Have We Hit The Top?

[ERICOPOLY]

On 12/13/2021 at 8:33 AM, muscleman said:

The difference is that this time is an everything bubble, but in 2000, value stocks went up when dot com stocks collapsed.

 

 

There are value stocks today as well.  Some are rising today as the market is falling.

[Spekulatius]

6 minutes ago, ERICOPOLY said:

 

There are value stocks today as well.  Some are rising today as the market is falling.

There are a lot of value stocks today. The dispersion in valuation is probably not as large than in 1999/2000 but isn't to different either. TSLA is still worth $970B , probably more than the rest of the cart industry combined just to name one nonsensical example.

[muscleman]

23 hours ago, ValueArb said:

 

Why do you think RE prices will be far higher in 3-5 years? If mortgage rates go up to 5% or so, won't that lead to flat or lower RE prices?

 

Why do people keep saying if rates go up, housing price has to go down? Have you taken a look at historical rates vs housing prices and find any cases when both were going up?

 

[muscleman]

11 minutes ago, ERICOPOLY said:

 

There are value stocks today as well.  Some are rising today as the market is falling.

Some are defensive stocks that trade like T-bills. Overall, it looks just like 2000. When dot com stocks crashed, BRK went up, but in the next two years of bear markets, these value stocks decline slowly until the bear market is over. I think we are right at that inflection point.

The correlation of these stocks are high these days. A lot of funds will be facing massive redemptions and they just have to sell everything in the end.

[Gregmal]

12 minutes ago, muscleman said:

 

Why do people keep saying if rates go up, housing price has to go down? Have you taken a look at historical rates vs housing prices and find any cases when both were going up?

 

Because it’s the lazy academic shit they put in the textbooks.

 

I think once those 25% annual paper returns in tech stocks vaporize the 10% or so in real returns you can get via value stocks will appeal to people. Much more so than the 0% returns on cash and the negative ones on bonds.

[ERICOPOLY]

15 minutes ago, muscleman said:

Some are defensive stocks that trade like T-bills. Overall, it looks just like 2000. When dot com stocks crashed, BRK went up, but in the next two years of bear markets, these value stocks decline slowly until the bear market is over. I think we are right at that inflection point.

The correlation of these stocks are high these days. A lot of funds will be facing massive redemptions and they just have to sell everything in the end.

 

I watched BUD rise throughout 2001 and 2002, it was incredible.  And today, it's at 1/2 of the level of 5 years ago and rising today as the market falls.  It was cheaper back then though.

Edited December 14, 2021 by ERICOPOLY

[Spekulatius]

44 minutes ago, Gregmal said:

Because it’s the lazy academic shit they put in the textbooks.

 

I think once those 25% annual paper returns in tech stocks vaporize the 10% or so in real returns you can get via value stocks will appeal to people. Much more so than the 0% returns on cash and the negative ones on bonds.

I believe if real interest rates ( net of inflation) turn positive and become significant- let's say 3%  - then hard assets like real estate will fall.

 

Right now, we have interest rates of 1.5% (10 year treasury) and inflation of ~7%, so the real interest rate is -5.5%. that's pretty much an ideal environment for real estate.

 

If interest rates go to 10% while inflation is at 10%,  to throw out an example, then I expect real estate to do fine.

[muscleman]

2 hours ago, Spekulatius said:

I believe if real interest rates ( net of inflation) turn positive and become significant- let's say 3%  - then hard assets like real estate will fall.

 

Right now, we have interest rates of 1.5% (10 year treasury) and inflation of ~7%, so the real interest rate is -5.5%. that's pretty much an ideal environment for real estate.

 

If interest rates go to 10% while inflation is at 10%,  to throw out an example, then I expect real estate to do fine.

 

By "interest rates", do you mean the 10 yr or 2 yr rates? The spread between the two are compressing lately.

[muscleman]

3 hours ago, Gregmal said:

Because it’s the lazy academic shit they put in the textbooks.

 

I think once those 25% annual paper returns in tech stocks vaporize the 10% or so in real returns you can get via value stocks will appeal to people. Much more so than the 0% returns on cash and the negative ones on bonds.

 

Fed's keeping rate at 0 is going to cause one bubble to start brewing immediately after the collapse of the prior bubble. People are not going to sit on cash earning 0%.

 

There seem to be a shift in investing trend every decade. The 2009-2021 era is growth. Maybe the decade of value is going to come soon.

[Gregmal]

3 minutes ago, muscleman said:

 

Fed's keeping rate at 0 is going to cause one bubble to start brewing immediately after the collapse of the prior bubble. People are not going to sit on cash earning 0%.

 

There seem to be a shift in investing trend every decade. The 2009-2021 era is growth. Maybe the decade of value is going to come soon.

That is kind of my suspicion. Money flows around. You've laid the foundation for certain types of assets to do well going forward over the past decade or so by wringing out those markets. Go through 13fs and stuff like that. RE and hard assets in general are horribly under owned. Everyone is basically closeting to the Nasdaq 100. Cash is worthless and over time more and more people will come to realize this. But its hard parting with a security blanket like cash the same way an infant cant part with their pacifier. But eventually you are 5 or 10 years old and realize you look like an idiot with a pacifier. Cash holders will have their moment too. 

[wabuffo]

I believe if real interest rates ( net of inflation) turn positive and become significant- let's say 3%  - then hard assets like real estate will fall.

 

Right now, we have interest rates of 1.5% (10 year treasury) and inflation of ~7%, so the real interest rate is -5.5%. that's pretty much an ideal environment for real estate.

 

Spek - it looks like US Govt is set to approve a $2.5t increase to the debt ceiling (currently locked at $28.9t gross).

 

I think Yellen wants to take the TGA back up to $1t pretty quickly (currently at $133b).  The Fed will begin to at least taper and set the stage for stopping its buying sometime in 2022.   That means some very heavy Treasury security issuance (with little to no Fed buying) is coming.

 

Add in the Fed starting to act on inflation worries and this sets the stage for some Treasury interest rate whiplash in 2022.

 

I think one should become cautious with growth-y equities (especially with little to no profits) because of the DCF effect of rising benchmark rates.

 

Bill

[Gregmal]

1 hour ago, wabuffo said:

I think one should become cautious with growth-y equities (especially with little to no profits)

 

This is a pretty crazy rabbit hole to go down, especially if the primer is a course on psychology and how it drives markets and cycles. I recall in 2013 how basically anything growthy had rather big short interest and shorts for the year got absolutely wrecked. I recall stuff, like TDOC was a popular short at $14 in the mid decade part on the basis that it incinerated cash and would never earn a real penny. Then you literally had a one in a hundred year event even take that and blow it up 20 fold or something. Every short has been wrecked and scarred; thoroughly washed out. Even people who thought about going short, but didnt, and probably branded psychologically by the bull market. If the book closed today a student of history could definitely say, "yup, cycle complete". Now imagine the destruction if rates gradually go to 5 or 10%?You could make a case that a huge portion of the market, even many darlings over the past half decade, would be wiped out, probably even several times over, O&G company style.  

 

I disagree with the statement that we are in unchartered waters and theres no precedent so therefor nothing you can do. Contrarily, theres predictable psychology behind what reactions will likely face certain events....and a LOT of dominos to fall thereafter. Theres almost too much you can do. Should be fun being part of it. Or maybe not. 

[Simba]

This sell-off seems to be concentrated in the non-profitable companies. My own take, is these companies overshot and are coming back down to reality. However, because many are not profitable, they are not necessarily "SCREAMING BUYS, BTFD, ITS RAINING GOLD". I do think within the pile they will be some real winners. 

 

Secondly, this market has been supported by the growth of names like Apple and Microsoft. We've never had many companies at several trillion dollar market caps, so I wonder what type of risk this brings to the market (if any?). Certainly a rug pull in the mega cap names, could lead to greater sell offs.

 

Thirdly, I think there are some real risks to the market in terms of inflation 

(i) inflation affecting earnings / margins going forward

(ii) rate hikes depressing valuations

 

My own personal take is the market seems tired. Tech got a uplift initially in 2020 and than reopening plays got boosted with vaccine news, however it seems like the market is finally starting to take valuation seriously. For example, $AMC lowest since Reddit decided to Meme it in Jun/21.

 

I think a 5% return for 2022 with 5% inflation would piss off a lot of people (0% real return), which is why my prediction for 2022 is exactly that (0-5% real return on equities). 

 

I think a negative return for 2022 with high inflation is also in the cards, and wouldn't write it off. 

 

Are we entering a different regime than 2009-2020 ? I certainly think so. For one valuations post GFC were at record lows. Post Covid, valuations are at highs.

 

Edited December 15, 2021 by Simba

[Spekulatius]

The risk is the same it was in 1999/2000. Since the indices are market cap weighted fund and stuff like TSLA and now AAPL made it to high or even ridiculous valuations, index fund are not safe or conservative investments any more and will fall hard when those large cap monsters start to see multiple compression.

 

In 1999 it was JDSU, Cisco, MSFT, INTC ORCL and SUN and many others that got into the SP500 and even more so the  QQQ and when those stocks deflated, the index funds deflated with them.

 

We now have similar things going on with AAPL, TSLA and others that dominate the QQQ and to a lesser but still significant extent the SPY. Seems like a great time for equal weighted index funds or just actively managed funds that avoid with excessive valuations for a while.

[Viking]

Crazy thought for the day: is a couple years of high inflation not just what is needed right now? (i ask this tongue in cheek). Is that not how a government/country solves a way, way too much debt problem? (At the same time paying an interest rate under 2% across the curve is just an added bonus). 
 

After all, isn’t deflation the real enemy of too much debt?

 

Now, yes, inflation is effectively a hidden tax especially to those who do not own assets (which are shooting higher) and those who own fixed income assets (‘earning’ large negative real yields). But the real value of all that debt (government, corporate and consumer) is dropping and fast. 

The rub, of course, is when those who do not own assets or those who own fixed income catch on to the real game that is being played. Too much of a good thing and… off with your head  

—————

https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp

Edited December 15, 2021 by Viking

[muscleman]

13 hours ago, Viking said:

Crazy thought for the day: is a couple years of high inflation not just what is needed right now? (i ask this tongue in cheek). Is that not how a government/country solves a way, way too much debt problem? (At the same time paying an interest rate under 2% across the curve is just an added bonus). 
 

After all, isn’t deflation the real enemy of too much debt?

 

Now, yes, inflation is effectively a hidden tax especially to those who do not own assets (which are shooting higher) and those who own fixed income assets (‘earning’ large negative real yields). But the real value of all that debt (government, corporate and consumer) is dropping and fast. 

The rub, of course, is when those who do not own assets or those who own fixed income catch on to the real game that is being played. Too much of a good thing and… off with your head  

—————

https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp

 

Yeah. It does seem like this administration is trying to solve the debt problem by inflation, and globally all countries are doing this.

[Libs]

<The Fed will begin to at least taper and set the stage for stopping its buying sometime in 2022.   That means some very heavy Treasury security issuance (with little to no Fed buying) is coming.>

 

How much treasury issuance has the fed been soaking up? Something like a third? And that's predominantly on the short end, right?

[Cigarbutt]

^From end Q1 2020 to now:

-The Fed 'absorbed' 45% of all Treasury paper issued

-90% of Fed printed money was used to buy/swap Treasury notes and bonds (minimal amount for bills)

-Over the period, the Fed 'absorbed' 83-85% of all Treasury notes and bonds issued

About control (yield curve kind), i wonder..

"Circumstances rule men; men do not rule circumstances."

Herodotus

 

[wabuffo]

These are flawed metrics b/c the US Treasury was also running down its TGA balance from a starting level of $1.7t to just $79b today.

 

Not Herodotus

[Gregmal]

Right now kind of feels like that period of denial where folks are slowly realizing they need to get the rifle and bring Old Yeller out back. The sooner you put him down the better. Or you can wait and hang around til he bites you. Tech is done.

[NotSoWise]

US tech... yes

Chinese tech might have better future near term given decreasing interest rates in China, earlier stage in internet development, low multiples. CCP is probably also done with spanking, as their asses are already hot red. Plus China cant invade Taiwan in risk free manner yet, they will need probably few more years.

 

So even Adobe at -10% today, is still way too expensive, even for the quality. Think about how crazy the valuations are when they have small miss and the price goes down 10%.

 

 

Edited December 16, 2021 by NotSoWise

[ERICOPOLY]

1 hour ago, NotSoWise said:

So even Adobe at -10% today, is still way too expensive, even for the quality. Think about how crazy the valuations are when they have small miss and the price goes down 10%.

 

And when the opinion of a single sell-side analyst drives T up 7%.

[Viking]

The Nasdaq was trading Sept of 2018 at 8,050 (a record at the time). In Feb of 2020 it was trading at 9,700 (a record at the time). Today it is trading at 15,180. Correction over? No idea. 

[Gregmal]

And today markets the first day of buyback blackouts for anyone not running a 105 plan. Long month til earnings +2. 

[changegonnacome]

Starting to feel like Jeremy Grantham’s early 2021 warnings and into the summer are coming to pass……….the Microsoft’s and Apple’s haven’t been taken out the back and shot yet but I can hear the click clacking of the soldiers feet.

 

I’m so tempted to sell some naked 2024 calls on Tesla at a $2trn valuation…the believers still seem to be buying them up….Elon being Man of the Year feels like the top of Musk-Mania