Have We Hit The Top?

[Libs]

16 hours ago, Spooky said:

 

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)

 

 

I went with the Vanguard one, VIOO

 

SPSM works too.

[Spekulatius]

On 8/4/2023 at 9:08 AM, 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. 

Yes, many Market observer point out that small caps and to a lesser extend mid caps seem to be massively undervalued relative to large caps. Same with international stocks vs US large caps.

The last time we had a similar situation was in late 90‘s and small caps/ mid caps and international stocks outperformed.

[Sweet]

I recently read that the SP-500 had an average growth rate of 4%, I think that explains a lot of the performance differential between small-mid caps and the large caps.  The current crop of large cap stocks are incredible performers and growth engines.

[changegonnacome]

4 hours ago, Sweet said:

I recently read that the SP-500 had an average growth rate of 4%, I think that explains a lot of the performance differential between small-mid caps and the large caps.  The current crop of large cap stocks are incredible performers and growth engines.

 

The margin differential married to the revenue growth is/has been an unbeatable combo......its an engine for EPS growth.

 

Then there's a whole argument about regulatory capture, antitrust......citizens united.....thats seen the large caps secure every break of the ball in the US tax code, M&A greenlights etc. It's been an unbelievable run.

[mattee2264]

Since the GFC economic growth has been anaemic. Even trillion dollar emergency pandemic deficits (still ongoing!) and ZIRP and successive rounds of QE and tax cuts etc have failed to push real GDP growth above 2% for more than about five minutes. Inflation gave a little boost to nominal growth post-pandemic but that will only be temporary. 

 

Obviously the market and the large cap segment especially have done wonderfully well over the last 15 years. But the operative factors are easy to identify and are unlikely to be sustainable and may even go into reverse and become severe headwinds

 

1) Successive rounds of QE flooding the markets with liquidity which has gone towards the most liquid large cap stocks and index funds. I think there is still some stealth QE going on e.g. the Fed expanding its balance sheet to help the regional banks but if the Fed ever gets serious about quantitative tightening and reducing its balance sheet that is going to spell trouble for stocks and especially the most liquid large caps. 

 

2) ZIRP has allowed large caps with good credit ratings to borrow money to buy back shares and therefore achieve EPS growth well in excess of underlying earnings growth. Obviously this doesn't work so well when the cost of borrowing is a lot higher. 

 

3) Various factors have resulted in much more concentrated markets so larger companies have been benefiting at the expense of smaller companies and therefore able to post impressive earnings growth even if the overall market is growing at not much more than GDP growth. And with greater market concentration it allows better margins that are not competed away. But market share gains are also not sustainable and market growth is far more linked to GDP growth so if GDP growth is weak then that will mean much weaker growth for large caps going forward. 

 

4) Technology has a winner takes all dynamic which has meant that Big Tech companies have been able to "eat the world" and achieve mindboggling multi-trillion market caps. And of course much of the increase in the S&P 500 from the pre-COVID peak of around 3000 to the current level of around 4500 has been driven by Big Tech who enjoyed the benefits of a lot of technology investment spending being pulled forward as well as an acceleration of adoption of online retail/online advertising/cloud etc. 

Obviously the hope is that AI will extend their growth runway. But under the surface over the last few years growth has stalled and while in the short term efficiency improvements and cost cuts can sustain growth a little longer they are not sustainable. 

 

5) Since the pandemic markets have become very speculative and it is much easier to speculate in large cap liquid stocks through the use of call options etc and they are also far easier to trade and holding periods are as short as they've ever been. And the reason for the speculation is that there is ever increasing confidence that markets will always recover and there will always be an eventual bailout. We had a V shaped recovery at the end of the last tightening cycle in 2018/19. We had a V shaped recovery from COVID. A V shaped recovery from last year's inflation shock. And the 50% decline during the GFC and dot-com bubble were so extreme and so long ago that they are being dismissed as outliers. And of course the usual bearish pundits look stupid as they keep crying wolf and no one takes them seriously anymore. 

 

 

 

 

 

 

[james22]

On 8/5/2023 at 10:56 AM, Sweet said:

I recently read that the SP-500 had an average growth rate of 4%, I think that explains a lot of the performance differential between small-mid caps and the large caps.  The current crop of large cap stocks are incredible performers and growth engines.

 

?

 

The Size and Value premiums disfavor Large Growth.

[dealraker]

So my guess is that if we - for the most part - start getting better news on inflation and "growth" then Mr. Market at some point not far away will pause and proceed downwards (more significantly).  His chant?  "Dudes, I predicted this upside crap already.  What else you got?  I don't think it is that great."  

 

At least that's what I've experienced in life.  

Edited August 9, 2023 by dealraker

[Sweet]

On 8/6/2023 at 6:00 PM, james22 said:

 

?

 

The Size and Value premiums disfavor Large Growth.

maybe, but there are obvious exceptions, most notably the likes of Google, Microsoft, Amazon.

[changegonnacome]

29 minutes ago, dealraker said:

So my guess is that if we - for the most part - start getting better news on inflation and "growth" then Mr. Market at some point not far away will pause and proceed downwards (more significantly).  His chant?  "Dudes, I predicted this upside crap already.  What else you got?  I don't think it is that great."  

 

At least that's what I've experienced in life.  

 

Can't remember where I read it or who said it - but there's something to effect that the market exists to embarrass as many people as possible....immaculate disinflation or the back to the races trade has sucked alot of folks.....and maybe its 'back to the meat grinder' as Grantham has called it...I think in the last few months we've taken every good piece of news on inflation and taken it to the inflation is done thesis extreme......been saying it for months.....but apart from the obvious & predictable headline CPI improvement the data I look at is disappointedly and stubbornly pointing to underlying persistent and hasnt budged an inch core ~3.5% inflation......the problem with ~3.5% inflation is that it is too subject to flare ups.....when folks ask why do central bankers shoot for 2%......the answer might be as piffy as - "they shoot for 2% such that they end up at 3%".......it hasnt always been so that central bankers failed to reach up to their 2% target.......the normal course of history for central bankers is that they've consistently failed to get inflation down to their target. I've a feeling we are entering a more normal period for this type of thing......just given the inflationary pressures around........makes it all the more important to get down to 2% for a number of quarters....such that inflation might actually might settle out at 3% over the next ten years.

[Gregmal]

Yup. The second everyone has clarity is when all the easy money is gone. Then you just gotta figure out where and when they’re gonna do it again. Or just permanently call for a recession lol. 

[james22]

1 hour ago, Sweet said:

maybe, but there are obvious exceptions, most notably the likes of Google, Microsoft, Amazon.

 

Sure, but we're comparing the average growth rates/performance differential between small-mid caps and the large caps.

 

I'm hoping for a SV (and International) comeback, but who knows? Maybe it's different this time?

[Parsad]

https://finance.yahoo.com/news/chinas-consumer-prices-swing-decline-014520524.html

 

https://www.barrons.com/articles/china-deflation-beijing-private-sector-ba37b49b?siteid=yhoof2

 

We're starting to see what was supposed to happen years ago.  Governments can't manipulate fiscal/monetary policy limitlessly and debt accumulation will have some consequence.  And not just for China!  Cheers!

[valueseek]

On 8/5/2023 at 9:28 AM, Libs said:

 

SPSM works too.

From an ROE perspective, SPSM/VIOO are in the 10-12% range, ND/EBITDA in 2+ times. SP500 dominated by the tech. titans has ROE around 20%+ and ND/EBITDA around 1-1.5. SP500 margins are much higher than small caps where one can argue they come down over time. Not arguing against the PE multiple difference bw. SP and small cap but just throwing some underlying stats.

[Sweet]

10 hours ago, james22 said:

 

Sure, but we're comparing the average growth rates/performance differential between small-mid caps and the large caps.

 

I'm hoping for a SV (and International) comeback, but who knows? Maybe it's different this time?

I would like that too, but there is a huge passive investment industry just indexing the SP-500.

 

This isn’t a this is different this time argument, I don’t know, just that I know the likes of Ackman have complained this is skewing the market.

[Sweet]

8 hours ago, Parsad said:

https://finance.yahoo.com/news/chinas-consumer-prices-swing-decline-014520524.html

 

https://www.barrons.com/articles/china-deflation-beijing-private-sector-ba37b49b?siteid=yhoof2

 

We're starting to see what was supposed to happen years ago.  Governments can't manipulate fiscal/monetary policy limitlessly and debt accumulation will have some consequence.  And not just for China!  Cheers!

Might be a catalyst behind the China weakness - Western companies moving operations elsewhere?

 

A lot of these economic and housing woos can be masked by a booming economy, but when the economy slows its a double or triple whammy as these weak areas roll over.

[Spekulatius]

7 hours ago, Sweet said:

Might be a catalyst behind the China weakness - Western companies moving operations elsewhere?

 

A lot of these economic and housing woos can be masked by a booming economy, but when the economy slows its a double or triple whammy as these weak areas roll over.

This is definitely happening. Also the West is diversify away from China in terms of supply chain, which means that Chinese manufacturing capacity is underutilized as well as underemployment. Both things are deflationary.

 

China needs to move away from their mercantilist trade model into towards a more  domestic consumption based economy.

 

They can’t just continue to make stuff and hope that somebody else will buy it.

Edited August 10, 2023 by Spekulatius

[changegonnacome]

1 hour ago, Spekulatius said:

China needs to move away from their mercantilist trade model into towards a more  domestic consumption based economy.

 

Totally agree - the Chinese saver needs to be turned into a more US-like consumer and fairly quickly if they are going to soak up some of the excess manufacturing capacity they have.

 

That Chinese savers effectively represented a very large purchaser of US treasuries is a very interesting dynamic......decoupling from China is both inflationary for the West in terms of the goods that we buy but encouraging/forcing the Chinese leadership to get their people to spend more and save less will, all things being equal, mean one less financier of OUR debt fueled consumption in the West.....yet another reason why perhaps we are never going back to ZIRP.

[Spooky]

12 hours ago, Parsad said:

https://finance.yahoo.com/news/chinas-consumer-prices-swing-decline-014520524.html

 

https://www.barrons.com/articles/china-deflation-beijing-private-sector-ba37b49b?siteid=yhoof2

 

We're starting to see what was supposed to happen years ago.  Governments can't manipulate fiscal/monetary policy limitlessly and debt accumulation will have some consequence.  And not just for China!  Cheers!

 

Combine this too with China's demographic challenges and it doesn't look pretty long term. I think people are underestimating the impact this will have on the world economy.

 

[changegonnacome]

26 minutes ago, Spooky said:

I think people are underestimating the impact this will have on the world economy.

 

Yep the Chinese tailwind might very easily turn into a headwind........and not just economically speaking!!!!!

[Jaygo]

1 hour ago, changegonnacome said:

 

Totally agree - the Chinese saver needs to be turned into a more US-like consumer and fairly quickly if they are going to soak up some of the excess manufacturing capacity they have.

 

That Chinese savers effectively represented a very large purchaser of US treasuries is a very interesting dynamic......decoupling from China is both inflationary for the West in terms of the goods that we buy but encouraging/forcing the Chinese leadership to get their people to spend more and save less will, all things being equal, mean one less financier of OUR debt fueled consumption in the West.....yet another reason why perhaps we are never going back to ZIRP.

 

Dont forget that the psychology of many Chinese would still be affected by the disastrous policies and mass starvation in the late 50's and I would imagine most people are terribly afraid of a return to those days. 

 

Its like the people who grew up during the great depression who are hoarders and refuse to waste anything. My dad grew up on a dirt floor in the wreckage of the Spanish civil war. He would not waste anything, ever!, old food, no problem just salt it heat it and eat it., carpet, paper clips, even small pieces of paper had to be used over and over until you could not fit a note anywhere. 

 

I remember after college I threw pounds of old papers in the recycling bin, by dad made a comment and I brushed it off. Later that day I saw he had removed every paper clip from the bunch and stacked up all the papers that still had a white side. My dad was not a nut by any means, he was wealthy, hardworking and incredibly sharp, most likely the person with the widest breath of knowledge I have ever met. He did have some serious PTSD from his formative years in poverty and intelligence aside he once spent 4 hours cutting up an old carpet from a reno into rectangles to use as floor mats. We literally had shitty old purple carpets for our front entry mat my entire life lol.

 

To turn the Chinese into a consumption led economy will be a very tough road ahead and could take generations. In the west we have an abundance that has shaped our patterns, stocks only go up, gas is cheap, food is plentiful ect. This is certainly not the case everywhere.

[changegonnacome]

5 minutes ago, Jaygo said:

To turn the Chinese into a consumption led economy will be a very tough road ahead and could take generations. In the west we have an abundance that has shaped our patterns, stocks only go up, gas is cheap, food is plentiful ect. This is certainly not the case everywhere.

 

Excellent points you make re: their history.....will require extra coaxing to get them to spend.

 

Kind of makes me think that the rest of the world might not be going back to ZIRP + printing...........but the Chinese might be.......was pretty nice time to own US stocks during the ZIRP years.....I wonder if we'll be saying the same thing in 10yrs time about Chinese equities.....0% on savings, stimulating demand via wealth effects......sounds very USA 2010's to me 

[Jaygo]

But in what currency can you take advantage. If Chinese equities go up do to low rates and money printing will the currency go down in that case?

[SharperDingaan]

You might want to keep in mind that China is still very much a planned affair, with two economies; the Renminbi internal economy behind capital controls, the Yuan external economy, and the PBoC/Party/Military in between. What a westerner sees is the price/volume of China exports, the price/volume of imported commodity inputs, and the foreign policy of the party (access to china, belt/road, balance of payments, etc). Quite a bit different to the experience of most people in China.

 

The reality is that even if China can consume materially more of its own production, it will not turn on a dime, and it will not be enough; simply 'cause different tastes will demand different quantities and qualities of goods. To the extent that surplus production cannot be exported (increasingly likely); it's more stress, for longer, on the internal economy.

 

So what? Luxury goods/commodities remain the place to be, but little else. Nothing wrong in that, but if you insist on holding the Asian Fangs/Shippers/Exporters versus the commodity producers, expect more volatility.

 

SD

[Intelligent_Investor]

The major catalyst is western economies slowing, thus slowing their exports and causing prices at the factories to fall (oversupply of stuff that isn't being bought by the west due to economic issues). China's consumer spending isn't that bad, but exports are falling as the US and other western countries grapple with economic strain. China will likely not be a purely consumption based economy anytime soon, because culturally the Chinese are savers/hoarders, and have been for thousands of years. This is also why western style economic stimulus doesn't work as well in China vs the US. In the US where the average American spends most of his money, direct stimulus actually flows into the economy, in China it flows into bank savings/real estate investments/housing, not the general economy and thus has much less impact.

[Castanza]

1 hour ago, changegonnacome said:

require extra coaxing to get them to spend.

Enter stage left the digital yuan that has an expiration date