Is The Bottom Almost Here?

[Gregmal]

16 minutes ago, SHDL said:

Thanks to @fareastwarriors for the link.

 

The reasoning isn't so clear to me from the article but it sounds like the gist is that the yield curve inversion we're seeing now is largely driven by the "inversion" in inflation expectations (meaning short term inflation expectations are much higher than long term inflation expectations) and therefore it is not as strong an indicator of an upcoming recession as it normally is.

 

Anyhow I thought it was interesting that this was coming from the man who invented the indicator.

This is halfassedly how I look at it and think it makes sense. We have shorter term, "transitory"(I know, gasp!) issues related to the covid experience that need to work their way through the system. The short term rate...4-5%....shockingly, is pretty darn close to what the real inflation rate is right now, give or take a few basis point. Inflation is NOT what the inflationistas are pointing to... IE CPI or some >5% rate. It wasn't even high most of last year either. It just went bonkers over 18 months and now averages out, no different than when people quote you on a 3-5 year annual return rate but the returns are flat 3 years, negative one, and then like 40% for one year. The past 3 years of market activity have been beautiful for everyone; investors, speculators, fraudsters, etc because theres such an amalgamation of datapoints that literally allow one to weave whatever the F the want to and create a somewhat believable narrative using largely real data. 

[TwoCitiesCapital]

4 minutes ago, SHDL said:

 

I'm pretty sure that 1.5% number is just taken from the TIPS yield curve. I do agree that 2.x% inflation is perhaps a bit too sanguine but it is what the bond market is currently pricing in.

 

I agree that it was taken from breakevens. 

 

I just think

1) the Fed owns a significant portion of the TIPS market (~25%)

 

2) TIPS are quite a bit less liquid then treasuries so incremental buyers/sellers impact prices more

 

3) we just came off an inflation scare where people flocked to TIPS and we're then disappointed by the performance. 

 

I dunno what that means for TIPS over-estimating, under-estimating, or correctly predicting inflation, but I'd hazard a guess that they're less accurate at predicting go-forward inflation than the nominal yield curve has been at predicting recessions which makes me hesitant to use them as a signal to debunk it. 

Edited February 15, 2023 by TwoCitiesCapital

[dealraker]

So I bought the lake lot next door at retail asking price (my family developed this area) of $5,000 then the lot next to it that I live on for $7,500.  Pretty sure there have been times when I'd have trouble selling either lot for what I paid - inflation adjusted - we've had some bang up downturns being where 15,000 furniture jobs vanished (in a community then of 130,000).  Although I have no biological children I come from a big family, we simply said  long ago, "If we have things for sale, either in the stores or company property, everybody pays the same thing...the market determines it."  So I didn't get discounts on building materials either.

 

Today?  I could get $250,000 to $300,000 per lot if the house wasn't on one of them.  Kinda the same way I invest, try to get things that over time will go up at some rate.  But I never think in terms of beating the market or selling one day.

 

So we are probably born engrained to do this or that and it may really be impossible to chage it.

Edited February 15, 2023 by dealraker

[Spekulatius]

7 minutes ago, dealraker said:

So I bought the lake lot next door at retail asking price (my family developed this area) of $5,000 then the lot next to it that I live on for $7,500.  Pretty sure there have been times when I'd have trouble selling either lot for what I paid - inflation adjusted - we've had some bang up downturns being where 15,000 furniture jobs vanished (in a community then of 130,000).  We have a big family, we simply said  long ago, "If we have things for sale, either in the stores or company property, everybody pays the same thing...the market determines it.  So I didn't get discounts on building materials either.

 

Today?  I could get $250,000 to $300,000 per lot if the house wasn't on one of them.  Kinda the same way I invest, try to get things that over time will go up at some rate.  But I never think in terms of beating the market or selling one day.

 

So we are probably born engrained to do this or that and it may really be impossible to chage it.

$250K for a nice buildable lot on the lake doesn't sound that steep. I have seen lakeside  lots trading for more in the southern NH boonies and the climate is much more agreeable in NC. I don't think the bottom is in for those.

Edited February 15, 2023 by Spekulatius

[changegonnacome]

2 minutes ago, Spekulatius said:

$250K for a nice buildable lot on the lake doesn't sound that steep. I have seen lakeside  lots trading for more in the southern NH boonies and the climate is much more agreeable in NC. I don't think the bottom is in for those.

 

Lake side lots are what the crypto nuts think bitcoin is - until you can sit on the porch of your bitcoin, have a beer and create life long family memories........I'll take the lake side lots all day long! 

[thepupil]

55 minutes ago, SHDL said:

 

I think part of it is that real rates are still kind of low. So for example you have a government with a lot of debt that now has to pay higher interest but, thanks to inflation, tax revenue has gone up automatically and so it has no difficulty paying. 

 

Another thing is that US households mostly have their home mortgage rates locked in at low rates and so their financial situations aren't affected too much by these rate increases - and if anything they may have benefitted some (e.g., if you took out a 30 year mortgage at 2.x% at the right time and put the cash you saved into long term bonds at say 3%+ you got "free money").

 

yes. @wabuffohas pointed this out a lot that in aggregate raising rates puts money in households pockets because they have more cash/bonds than debt. obviously that "in aggregate" is doing a lot of work. Someone with $2mm of 1 year treasuries is making $100K risk free that they weren't 2 years ago. anyone (people assets and corporations) with significant net floating rate debt is hurting. 

 

[Viking]

37 minutes ago, thepupil said:

 

yes. @wabuffohas pointed this out a lot that in aggregate raising rates puts money in households pockets because they have more cash/bonds than debt. obviously that "in aggregate" is doing a lot of work. Someone with $2mm of 1 year treasuries is making $100K risk free that they weren't 2 years ago. anyone (people assets and corporations) with significant net floating rate debt is hurting. 

Here in Canada, a reasonably large subset of the population carries lots of debt (mortgages and LOC) thanks to our housing bubble. Lots of people own multiple properties with big mortgages (that were already cash flow negative at historically low interest rates). Most of this debt is variable, especially if interest rates stay high for years (even 20% of those 5 year fixed mortgages come due every year).
 

The real estate bubble has also created a mental rental market: here in Vancouver it is not uncommon to pay C$1,500-$1,700/month for a one bedroom and $2,800-$3,000 for a two bedroom - if you can find one (crazy low vacancy rate). Landlords with mortgages are going to need big increases in rental rates given their mortgage costs are going through the roof.

 

The learning is you do not want to blow a housing bubble because it usually causes big problems for years when it corrects. The US learned its lesson in 2008-2010. China is in even worse shape than Canada.

 

The Bank of Canada is really boxed in. Their answer is to stop rate hikes. Even in the face of high inflation (Canada has lots of very large public sector unions) and a very tight labour market. Government spending looks like it is accelerating.
 

No idea how it plays out here. Super happy i have no debt. 

Edited February 15, 2023 by Viking

[Gregmal]

Student in the back row raises hand and asks question…..

 

Teacher, if earnings keep coming in better than expected and stocks respond favorably because of this, what is the proper refrain? Revert back to “it’s a bubble and people are euphoric so the market still needs to crash”? Or what? 

[Dinar]

29 minutes ago, Viking said:

Here in Canada, a reasonably large subset of the population carries lots of debt (mortgages and LOC) thanks to our housing bubble. Lots of people own multiple properties with big mortgages (that were already cash flow negative at historically low interest rates). Most of this debt is variable, especially if interest rates stay high for years (even 20% of those 5 year fixed mortgages come due every year).
 

The real estate bubble has also created a mental rental market: here in Vancouver it is not uncommon to pay C$1,500-$1,700/month for a one bedroom and $2,800-$3,000 for a two bedroom - if you can find one (crazy low vacancy rate). Landlords with mortgages are going to need big increases in rental rates given their mortgage costs are going through the roof.

 

The learning is you do not want to blow a housing bubble because it usually causes big problems for years when it corrects. The US learned its lesson in 2008-2010. China is in even worse shape than Canada.

 

The Bank of Canada is really boxed in. Their answer is to stop rate hikes. Even in the face of high inflation (Canada has lots of very large public sector unions) and a very tight labour market. Government spending looks like it is accelerating.
 

No idea how it plays out here. Super happy i have no debt. 

Man, that's low.  How can I move to Vancouver?  Nice two bedroom in NYC is at least USD 8K in Manhattan (10K+ CAD), and as much in nice neighborhoods in Brooklyn.

[thepupil]

 

some doom porn for y’all

[thepupil]

2 hours ago, Gregmal said:

Student in the back row raises hand and asks question…..

 

Teacher, if earnings keep coming in better than expected and stocks respond favorably because of this, what is the proper refrain? Revert back to “it’s a bubble and people are euphoric so the market still needs to crash”? Or what? 

 

 

What are you referring to?

 

Here are the 2023 earnings estimate trajectories of the S&P 500 and 4/5 top components (I skipped AMZN because EPS not relevant)

 

 

 

 

 

 

 

Edited February 16, 2023 by thepupil

[TwoCitiesCapital]

2 hours ago, Gregmal said:

Student in the back row raises hand and asks question…..

 

Teacher, if earnings keep coming in better than expected and stocks respond favorably because of this, what is the proper refrain? Revert back to “it’s a bubble and people are euphoric so the market still needs to crash”? Or what? 

 

1) the estimates have been dramatically lowered over the last 3-6 months. The "beats" that are occuring are relatively to these newly lowered expectations. Compared to where markers thought they'd be 6 months ago, earnings have been hugely disappointing. According to Yardeni, estimates were for -1% as recently as February 1st. -5% is shaping up to be a disappointment just from estimates 2 weeks ago...

 

2) despite lowering those estimates so as to claim companies "beat" them, my company estimates that only ~70% of companies are beating these lowered estimates as opposed to the historical average of ~77%. So despite lowering the benchmark significantly, it's still proven tougher to beat those "expectations" then average.  

 

3) I'd argue outside of day trading, what matters is the trend and not what they're doing relative to variable expectations. What matters is that earnings are down -5% YoY and not that the expectations had recently been revised down to -6% or whatever they were so as to "beat" that benchmark. 

 

Current expectations are -5% for Q1. Similar estimates have Q2 at minus 2-3%. Not major drops, of course, but also not what you pay 28x forward earnings for. Also, I'd argue that these, too, will prove optimistic just like Q4's were wve just a few weeks back. 

 

Edited February 16, 2023 by TwoCitiesCapital

[TwoCitiesCapital]

2 minutes ago, thepupil said:

 

 

What are you referring to?

 

Here are the 2023 earnings estimate trajectories of the S&P 500 and 4/5 top components (I skipped AMZN because EPS not relevant)

 

 

 

 

 

 

 

 

+1

 

Glad you had the charts. Couldn't find any of the resources to share on my phone other than looking up Yardeni's research reports

[thepupil]

to be clear, this is why you own stocks for the long run. EPS fo brrrr. America!!! 

 

But let's not pretend that earnings estimates for the biggest co's and whole market have not done anything but come down for like 3 q's. 

 

[Gregmal]

16 minutes ago, thepupil said:

What are you referring to?

I’m kidding cuz I pulled up a trending stock/news feed while at dinner and there’s all these tech stocks blasting off after earnings beats the last couple days. As you probably know, my tech stock exposure is minimal…so I have no real horse in the game outside of a few positions. But it’s weird to see. 

Edited February 16, 2023 by Gregmal

[Gregmal]

5 minutes ago, thepupil said:

to be clear, this is why you own stocks for the long run. EPS fo brrrr. America!!! 

 

But let's not pretend that earnings estimates for the biggest co's and whole market have not done anything but come down for like 3 q's. 

 

Yea, I guess this is part of the “market” discussion…I almost want to start a new thread disclaiming that we are no longer allowed to include FANG is any discussions about the markets cuz it just obfuscates things. No interest in those. And I’m not talking about CVNA type rallies either. But ABNB, RBLX, ROKU, UBER, TTD, etc. Even Z…what to make of this? Something, nothing? Idk. But if you’re following this whole time the market things…those were some of the first to crash, first to bottom, now breaking out. 

[thepupil]

Not allowed to include the largest companies by rev/mkt cap/ etc but instead should focus on a sideshow basket of unprofitable tech when talking about market fundamentals? 
 

greg, cmon man, like I kind of agree with your overall view here, but it’s this type of stuff that pulls me back into uselessly debating you

[Gregmal]

3 minutes ago, thepupil said:

Not allowed to include the largest companies by rev/mkt cap/ etc but instead should focus on a sideshow basket of unprofitable tech when talking about market fundamentals? 
 

greg, cmon man, like I kind of agree with your overall view here, but it’s this type of stuff that pulls me back into uselessly debating you

I guess this is where I circle back into my thing about hating FANG stocks in todays environment and only being interested in potential 5-10x stocks if I’m venturing into the tech space. I guess I’m just literally incapable of seeing “the market” because I’m 1000% a specific stock guy. So everyone says market and I think of a gazillion interesting sub sectors of the market and say “wtf are people wasting their time with”. 

[thepupil]

1 hour ago, Gregmal said:

I guess this is where I circle back into my thing about hating FANG stocks in todays environment and only being interested in potential 5-10x stocks if I’m venturing into the tech space. I guess I’m just literally incapable of seeing “the market” because I’m 1000% a specific stock guy. So everyone says market and I think of a gazillion interesting sub sectors of the market and say “wtf are people wasting their time with”. 

I’ll do some non tech heavyweights when I have time.

 

 

 

 

[changegonnacome]

1 hour ago, TwoCitiesCapital said:

Current expectations are -5% for Q1. Similar estimates have Q2 at minus 2-3%. Not major drops, of course

 

Everybody is also conveniently forgetting to inflation adjust falling nominal earnings........I'm not claiming inflation is 9%.........but it isn't 2% either.......I'd be comfortable saying one should take whatever your nominal fall in earnings is and adding 4-5% on to that to come up with the REAL fall.........or put another way if your equity stub isnt growing earnings ~5% YoY in the current climate it isn't growing its earnings power at all.

 

Simply another reason why one, in a inflationary & higher interest environment, should be seeking companies with higher than normal FCF yields and ideally companies that have positive FCF per share growth YoY in REAL terms. Put another way value beats growth in this environment because its a better vehicle for preserving purchasing power......with less risk of being killed by multiple contraction which haunts many equities I see still. Value provides way less ways to get hurt right now IMO.

Edited February 16, 2023 by changegonnacome

[changegonnacome]

9 hours ago, Spekulatius said:

For a real hard landing, the annual stress test results give you an idea what a 2008 GFC like scenario looks like. It's not pretty but the major banks would survive. That said, you don't want to own banks in this scenario.

 

I consider such a hard landing very unlikely however.

 

Me too - hard hard landing that would endanger current banks equity capital such that common shareholders gets diluted ala GFC or whatever is very very very unlikely.

 

The GFC was fundamentally a balance sheet recession.......everybody got levered up and paid dumb prices for stuff......and a tiny move in the value of the underlying destroyed what little equity there was in the banks AND households. This is a scenario where defaults for just about everything (not just housing) go through the roof as people throw in the towel on all debt and declare bankruptcy. 

 

What we are likely to experience, in an adverse scenario, is kind a little of what we are seeing already which is a household income statement recession.....wages failing in real terms.....household budgets getting stressed......more folks in trouble at the margins........unsecured sub-prime lenders I would be concerned about here.....but prime secured stuff IMO should be OK.

[Gamecock-YT]

10 hours ago, Viking said:

Here in Canada, a reasonably large subset of the population carries lots of debt (mortgages and LOC) thanks to our housing bubble. Lots of people own multiple properties with big mortgages (that were already cash flow negative at historically low interest rates). Most of this debt is variable, especially if interest rates stay high for years (even 20% of those 5 year fixed mortgages come due every year).
 

The real estate bubble has also created a mental rental market: here in Vancouver it is not uncommon to pay C$1,500-$1,700/month for a one bedroom and $2,800-$3,000 for a two bedroom - if you can find one (crazy low vacancy rate). Landlords with mortgages are going to need big increases in rental rates given their mortgage costs are going through the roof.

 

The learning is you do not want to blow a housing bubble because it usually causes big problems for years when it corrects. The US learned its lesson in 2008-2010. China is in even worse shape than Canada.

 

The Bank of Canada is really boxed in. Their answer is to stop rate hikes. Even in the face of high inflation (Canada has lots of very large public sector unions) and a very tight labour market. Government spending looks like it is accelerating.
 

No idea how it plays out here. Super happy i have no debt. 

 

Australia is in a similar boat. 23% of households will be getting mortgage rates resetting by roughly a 2% increase in Q2 and Q3. They're already have one of the highest household debt in the world.

[nafregnum]

8 hours ago, Gamecock-YT said:

 

Australia is in a similar boat. 23% of households will be getting mortgage rates resetting by roughly a 2% increase in Q2 and Q3. They're already have one of the highest household debt in the world.

 

As opposed to "What's the Fed gonna do next?", I think this kind of "macro" has to be at least as actionable as weather reports following the path of a hurricane.  Sure, a hurricane can change direction and make landfall somewhere else, but that doesn't mean weather reports are useless noise.

 

So, as mortgage rates in Australia and Canada begin to climb, what will happen?

 

  - Mortgages become more expensive.  Real estate prices see downward pressure.  Some areas suffer more than others, depending on demand as people move to where they can afford to live.

  - If rents go higher, do people move further from big cities out into the suburbs?

  - In general, people have less money to spend?

  - Maybe foreclosures go up?

 

In the aggregate, what behaviors change when people are feeling the pinch?

 

  - Less eating out at restaurants?

  - Cut back on travel plans?

  - Start shopping at DollarTree and Walmart type stores?

  - More people do their own car maintenance?

 

Some of you could add some good insights to add to these bullet points based on your wide reading and long experience.  I remember reading that Allan Mecham (who used to run a fund called Arlington Value) wrote that AutoZone would benefit during downturns because as people have less money to spend, those who know how will start doing their own oil changes.  I always thought that was an interesting detail to notice, and I often find myself trying to think of new insight like that.  

 

If a mortgage debt hurricane is threatening Vancouver and Australia, how would you prepare for the financial storm? 

Edited February 16, 2023 by nafregnum
grammar

[changegonnacome]

Troubling signs emerge as credit card debt hits record high

https://finance.yahoo.com/news/troubling-signs-emerge-as-credit-card-debt-hits-record-high-160607906.html

 

I'm sure someone else will post...........on the surface its concerning...........but being internally consistent the nominal level of credit debt reaching a record high is mis-leading.........we've had a couple of years now of inflationary pressure.........knowing this one would expect aggregate nominal credit card debt to be posting records!!!!!!!!............the same way I would expect nominal spending levels to be hitting records too.....the numbers attached to everything have gone up (incl. wages) and so too should numbers like this.

 

Missed payments as % of outstanding payment is a more important metric and this report show they are a little higher than the last two years.......yeah of course they are!.....the last two years were historically unprecedented low in delinquencies cause everybody and their mother were getting cheques every two weeks so they paid their credit cards.

 

I put articles like this firmly in the bear porn that folks talk about......headline scary....underneath the surface its kind of a nothing burger.

[Gregmal]

Yea between ABNB and the MSG earnings calls, I’m not sure there’s any signs of a struggling consumer…at least if you are picking your spots wisely.