Bonds!

[TwoCitiesCapital]

4 hours ago, RedLion said:

 

 

Can you help me understand this? It seems that if equity earnings grow 10% per annum and there's no multiple contraction, then you'd earn 10% + the dividend yield = 11.5% per annum return, how could a 5-7 year core bond fund with YTM in the 6s outperform that? 

 

I can certainly see bonds outperforming, but that would involve a multiple contraction or significantly lower earnings growth than 10% per year, both likely outcomes in my opinion. 

 

Current earnings yield is basically 3-4% with a 25-30x multiple (based on your outlook for earnings continuing to decline or not). 10% growth means next year it'd be 3.3%, the year following 3.7%, etc. That is inclusive of the compounding effect as well.

 

I do think I made a mistake above in not including what 30x the ending earnings would be to include a nominal price return return, so I was wrong about assuming "even if multiples doesn't contract" but I really don't expect to maintain a 25-30x type multiple either. Assuming a reasonable price return for equities at such high multiples still leaves a significantly high bar for earnings growth or multiple retention. 

 

Takes a long time to get anywhere near the current rates on spread fixed income like 6-7% in mortgages, 6-7% in corporates, 8-10% in EM and HY, etc let alone to make up for the years where you were earning less. 

Edited August 30, 2023 by TwoCitiesCapital

[thepupil]

 

I see you're referring to earnings yield not total return. That makes more sense now, but what's all this 30x talk? 

 

 

 

 

 

[TwoCitiesCapital]

3 minutes ago, thepupil said:

 

I see you're referring to earnings yield not total return. That makes more sense now, but what's all this 30x talk? 

 

 

 

 

 

 

P/E is at 25 trailing earnings, but earnings have been contracting for over a year now and I don't see much reason to expect that we'll suddenly reverse to positive growth next quarter. So not sure you can take that at face value. 25-30x is where I expect we currently are they are based on current earnings. Even your chart above estimates YE multiple at 27+ 

 

I've amended the above to reflect that range. 

Edited August 30, 2023 by TwoCitiesCapital

[thepupil]

that's only for the nasdaq 100, which isn't the market. 

 

I just downloaded the entirety of the S&P 500 (which is most, but not all of the broad market / a selected portion of the profitable US market). Median PE is 20.5x  Median Fwd PE is 18x. Summing up all forward year estimates and market cap (the right way to do index PE) you get 18x fwd. Now you can take issue w/ next year's earnings or some of the top guys, but I simply don't see the broad US mkt at the kinds of current multiple you do. 

 

Here is the Wall Street Journal. S&P 500= 20x Nasdaq  =30x. "PE Data is based on as-reported earnings"

 

 

S&P provides a comprehensive excel of S&P 00 earnings. They have S&P at

19.5x 2022 EPS

20x 2023 EPS

18x 2024 EPS

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

 

Edited August 30, 2023 by thepupil

[TwoCitiesCapital]

4 minutes ago, thepupil said:

that's only for the nasdaq 100, which isn't the market. 

 

I just downloaded the entirety of the S&P 500 (which is most, but not all of the broad market / a selected portion of the profitable US market). Median PE is 20.5x  Median Fwd PE is 18x. Summing up all forward year estimates and market cap (the right way to do index PE) you get 18x fwd. Now you can take issue w/ next year's earnings or some of the top guys, but I simply don't see the broad US mkt at the kinds of current multiple you do. 

 

Here is the Wall Street Journal. S&P 500= 20x Nasdaq  =30x. "PE Data is based on as-reported earnings"

 

 

S&P provides a comprehensive excel of S&P 00 earnings. They have 20x 2023 EPS and 18x 2024 EPS

https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

 

 

My bad. I hadn't paid close enough attention to what ticker you put in. 

 

From what I can see, current S&P earnings are 175. A price of 4500 puts the current multiple at 26x if the contraction stops here. 

 

https://ycharts.com/indicators/sandp_500_earnings#:~:text=Basic Info-,S%26P 500 Earnings is at a current level of 175.17,11.49% from one year ago.

Edited August 30, 2023 by TwoCitiesCapital

[thepupil]

in fairness, there's a gap b/w "as reported" and "operating earnings" that gets you to more like 24.5x

 

[TwoCitiesCapital]

19 minutes ago, thepupil said:

in fairness, there's a gap b/w "as reported" and "operating earnings" that gets you to more like 24.5x

 

 

I don't think it's operating earnings. Y-charts quotes Shiller as their source, but I can't access his website to see the source material. 

 

Ed Yardeni also has current trailing S&P 500 earnings in August at 175ish with operating earnings closer to 200/share. 

Edited August 30, 2023 by TwoCitiesCapital

[thepupil]

not trying to get into some kind of index multiple tit for tat here, but Yardeni is at 20x trailing operating earnings for S&P 500, Ibbotson as source. there's like 40 PE's in this YArdeni PDF. Let's just agree that it's somewhere between 20 and 30x trailing lol (which is a huge delta)

 

https://www.yardeni.com/pub/stockmktperatio.pdf

 

 

Edited August 30, 2023 by thepupil

[TwoCitiesCapital]

I'm getting 175 on last 4 quarters earnings using Standard and Poor's data too. 

 

Q1: 48.41

Q4: 39.61

Q3: 44.41

Q2: 42.74

 

I think $175/share is right. 4500 price level and 175 earnings is 25.7x without considering Q2 is down ~5% YoY so far. Assuming all earnings come on around that level, we'd be closer to $173 & 26x using current prices and estimations of Q2 earnings. 

[Red Lion]

14 hours ago, TwoCitiesCapital said:

 

Current earnings yield is basically 3-4% with a 25-30x multiple (based on your outlook for earnings continuing to decline or not). 10% growth means next year it'd be 3.3%, the year following 3.7%, etc. That is inclusive of the compounding effect as well.

 

I do think I made a mistake above in not including what 30x the ending earnings would be to include a nominal price return return, so I was wrong about assuming "even if multiples doesn't contract" but I really don't expect to maintain a 25-30x type multiple either. Assuming a reasonable price return for equities at such high multiples still leaves a significantly high bar for earnings growth or multiple retention. 

 

Takes a long time to get anywhere near the current rates on spread fixed income like 6-7% in mortgages, 6-7% in corporates, 8-10% in EM and HY, etc let alone to make up for the years where you were earning less. 

Fair enough that makes sense. I agree the multiple is quite high. 
 

 

[james22]

[james22]

[james22]

[james22]

[james22]

From Tilson's email today.

[TwoCitiesCapital]

1 hour ago, james22 said:

 

A bit early to be saying it's gonna be negative for the 3rd consecutive year... we've got a month left in fiscal year and 4 left in the calendar year. In either case, the interest accrual over either time frame is basically enough to turn that -0.4% positive even without yields falling much more than individual basis points. (We've actually already fallen 5 bps since the chart was made eliminating much of that 0.4% loss). 

[Gregmal]

5 hours ago, TwoCitiesCapital said:

 

A bit early to be saying it's gonna be negative for the 3rd consecutive year... we've got a month left in fiscal year and 4 left in the calendar year. In either case, the interest accrual over either time frame is basically enough to turn that -0.4% positive even without yields falling much more than individual basis points. (We've actually already fallen 5 bps since the chart was made eliminating much of that 0.4% loss). 

Ok. But if we re talking about such small movements that intraday is make or break, isn’t that kind of “losing” to begin with? Like go back two decades on that chart and there’s like 3-4 years where maybe you got an acceptable return. Same number of year you would have got a horrendous one. These are basically just instruments for governments and pensions that wanna skim fees.

Edited August 30, 2023 by Gregmal

[Guest]

8 hours ago, james22 said:

From Tilson's email today.

 

Is he bullish or bearish on markets? I might do the opposite. 

[Gregmal]

Just now, stahleyp said:

 

Is he bullish or bearish on markets? I might do the opposite. 

Almost certainly touting Ackmans rate take. If there’s one thing the guy does well, it’s copy Ackman. 

[james22]

1 hour ago, stahleyp said:

 

Is he bullish or bearish on markets? I might do the opposite. 

 

So, what does all this mean?

 

It's simple: rising rates reduce the value of bonds (which are paying lower rates that prevailed when they were issued), which goes a long way to explaining the banking crisis earlier this year.

 

But this is actually good news for investors today because they no longer face the TINA ("there is no alternative") dilemma when thinking about whether to invest in stocks or bonds/cash because both are now attractive.

[TwoCitiesCapital]

15 hours ago, Gregmal said:

Ok. But if we re talking about such small movements that intraday is make or break, isn’t that kind of “losing” to begin with? Like go back two decades on that chart and there’s like 3-4 years where maybe you got an acceptable return. Same number of year you would have got a horrendous one. These are basically just instruments for governments and pensions that wanna skim fees.

 

Im not claiming it's make it or break it. Just that someone making the claim that -0.4% constitutes a negative return for the year when you still have 1-4 months left (pending the calendar they use) is being premature. 

 

I'd argue annual returns are largely arbitrary to begin with and I tend to focus more on peak to trough type movements. 

 

I expect double digit like returns out of 10-year treasuries over the next 12-18 months - not just avoiding the -0.4%. 

Edited August 31, 2023 by TwoCitiesCapital

[james22]

1 hour ago, TwoCitiesCapital said:

Just that someone making the claim that -0.4% constitutes a negative return for the year when you still have 1-4 months left (pending the calendar they use) is being premature. 

 

He did qualify with on pace.

 

But more significant than the duration is the negativity: 2023 will need be +18.9% for 2021-2023 to avoid being the worst three-year period since 1928.

 

That seems unlikely.

[TwoCitiesCapital]

34 minutes ago, james22 said:

 

He did qualify with on pace.

 

But more significant than the duration is the negativity: 2023 will need be +18.9% for 2021-2023 to avoid being the worst three-year period since 1928.

 

That seems unlikely.

 

Sure. Starting at what was basically sub-1% rates and then experiencing 9% inflation will do that. 

 

Given the starting point, the worst 2 or 3-year return in history makes sense. Just seems very rearview mirror-ish, and unrelated to the returns on 2023 at all, given that all of this was basically also known 9 months ago. 

 

 

Edited August 31, 2023 by TwoCitiesCapital

[thepupil]

5,10,20,30 year yields all now > October 2022 highs. 

[Spekulatius]

Sold my KW 2/2030 bonds I had for a small profit. I am not feeling all that giddy about the collateral. I am surprised the equity still trades where it does (~$16/share).