cap value ETF's are around 12X. These are forward earnings, but I don't think that reflects expectations of a big jump in earnings next year.

 

My point is, there are reasonable multiples available outside tech / the magnificent 7 via ETF's, not to mention many of the individual names discussed on hits board. IMO. 

 

this is a fair point, though many of us have a lot of $$$ that can only be invested in indices (of the cap weighted variety) so some degree of view on the overall market's valuation may be warranted. I invest my index only stuff in foreign stock indices these days..I vacillate b/w bonds and foreign stocks and have recently (perhaps stupidly and procyclically) gone with foreign stocks. a recent trip to Europe where verything jsut felt oo freaking cheap relative to my strong dollars tipped the scale for me..Generally the foreign indices are of lower quality and in in lower multiple sectors, so the 13x  offered by foreign markets isn't comparable to the 21x of the US. But I think b/w the valuation discount and currency diversification, a reasonable addition to a portfolio....the EM index is mostly just china though...

 

 

 

 

 

 

[thowed]

@thepupil Personally, while I think US index investing makes total sense for large-caps (how many funds beat them?), I think EM indices are pretty rubbish & there are some decent active managers to choose from.

 

Separately I also think that over 10 years, Vietnam should be one of the best-performing EMs (well, technically Frontier, but it's all marketing...).

 

Europe... I thought this was the way back in 2010, 'because the US market is expensive', so I'm a bit scarred there. But undeniably some great companies on much lower ratings than their US equivalent (there's been some good material from Lindsell Train in their UK strategy on this e.g. Experian vs. Equifax).

 

 

 

[Saluki]

4 minutes ago, thowed said:

@thepupil Personally, while I think US index investing makes total sense for large-caps (how many funds beat them?), I think EM indices are pretty rubbish & there are some decent active managers to choose from.

 

Separately I also think that over 10 years, Vietnam should be one of the best-performing EMs (well, technically Frontier, but it's all marketing...).

 

Europe... I thought this was the way back in 2010, 'because the US market is expensive', so I'm a bit scarred there. But undeniably some great companies on much lower ratings than their US equivalent (there's been some good material from Lindsell Train in their UK strategy on this e.g. Experian vs. Equifax).

 

 

 

 

I don't have much choice in my employer provided retirement plan, so I'm exposed to the Magnificient 7 at any valuation. I try to think of it like a ballast (or a barbell approach), where the bigger stocks are in my 401k account via the index, and (other than BRK and GOOG) the majority of my discretionary portfolio is in small-mid caps (JOE, FRFHF, VTS, FFXDF, STNG, TV, SWBI etc.) 

 

If we get a "correction" in the magnificent 7 the smaller stuff might do okay because a lot of it is already cheap. If you can buy British Tobacco today at less than 9x earnings, how much lower could it correct to?  

[thepupil]

24 minutes ago, thowed said:

@thepupil Personally, while I think US index investing makes total sense for large-caps (how many funds beat them?), I think EM indices are pretty rubbish & there are some decent active managers to choose from.

 

Separately I also think that over 10 years, Vietnam should be one of the best-performing EMs (well, technically Frontier, but it's all marketing...).

 

Europe... I thought this was the way back in 2010, 'because the US market is expensive', so I'm a bit scarred there. But undeniably some great companies on much lower ratings than their US equivalent (there's been some good material from Lindsell Train in their UK strategy on this e.g. Experian vs. Equifax).

 

 

 

 

yea i hear you. for my 401k its just the indices available, not active funds, so i go with those. I think the quality of the EM index has improved over time (if one is okay owning chinese tech). it's no longer just a bunch of telco's and miners and energy (and the energy is amking lots of money)

 

 

 

Edited August 4, 2023 by thepupil

[LC]

14 minutes ago, Saluki said:

If you can buy British Tobacco today at less than 9x earnings, how much lower could it correct to?  

Famous last words

[Spooky]

3 hours ago, Libs said:

I'm seeing RSP, the S & P equal weight, at 16X. Below that, mid and small cap value ETF's are around 12X.

 

I bought an S&P 600 ETF at a p/e of 12x. Think this will significantly outperform the magnificent 7 over the long run.

[adesigar]

I think part of the reason the S&P is high and could stay high is all the money flowing into it from 401k plans?

 

Nowadays most people I know are investing into index funds or target date retirement funds(which in turn hold index funds). So every month there is a constant flow of money from 401k plans into the stocks in the S&P 500. 
 

 

[Parsad]

3 hours ago, Gregmal said:

I think the market gives everyone what they want. Todays "long bonds" fear is a few weeks ago's recession fear and a few months ago banking crisis and the year befores sticky inflation, and the prior years covid variant.....

 

If you're looking for ways to make money, the market will give you that. If you're looking for things to be afraid of the market will give you that too. The market basically gives everyone what they want. 

 

+1!  Yes, that's an excellent point.  My comments are meant to suggest that overvaluation in some sectors has brought up the value of the broad market to a high average valuation.  Not that you can't find opportunity even in such a market. 

 

Only that history suggests that such high average valuations correct...sometimes only in those overpriced sectors and sometimes broadly across the entire market.  Cheers!

[thowed]

56 minutes ago, Spooky said:

 

I bought an S&P 600 ETF at a p/e of 12x.

Nice one.  S&P 600 is an underrated index - I've never understood why the Russell 2000 is so much better known - by my understanding the 600 has stricter criteria on profitability.

 

Incidentally one of the best US small-cap fund houses I know moved into large-caps in about 2010, and is just moving back more into small & mid-caps on valuation grounds.

[Jaygo]

2 hours ago, Spooky said:

 

I bought an S&P 600 ETF at a p/e of 12x. Think this will significantly outperform the magnificent 7 over the long run.

What one did you choose?. I'm looking for one as well. I thought about VTI but would prefer less holdings overall 

[Gregmal]

I really don’t see a whole lot different in sentiment. Some people are still investing. But largely the same folks who were bullish or bearish are still finding excuses and moving goalposts in order to maintain the same exact macro positions they’ve had. All I see personally is a good deal less value broadly speaking, but there’s still pockets of it.
 

Otherwise think it’s a stretch and cop out to say euphoria or bubble and the only ones who are doing that are the ones who have been doing it a long time and wrong.

[thepupil]

8 minutes ago, Gregmal said:

I really don’t see a whole lot different in sentiment. Some people are still investing. But largely the same folks who were bullish or bearish are still finding excuses and moving goalposts in order to maintain the same exact macro positions they’ve had. All I see personally is a good deal less value broadly speaking, but there’s still pockets of it.
 

Otherwise think it’s a stretch and cop out to say euphoria or bubble and the only ones who are doing that are the ones who have been doing it a long time and wrong.

 

My overall view is similar to that which I wrote 2 and change years ago. High quality US stocks (ie the best of companies in the most expensive and highest returning major market) trade for 24x trailing and 22x forward. Is this a "bubble"? In my view it is not. Is it "cheap" "compelling"? No. Does it offer a mrgin of safety over near term investment horizons? No. 

 

What has changed since I wrote that is the 10 yr inflation linked treasury wentr from -1% to +1.7%, CLO AAA yield went from 1.5% to 6.2%, 30 yr went from 1.5% to 4%, HY went from 4.5% to 8.7%, etc. So bonds, cash, low risk floating rate paper, risky bonds etc, all beefed up as as competitors to stocks by ~2-3% REAL and 3-4% nominal, which is meaningful. but the trade off is still not so so clear. it was hard to picture oneself owning any bonds/cash/etc 2 years ago. Now things are better for those. In some ways (as I mentioned earlier), it's been the best of all possible worlds for asset owners as one can take the stock gains and invest in the lower risk stuff at much higher returns without having lost any money. it's a good time to re-assess asset allocation, lock in some gains. maybe do some heding for the more frisky of us...

 

Still struggle to call it a bubble. 

 

 

On 6/27/2021 at 12:13 PM, thepupil said:

I'm in my early 30's as well so I can't comment on the 90's. 

 

whenever i hear the B word, I pull this up. the index of high quality companies in the US. there are 125 of MSCI's definition. 

https://www.msci.com/documents/10199/4af921f5-0bbc-470b-ad69-19a177fad9cf

 

The US is the world's best performing market. these companies have tonned it and returned 16% / year for the past 10 years.

 

But are they "bubbly"? 

 

27x trailing and 24x forward. I would say NO. Prices don't seem bubbly at all; stretched? sure, they're stretched. I'd note that in early 2020, when RuleNumberOne was inundating us with bubble talk, this same index was 20x (not sure if trailing or forward). 

in my view we can't really be in a bubble unless earnings are VERY MATERIALLY unsustainable. I'm not talking a 10% ding from a little higher tax, I'm talking a 40% cut. my preferred definition of a bubble is that prices could halve and still be expensive. Any company on this list I would buy hand over fist at 14x trailing and 12x forward. So earnings must collapse or the cost of capital must skyrocket for us to be in a bubble.

 

there's a risk of either or both occurring, but is it the base case? is that what is most probable?

 

I also don't think we're in a real estate bubble. I'm not saying that everything out there is cheap, safe, and has a giant margin of safety or anything; it's not! 

 

But bubble is a strong word. 

 

and for all the attention that crypto and meme stocks get, I know plenty of people participating, but have yet to really meet anyone who's irresponsibly leveraged / allocated in that stuff. likewise w/ real estate. it doesn't at all feel like 2005/6 in south florida when i was in high school and EVERY one's parents regardless of circumstances were buying/buildingon spec/flipping on spec etc. 

 

No one is entitled to high real returns; we've been financially repressed for 10+ years and valuations may continue to go up as stocks re-price to deliver lower returns going forward. Stocks don't have to be as cheap as we'd all like. Most people and institutions are on autopilot. they have a lower cost of capital than a bunch of wannabe buffett's expecting to buy good companies for 10x. 

 

TINA TINA TINA fo feena fee fo fo meena TINA. 

 

Buy Stocks! They've reached a permanently higher plateau 

 

 

 

 

 

 

[Gregmal]

I think there’s a high correlation between those that are using the word bubble, and those that are either trying to sell you something, or make excuses for shitty performance. 

[Spooky]

3 hours ago, thowed said:

Nice one.  S&P 600 is an underrated index - I've never understood why the Russell 2000 is so much better known - by my understanding the 600 has stricter criteria on profitability.

 

Incidentally one of the best US small-cap fund houses I know moved into large-caps in about 2010, and is just moving back more into small & mid-caps on valuation grounds.

 

Ya I read a bunch of performance documentation that the S&P 600 has significantly outperformed the Russell 2000 and I think it is because the profitability requirement cuts out a lot of companies. (credit to @Spekulatius for pointing me in this direction)

 

1 hour ago, Jaygo said:

What one did you choose?. I'm looking for one as well. I thought about VTI but would prefer less holdings overall 

 

I went with the Vanguard one, VIOO

Edited August 4, 2023 by Spooky

[changegonnacome]

 

BLS wage data today......totally inconsistent with 2% inflation......ChatGPT better start delivering some productivity gains pronto or else

 

Short version - seems like further hikes are incoming......& the soft-landing/no landing dream is receding.....

[UK]

https://fortune.com/2023/08/05/black-swan-hedge-fund-mark-spitznagel-interview-taleb-credit-bubble/

 

I hoped that Spitznagel would help me find a simple yet practical solution to protect your portfolio from worst-case scenarios (or tail risks)—after all, that is his “bread and butter.” But his answer wasn’t what I anticipated. When you ask the man who has written multiple books on risk mitigation—his latest is called Safe Haven: Investing for Financial Storms—how retail investors can protect their capital, you expect to hear a few of the typical options: gold, Treasurys, or maybe the Swiss Franc. Instead of all that, Spitznagel warned that when it comes to safe-haven investing, “the cure is often worse than the disease.” If risk mitigation isn’t cost effective and supportive of higher overall returns in the long term, then it’s not worth it. In his view, most of the classic safe-haven strategies used by retail investors fall into this category. There is some good news, however. A recession or market downturn may come—and Spitznagel says he’s worried about what he calls the “greatest credit bubble in human history” and a “tinderbox” economy—but perhaps paradoxically, he doesn’t expect even that to be the end of the world for retail investors focused on building wealth for the future. It may take time, he said, but markets always recover, even from unexpected, economy-crushing black swan events. In spite of the potential for economic disaster, Spitznagel believes that retail investors should probably just listen to the timeless advice of Berkshire Hathaway chairman Warren Buffett: Focus on the long haul and don’t bet against America.

[thowed]

V interesting, UK.  I think it's true that many of us (myself included) try to be too clever, to our detriment.

 

If you are concerned about the market, often the easiest thing is to just increase your cash weighting (esp. if IB are paying you decent interest). 

 

It's so easy to get Puts etc. wrong, so just KISS.

 

(of course, I can't help myself and have a few protective Puts at the moment...).