Is The Bottom Almost Here?

[Gregmal]

Or look another way, one that I would say is almost completely ignored…what does the Fed do if CPI comes in negative 6-8 months from now? Keep wallowing about wages and needing more data? Almost certainly not. 

[changegonnacome]

4 hours ago, Gregmal said:

“earnings are going to be awful” talk.

 

 

Bit early to declare victory & announce the new bull market open……earnings peaked at 53.94 in Q4 2021…….every subsequent print has been down….if you think we are stopping here you’re gonna be mistaken…..opex costs into 2023 are rising as wage costs ratchet it up…..pushing price game on a weakening consumer is over….you accept lower volume or you accept lower margin……either way it’s not good for the bottom line. Let’s see.

Edited November 27, 2022 by changegonnacome

[Gregmal]

In June we were told how awful Q2 would be and then again how awful Q3 would be. This was said in tandem with “the market is asleep and looking through rose colored glasses”. At the least, now with hindsite confirming it, we can conclude that it was obviously “baked in”. Pretty much any time I’ve ever heard “it’s not baked it” when an index or sector is off 20%+, it’s baked in.
 

Right now we re at 15x 2023 estimates and even if those are off, probably no more than 20x. That neither bores me nor excites me but again seems to validate the absurdity to being greedy on either the bull or bear side. If I had to guess the markets probably go sideways for a good while with individual sectors and stocks being where the money is made.

[Gregmal]

And to line that up with the bottoms….late June and early October…basically right before reporting started and all the bears were jacked up on their own rhetoric.

Edited November 27, 2022 by Gregmal

[changegonnacome]

1 hour ago, Gregmal said:

And to line that up with the bottoms….late June and early October…basically right before reporting started and all the bears were jacked up on their own rhetoric.

 

This cycle aint over......call me.......when unemployment goes to 5%+...... inflation goes down to 2.x%......and the Fed is cutting rates.

 

I still expect us to smash through June/Oct 2022 lows on SPY........with VIX peaking at 40.......once we get that.....happy to think about the next bull market Lets see.

Edited November 28, 2022 by changegonnacome

[Gregmal]

Markets are forward looking. I can guarantee if you're waiting for a 2% inflation print(via CPI or whatever other measure one would be privy to) you'll miss the bottom by a mile. Fed may not "cut" anytime soon...I personally dont want them to...4-5% rates are fine. The world existed at that level while previous tech, housing, and overall market booms were born. And 4% unemployment is fine too, although perhaps a slight goalpost move from the 5-6% everyone said we needed a couple months ago? 

 

It may be a wildly contrarian opinion, but when everything under the sun is coming down, and most of it, numerically, pretty hard, we dont have inflation just cuz people get annual raises. And its gonna be a really, really hard sell to the politicians and powers that be, if we drive the economy off a cliff, fighting a healthy jobs market with a boastful vengeance, as everyones favorite inflation measure...CPI, falls off a cliff finally too. 

[changegonnacome]

14 minutes ago, Gregmal said:

you'll miss the bottom by a mile.

 

Not picking bottoms as we spoke about before - I own what makes sense..........I hedge with what doesn't make sense.......this long/short structure makes little sense most of the time in periods where markets are boring and going up.......during this period......lets call it choppy waters getting from ZIRP to a post ZIRP world.......it makes a tonne of sense to me. Lets see.

[crs223]

more than half of the small businesses in my neighborhood have “help wanted” signs in their window: all restaurants, dry cleaners, supermarkets, even the “olive oil tasting” place.

 

Each Help Wanted sign represents a business that cannot afford market rate labor.  Not sure why the workers stick around.

[Gregmal]

The 1% pitch trickle down economics until it actually trickles down and then just as it does they get their boys within the establishment to put an end to it. Rigged?

[UK]

I am repeating myself, but I think at this point it is better not to stick to one of the scenarios (transitory or not) too strongly. There are valid arguments on both sides: labor costs is still increasing perhaps to much and it is a negative for inflation  (however covid savings also are running out, so maybe bigger wages will only compensate for that?), while costs of goods/commodities and especially shelter are turning into obvious positives. But who knows for sure? And even if someone think he does I am afraid the world is too uncertain to deliver surely predicted outcomes. I turned over like 2/3 of my portfolio in the last 3 month, from very defensive and almost mostly shorter duration (value) to neutral on the defensiveness (+- fully invested) and ~50/50 on short (value) / long (growth), with no positions with large leverage in either bucket, and I think it is the best way to go for me at this point. Market as the whole is still really not cheap enough to become more aggressive, but it is also not to dangerously expensive I think and there are really good opportunities if you look at individual companies.   

[changegonnacome]

I'm not too sure its that confusing.......US at beyond full employment, labor shortages everywhere you look....historically low immigration....historically high retirements....historically low participation rates against a backdrop of historically poor educational outcomes for low income cohorts.......historically low productivity growth....historically high nominal spending increases....demographic trends locked in a box for decades........DC unable to get out of its own way to fix the supply side.

 

Then 2020 came and you unleashed just unprecedented monetary & fiscal stimulus......which lit the fuse on inflation which is now with us coming up on two years solid and getting integrated into every pay deal I've spoken to anyone about.........some people talk about inflation, its link to wages and its knock on effect on prices as some kind of fringe academic theory unproven in the real world.........yet I talk to small business owners and its just the most practical common sense mental exercise any of them ever heard.....they literally look at me puzzled when I talk to them about it & inquire how they respond to higher labor costs.........seriously they look at me like "duh! dummy"....."if I have to pay people more in my store I"m gonna charge my customers more, I'm not running a charity"....is the general jist.

 

So inflation is here....its entering its terrible two's.......and the historical record is pretty clear on it.......you need a recession and a period of sustained below trend aggregate output to really conquer it. The FED has a shot heading into 2023 to put the inflation genie back in the bottle.....how......ensure comp discussions in H2 2023 are informed by job insecurity such that chain mail nature of inflation is broken....they've utterly failed at that task in 2022 as they started hiking way too late. Shame on them.

Edited November 28, 2022 by changegonnacome

[mattee2264]

Black Friday sales record breaking but a lot of people I have spoken to have taken advantage of the sales to do their Christmas shopping early and by definition Black Friday sales are lower margin than usual sales. And apparently lot of the sales done on a buy now pay later arrangement. 

 

Does seem like an eye of the storm type scenario where it seems that the worst has passed (inflation has peaked, bulk of the rate increases behind us, COVID in the rear window, US economy technically out of recession) but we are actually probably still halfway through the bear market with the story to shift in 2023 to falling earnings and how much damage will be done until the Fed is prepared to aggressively ease to bail out markets the way they always do eventually)

 

 

[dealraker]

14 hours ago, changegonnacome said:

 

Not picking bottoms as we spoke about before - I own what makes sense..........I hedge with what doesn't make sense.......this long/short structure makes little sense most of the time in periods where markets are boring and going up.......during this period......lets call it choppy waters getting from ZIRP to a post ZIRP world.......it makes a tonne of sense to me. Lets see.

Old dealrakers view:

 

Enlessly collecting macro information keeps investors from thinking about anything worthwhile, thus not thinking at all

Self funding businesses with moats are just as prevalent today as they always have been

Macro collection calls you to action that is not good for investing success

Being vague and unsure macro wise is far better than being intense and certain

All weath in capitalism is the direct ownership of businesses that take in X and spurt out X plus

Limiting portfolio ups and downs with "stuff" (that costs money) is harmful to long term results

As you obsess on one thing you are missing something far more important screaming at you

While endlessly checking for greener grass the diamonds are most often under your feet

Relax...you'll likely get old and not remember any of the intense feelings you have today

Read what others post and plug it into all your life's experiences, you will see and get to know the person in your mirror

 

 

 

 

 

 

[changegonnacome]

Yeah broadly @dealraker I agree.....but I'm afraid in this instance the macro and bear market bias is just too obvious to me...but I'm not frozen, I haven't stopped analyzing business/industries.....I'm moving forward with greater caution than usual....a higher hurdle for investment........more hedged, more dry powder........its a kind of positioning thing with some market cycle overlay.....if my bearishness is wrong it'll cost me a few 100bps of performance.......if I'm right and I've been pretty right since the spring/summer it will be and has been a source of outperformance relative to the beta.

 

Not for everyone what I'm doing......but yes wouldnt want anyone to suck their thumb pondering macro it is usually a fools erand...guess you can add me to this fools list in this instance.........but I continue to turn over rocks and find things I like.

[TwoCitiesCapital]

18 hours ago, changegonnacome said:

 

 

Bit early to declare victory & announce the new bull market open……earnings peaked at 53.94 in Q4 2021…….every subsequent print has been down….if you think we are stopping here you’re gonna be mistaken…..opex costs into 2023 are rising as wage costs ratchet it up…..pushing price game on a weakening consumer is over….you accept lower volume or you accept lower margin……either way it’s not good for the bottom line. Let’s see.

 

+1 

 

Earnings contraction is likely to continue. Rates have continued to move higher and CPIs have continued to lag PPIs (margin contraction). 

 

The other factors: 

1) USD - off it's recent highs, but still significantly higher than a year ago which will continue to show poor comps YoY for exports

 

2) Oil prices are back down to where they were a year ago, but only after taking SPR reserves to multi-decade lows to accomplish it. What's the likelihood oil prices remain this low while physical shortages abound without additional releases of reserves? Oil may go modestly lower in a recession, but intermediate term outlook is for higher prices to destroy demand and fix the shortage. 

 

The story for Q3 earnings is that fewer companies are beating estimates for revenues/profits than historical quarters, and the few who do beat are beating by a significantly smaller margin than historical beats. And those "beats" are only occurring AFTER months of downward revisions.

 

And all of this is occurring before the bulk of the lagged effect from rate hikes is felt and before labor market weakness is evident... 

 

 

[Ulti]

https://www.philadelphiafed.org/surveys-and-data/regional-economic-analysis/state-coincident-indexes

 

good read on how state economies are doing... monthly readings

[changegonnacome]

11 minutes ago, TwoCitiesCapital said:

And all of this is occurring before the bulk of the lagged effect from rate hikes is felt and before labor market weakness is evident... 

 

Yep - if I counter my own bearishness..... the only thing different this time versus rate hiking/inflationary cycles of the past.........is the sheer number of job openings vs job seekers........the big question and I'm not convinced that it changes anything.......is whether simply killing the number of job openings from historically crazy high rates might be enough, in and of itself to carry the load of the heavy lifting needed to tame inflation pressures. I hope it does........but really I return to the basics when I ponder this.......CPI & wage increase expectations/success and their inextricable link are only killed by higher unemployment & below equilibrium aggregate production for a while......when you think of extreme level of JOLTS then one should think of it like extra dense jungle that the monetary authorities need to cut away at first before they can get to the solving inflation pressures.....pointing to perhaps not higher interest rates.....but rates which need to remain at their terminal level for longer than is usual to have the same desired effect. 

[maplevalue]

On 11/27/2022 at 11:49 AM, Spekulatius said:

Just my hunch, if labor market stays reasonably strong and the wage increases continue to trail inflation, we are going to see widespread labor strikes and more unification.

 

That will complete the 70‘s experience. Maybe even the bellbottom jeans come back as well.

 

P. S. Perhaps the strikes are already happening in the way of quiet quitting.

 

In Ontario we recently had the government attempt to bypass collective bargaining and enforce a contract on a education union (union wanted more $$$ citing inflation). The government backed down and eventually negotiated after there was talk of an indefinite general strike from a variety of unions in Ontario (https://labornotes.org/2022/11/general-strike-threat-beats-ontario-anti-worker-law).

 

Just a taste of the disruption of what can happen when inflation -> real wage decreases.

 

 

[Gregmal]

If jobs dont equal inflation then everything holding the argument up goes poof. If people normally get 3% and now get 5% raises...that creates the widespread and rampant inflation we saw earlier? That warrants wrecking the economy? Where does the madness end?

 

Going back to the theoretical index/market bottom debate..not that its too heavily important to me as I've always thought idiots buy the indexes, real investors buy individual stocks and assets....but, who dies and who becomes king and determines that this cratering occurs? Earnings "collapse" and what? all of a sudden we need a low teens multiple assigned to whats likely trough earnings for the first time ever? Seems like a lot of story telling that skips over the important parts or assigns high probability bridges where there should be low probability ones, many times over. 2009 SPY multiple it was like 60x and early 2000s like 30x. Or is this where we go back to the 70s again without context and just say, idk, 12?

[Spekulatius]

10 minutes ago, maplevalue said:

 

In Ontario we recently had the government attempt to bypass collective bargaining and enforce a contract on a education union (union wanted more $$$ citing inflation). The government backed down and eventually negotiated after there was talk of an indefinite general strike from a variety of unions in Ontario (https://labornotes.org/2022/11/general-strike-threat-beats-ontario-anti-worker-law).

 

Just a taste of the disruption of what can happen when inflation -> real wage decreases.

 

 

This wage inflation spiral is not a given imo but something to watch for. it's exactly what happened in the 70's. the ,labor market in the 70's wasn't weak except in 1974/75 and later in 1979 and workers felt screwed by inflation and salaries tracking inflation, hence the strikes.

 

We have now rumblings bout a railroad strike which could wreck supply chains for bulk goods, cars etc.

 

As will all inflation talk, i can't predict the future but one can look at what's happening and I think 5% salary rises with 7-9% inflation in conjunction with a strong labor market are potent mix that could lead to unwelcome surprises.

 

To avoid this from happening, we need inflation to quickly drop to 4% or less, I think.

Edited November 28, 2022 by Spekulatius

[Parsad]

10 hours ago, changegonnacome said:

I'm not too sure its that confusing.......US at beyond full employment, labor shortages everywhere you look....historically low immigration....historically high retirements....historically low participation rates against a backdrop of historically poor educational outcomes for low income cohorts.......historically low productivity growth....historically high nominal spending increases....demographic trends locked in a box for decades........DC unable to get out of its own way to fix the supply side.

 

Then 2020 came and you unleashed just unprecedented monetary & fiscal stimulus......which lit the fuse on inflation which is now with us coming up on two years solid and getting integrated into every pay deal I've spoken to anyone about.........some people talk about inflation, its link to wages and its knock on effect on prices as some kind of fringe academic theory unproven in the real world.........yet I talk to small business owners and its just the most practical common sense mental exercise any of them ever heard.....they literally look at me puzzled when I talk to them about it & inquire how they respond to higher labor costs.........seriously they look at me like "duh! dummy"....."if I have to pay people more in my store I"m gonna charge my customers more, I'm not running a charity"....is the general jist.

 

So inflation is here....its entering its terrible two's.......and the historical record is pretty clear on it.......you need a recession and a period of sustained below trend aggregate output to really conquer it. The FED has a shot heading into 2023 to put the inflation genie back in the bottle.....how......ensure comp discussions in H2 2023 are informed by job insecurity such that chain mail nature of inflation is broken....they've utterly failed at that task in 2022 as they started hiking way too late. Shame on them.

 

This is insane!  To analyze and hypothesize about all of this is exhausting and has no bearing on when to invest and when not to invest.  

 

You buy things when they are cheap...some things got awful cheap in March 2020, and then again in March 2022 and September 2022.  And then you sell when those investments begin to approach intrinsic value.  Otherwise, you sit on cash or instruments that will generate some income while taking a benign approach to market volatility.  

 

You don't try and analyze what the FED and everyone else is going to do, because that's a fool's game.  And often, the trigger that causes the large scale correction isn't what you expected, or at the very least fully expected.  

 

When I bought Fairfax, no one wanted to touch it.  Even Greg was calling it fool's gold!  Now, when it is sitting near all-time highs, everyone thinks that FFH's earnings are going to go through the roof and want to buy it.  Same thing with out of favor tech stocks.  No one wanted to touch them this year...yet a year or two years down the road, investors will be clamoring for them again. 

 

This is the life of the value investor.  Buy when no one wants it and then sell it when everyone is screaming for it again.  Everything else is just noise!  Cheers!

[Gregmal]

25 minutes ago, Parsad said:

To analyze and hypothesize about all of this is exhausting and has no bearing on when to invest and when not to invest.  

Yup. The more variables you need to account for, the higher the likelihood things can go wrong. Generally though, the more bridges and ladders you need to connect a thesis, the higher the payoff should be. Here though, we're staring down indexes at -20-30% and individual names in many cases much more than that, and it just seems like awful risk reward and a case of "hello boat, I missed you". The time to short or play the short growth and buy value game was by and large right after the vaccine announcement for the fad and bubble stuff. All of last year it worked well too. Early this year was a great window too, Q1-Q2 end. The last few months just seem like the late to the party crew trying to claim their "I called it" status but it just seems long in the tooth because of stuff like above were you need to make 15 different judgment calls and have them all go right together. And then what? Maybe you eke out another 10-20% on the index IF EVERYTHING goes right but also have to time the entry and exits perfect while probably leveraging it with options to make the return worthwhile? 

 

Ive run off pretty much all my index stuff in October. All thats left is a few VIX calls I bought last week to hedge into year end and with VIX 20 it was pretty much free, Tesla and today with all the China stuff I threw a little more money into the fire pit on Apple puts, but even there...what am I shorting for? $120? My hunch is the last 2 quarters were basically the last leg needed before new leadership emerged in the market. Stuff like LPX for instance....retards traded it down to $50, like 2-3x earrings, while buying back stock. What was their play? 1.5x earnings LOL. Pigs get killed both long and short if they overstay their welcome. FFH indeed looks like its earning a new multiple soon. 

Edited November 28, 2022 by Gregmal

[Parsad]

Also, if investors are still risk averse when it comes to equities, the credit markets are offering up some good opportunities.  Even Howard Marks is finding good investments in the credit markets right now:

 

https://ca.finance.yahoo.com/news/billionaire-investor-howard-marks-touts-142841516.html

 

Cheers!

[changegonnacome]

4 hours ago, Parsad said:

This is insane!  To analyze and hypothesize about all of this is exhausting and has no bearing on when to invest and when not to invest. 

 

Again everybody mischaracterizes my ramblings..........its not about when to invest and when not to invest.......I've never said sell it all, wait, dont buy....everybody down tools........its a question of defensive or offensive posture......I'm invested, I remain invested....I buy things when they make sense to me....loaded up more Irish banks today......however I have a broadly defensive posture currently with a view that a time is coming to get aggressive, very aggressive but just not yet......I want cash on-hand.......I want things that will turn to cash in the strife that could come........I'm interested in indexes because I'm interested in the beta.....cause good companies will get caught in the beta and I'll buy them.......I'm interested in the indexes as a hedging and shorting tool. Thats my interest in SPY/QQQ. I buy companies not indexes.

[changegonnacome]

6 hours ago, Spekulatius said:

To avoid this from happening, we need inflation to quickly drop to 4% or less, I think.

 

Yep I agree.......look at UK........nurses, rail workers, london underground.......all going on strike......the de-unionization of the past 40 years is whats saving the US economy from a winter of discontent like they are having in England........but re-unionization, as seen in Starbucks/Apple Stores & as you mentioned, is step one in a two step process where collective bargaining really starts kicking things off and in my view in-graining inflationary pressures further into the economy....you bring Union's back to life you bring inflation back to life.......another good reason why the Fed must remain steadfast in 2023 as unemployment & economy begin to feel the burn of higher rates.....they get one more shot at this to turn this COVID inflation flare into a short-ish 3 year "blip" (April 2021 - Q1 2024) if they miss this window.....it could be a decade long affair ala the 70's..........they've got to really hold the economies head under the water in 2023 IMO. Lets see....the book says central bankers chicken out always and kick the can.......stagflation is my case as a result.