Is The Bottom Almost Here?

[changegonnacome]

1 hour ago, vinod1 said:

Conclusion: The very popular Fed model has the appearance but not the reality of common sense. Its lure has captured many a Wall Street strategist and media pundit. However, the common sense is largely misguided, most likely due to a confusion of real and nominal (money illusion).

Vinod

 

Your sending me research papers....and factor quant models...and the Dean of Valuation.....and I'm simply telling you & saying that if say Uncle Sam offered me a 10yr treasury bill today with a 10% coupon....and Apple was being offered to me at the same time with TTM FCF earnings yield of 3% & IMO poor prospective earnings growth....that somehow those two instruments can't be compared somehow...cause they are apple & oranges ...nonsense....if thats my investment choices.....in my humble opinion you take the 10yr T-bill @ 10% and run, run fast....if you offer me Hostelworld equity then I tell Uncle Sam to go to hell with his t-bill.

 

Now if your also saying that the ERP hasn't been a great predictor of prospective stock returns..that the ERP as a factor is useless..thats its use is limited.....I just agreed with that in my post above.....I never said it was gospel or live your life by the ERP....the ERP in 2021 flashed a very generous 2-3% over bonds...signalling stocks were cheap and one should buy them up.....it was wrong, very wrong....stocks were actually expensive.....bonds were in a 3000yr bubble...making stocks look relatively cheap under the ERP or 'fed model'...Cliff Asness is right.....but if you are trying to tell me that an investor can't think in opportunity cost across both bonds and equities in a holistic way, forecasting & estimating prospective returns relative to risk in both and coming to a conclusion on where best to put their incremental marginal dollar cause somehow it's impossible to compare the two . Then we have fundamental disagreement. As  @thepupil says above.....equities arent always the 'right' answer....and to not consider them while thinking about where your next incremental dollar gets invested....is to be a one trick pony.........and thats before we get in to your or anyones relative or historical ability @vinod1 to accurately forecast the equity coupon or future prospects for a company.....lots of investors I know..... lack a demonstrable ability as fundamental business analysts.....and their returns would greatly benefit from loading up on bonds for all their nominal limitations....simply because they provide a lower probability of impairment of capital.....whereas poorly chosen equities offer limitless opportunities to do so.

[Parsad]

https://finance.yahoo.com/news/bank-america-shares-12-charts-004727999.html

 

Cheers!

[thepupil]

A nice discussion of rebalancing bonus (relevant to cash/bonds/other non equity stuff)

 

https://portfoliocharts.com/2022/04/12/unexpected-returns-shannons-demon-the-rebalancing-bonus/

[TwoCitiesCapital]

7 hours ago, thepupil said:

 

an aside: 

I think I'm an outlier amongst folks here and probably my peers, but I think that the traditional 60/40 or 70/30 portfolio works well in growing and preserving purchasing power and is a reasonable approach;

 

back to bonds/stock:

Since that thread, bonds have made about 0% in total return. Stocks are down 5-6%. The market PE (using S&P 500/trailing PE on bloomberg) has de-rated from 21x to 18x, margins have come down and the index composition has changed such that EV/Sales has gone from 3.1x to 2.6x. 

 

On a very short term, 1 year basis, I'd say the idea of bonds becoming "reasonable" as part of a portfolio  was correct. I personally went from 0% to like 25% ish in bonds/cash/CLO AAA etc, but am now more like 85%/15% as found some opportunities. 

 

Looking at today, I still maintain it's not entirely crazy to have some bonds. 

 

+1

 

I think the only place where Im largely taking a different approach is i'd say for the next 5-years or so, you might do better on 40/60 than 60/40. 

 

Bonds are providing lowish equity like returns. Equities are coming off high multiples, on record earnings boosted by trillions in stimulus while heading into a recession IMO. Also, doing this while inflation is changing regimes from low and stable to, at the very least, unstable. It takes time for these resets to occur. 

 

There will absolutely be opportunities to buy equities on dips in the next few years, but I wouldn't be shocked if it's 7-10 years or so before we exceed 2021 highs like it has been in prior secular bear markets. Thus, I want less exposure to equities than normal - particularly in an environment where alternatives are attractive, have historically out performed in similar environments, and require little duration or spread risk to work.  

 

Edited April 12, 2023 by TwoCitiesCapital

[changegonnacome]

CPI print for March is consistent with my long held view…..domestic services inflation is not magically going away….it is not some exogenous phenom that is disappearing or rolling off soon…this ain’t supply chains and it ain’t Putin….it’s occurring contemporaneously MoM at a ~5%+ clip….it is Made in America inflation created at the intersection of nominal pay increases/spending growth & anemic productivity growth underpinned by ultra low unemployment …..headline inflation will continue to fall for a little while more…..but it can’t fall forever cause headline & core are about to converge & flat line in the mid-4’s. The only thing that changes the math is weakening spending, rising unemployment & maybe some minor uptick in labor force participation precipitated by weakening economic backdrop. 
 

I stand ready at each inflation print & economic print to pivot from my view and go 112.5% long…..the inflation prints are changing until demonstrable economic weakness starts showing up in the data….retails sales, unemployment etc etc

[mcliu]

Core inflation actually increased from Feb.

[Gregmal]

I just wanna know when I can bust out my SPY 3000 hat. Been told for a while it’s coming. Been told to place all my focus on not just 50-100 basis points here and there but tenths of a percent fluctuations in poorly calculated monthly measures. Where’s the payoff? Or at least a way to massively lever a bet to todays figures? Is there anyone out here who thinks that July numbers will be equal to or higher than these? 

[Santayana]

If gas prices follow history and rise into the summer, then yes I think inflation stays at least at these levels.   Anecdotally, every bar and restaurant in my area has raised prices over the last month or 2, and both the cost of goods and shipping costs I pay for merchandise at my store keeps climbing as well.  Just paid $1200 freight on a delivery that was $900 last summer.

[vinod1]

18 hours ago, thepupil said:

 

So about a year ago, I started a thread arguing that bonds were starting to look like a real alternative to equities and were beginning to become more relatively attractive to equity indices. By alternative, I do not mean "you should sell all your stocks and buy bonds". By alternative, I meant that holding bondsas part of a diversified investment portfolio would cost less in opportunity cost than in the past because yields were perking up and becoming more competitive with yields on stocks. If you think stock indices will do 6-8% / year for 10 years or whatever, whether bonds yield 0%, 2%, or 4% determines the opportunity cost of holding bonds. 

 

an aside: 

I think I'm an outlier amongst folks here and probably my peers, but I think that the traditional 60/40 or 70/30 portfolio works well in growing and preserving purchasing power and is a reasonable approach; VWENX can work just fine for a lot of people (a relatively smooth 8.2%/yr since 1929 as the world's oldest balanced fund). Financial repression and ZIRP though forced people to either buy bonds are really really low yields or take on more risk to earn the same return and I view the reversal of that as a positive. TIPS offer real yields. bonds pay a withdrawal rate and arguably have less opportunity cost.I think Powell is mostly doing a good thing by returning to a normal cost of capital. there will be some adjustment, he may go too far, some shit may blow up, but I don't think we should be at ZIRP forever. 

 

back to bonds/stock:

Since that thread, bonds have made about 0% in total return. Stocks are down 5-6%. The market PE (using S&P 500/trailing PE on bloomberg) has de-rated from 21x to 18x, margins have come down and the index composition has changed such that EV/Sales has gone from 3.1x to 2.6x. 

 

On a very short term, 1 year basis, I'd say the idea of bonds becoming "reasonable" as part of a portfolio  was correct. I personally went from 0% to like 25% ish in bonds/cash/CLO AAA etc, but am now more like 85%/15% as found some opportunities. 

 

Looking at today, I still maintain it's not entirely crazy to have some bonds. What's interesting is that the nominal yield on S&P 500 was about 4.7% 1 year ago and is now 5.5% (so it increased by about 80 bps), but bonds also increased in yield from 3.2% to 4.4% YTW on Barclays agg index. So both asset classes saw a de-rating, it's just that reinvestment of coupon and lower duration is the reason that bonds OP'd stocks. that's what i like about bonds, in a rising rate/rising cost of capital environment you don't really lose much and aren't takin on general economic risks. the reinvestment of safe coupon keeps you in the game. 

 

I hope rates continue to rise (though I don't think they really can). I love having safe bonds/cash/whatever as a tool in the toolkit. stocks will (hopefully) destroy bonds over next 10-30 years, but nothing wrong with having some diversifitcation / other ways to preserve and grow purchasing power. 

 

@Gregmalwill say the indices don't matter. For many they do. they matter in terms of how I deploy $60K/yr where indices are my only option. 

 

 

 

 

 

 

 

I do not disagree one bit with what you wrote. It makes perfect sense. 

 

The question of how much you want to hold in stocks vs. bonds is a separate and in 99 out of 100 cases the key determinant of overall portfolio returns.

 

The issue I am arguing about is this: predicting what inflation is going to do, then predicting how the economy is going to react, then predicting how the Fed is going to react and then predicting how the stock market is going to behave, then positioning the portfolio to take advantage of that prediction. 

 

Been there. Done that. Lesson learned having needlessly ignored Buffett's advice.

 

I think stocks are reasonably priced. My estimate for S&P 500 is around 3600 +/- 15%-20%. It looks like the estimates from more bearish investors are something in the 3000 - 3200 range at which they would look to buy - because that is their prediction of market likely behavior. 

 

To me market can fall 25%-50% anytime for any number of reasons. Most of which we have no idea. So why bother. If market does fall 50% to say 2000, I would see that as an indication that there is a God. And he loves me and wants me to get rich.

 

Otherwise just ignore the needless macro forecasts and get on with it. If you are willing to put in the effort you would find opportunities. If not, just put it in the index and wait for opportunities to show up. No need to wait for it in cash.

 

Vinod

 

 

 

[changegonnacome]

42 minutes ago, mcliu said:

Core inflation actually increased from Feb.

 

Yep......why wouldnt it....unemployment at 50yr lows, nominal wage increases running at 5-6%......feeding into nominal spending increases YoY of about the same...against.....a labor force participation rate that is flat/depressed, productivity growth horribly low, demographics deteriorating & a dysfunctional immigration system......the 'spend' side of the economy is outpacing the 'output' side of the economy by a level which just makes 2% inflation impossible.

[Gregmal]

7 minutes ago, Santayana said:

If gas prices follow history and rise into the summer, then yes I think inflation stays at least at these levels.   Anecdotally, every bar and restaurant in my area has raised prices over the last month or 2, and both the cost of goods and shipping costs I pay for merchandise at my store keeps climbing as well.  Just paid $1200 freight on a delivery that was $900 last summer.

Gas prices rising into summer would depend on how much. Long way to go to get back to $120 a barrel and $5 at the pump. In which case, they’d be EQUAL to a year ago. Housing is still the entire process influence here, at 60%. It’s funny because the same jabronis saying real estate is collapsing are pitching rate hikes cuz housing is bizarrely tracked at 8.5% y/y which we all know isn’t representative of reality. 
 

Separately, the “used car prices are rising” folks are quiet again. Year over year…is that -11%?

Edited April 12, 2023 by Gregmal

[vinod1]

17 hours ago, changegonnacome said:

 

Your sending me research papers....and factor quant models...and the Dean of Valuation.....and I'm simply telling you & saying that if say Uncle Sam offered me a 10yr treasury bill today with a 10% coupon....and Apple was being offered to me at the same time with TTM FCF earnings yield of 3% & IMO poor prospective earnings growth....that somehow those two instruments can't be compared somehow...cause they are apple & oranges ...nonsense....if thats my investment choices.....in my humble opinion you take the 10yr T-bill @ 10% and run, run fast....if you offer me Hostelworld equity then I tell Uncle Sam to go to hell with his t-bill.

 

Now if your also saying that the ERP hasn't been a great predictor of prospective stock returns..that the ERP as a factor is useless..thats its use is limited.....I just agreed with that in my post above.....I never said it was gospel or live your life by the ERP....the ERP in 2021 flashed a very generous 2-3% over bonds...signalling stocks were cheap and one should buy them up.....it was wrong, very wrong....stocks were actually expensive.....bonds were in a 3000yr bubble...making stocks look relatively cheap under the ERP or 'fed model'...Cliff Asness is right.....but if you are trying to tell me that an investor can't think in opportunity cost across both bonds and equities in a holistic way, forecasting & estimating prospective returns relative to risk in both and coming to a conclusion on where best to put their incremental marginal dollar cause somehow it's impossible to compare the two . Then we have fundamental disagreement. As  @thepupil says above.....equities arent always the 'right' answer....and to not consider them while thinking about where your next incremental dollar gets invested....is to be a one trick pony.........and thats before we get in to your or anyones relative or historical ability @vinod1 to accurately forecast the equity coupon or future prospects for a company.....lots of investors I know..... lack a demonstrable ability as fundamental business analysts.....and their returns would greatly benefit from loading up on bonds for all their nominal limitations....simply because they provide a lower probability of impairment of capital.....whereas poorly chosen equities offer limitless opportunities to do so.

 

"but if you are trying to tell me that an investor can't think in opportunity cost across both bonds and equities in a holistic way, forecasting & estimating prospective returns relative to risk in both and coming to a conclusion on where best to put their incremental marginal dollar cause somehow it's impossible to compare the two ."

 

Ah ha! The discussion started when the WSJ article you referred to did not do what you just said you are doing. What WSJ article did is this: bond yield x%, stock yield y%. Vola stocks bad deal. 

 

There is a little bit more than that, as you now point it out clearly.  

 

Vinod

[TwoCitiesCapital]

15 minutes ago, Gregmal said:

Gas prices rising into summer would depend on how much. Long way to go to get back to $120 a barrel and $5 at the pump. In which case, they’d be EQUAL to a year ago. Housing is still the entire process influence here, at 60%. It’s funny because the same jabronis saying real estate is collapsing are pitching rate hikes cuz housing is bizarrely tracked at 8.5% y/y which we all know isn’t representative of reality. 
 

Separately, the “used car prices are rising” folks are quiet again. Year over year…is that -11%?

 

I think that's the point. Even with oil down 30-40% YoY, we still have inflation of ~5%. What happens when energy rises into the summer is his whole point if I'm understanding it correctly. 

 

I think it's likely to occur, but whether or not its offsets the eventual bleed in of housing price declines from the peak last summer in YoY comparisons is hard to say. I think it might remain sticky above the Feds 2% target, but may still decline into the summer even with rising energy costs. 

[Dinar]

25 minutes ago, TwoCitiesCapital said:

 

I think that's the point. Even with oil down 30-40% YoY, we still have inflation of ~5%. What happens when energy rises into the summer is his whole point if I'm understanding it correctly. 

 

I think it's likely to occur, but whether or not its offsets the eventual bleed in of housing price declines from the peak last summer in YoY comparisons is hard to say. I think it might remain sticky above the Feds 2% target, but may still decline into the summer even with rising energy costs. 

Actually, we do not have inflation at 5%.  Look at shelter which makes up more than 30% of the CPI, and it is supposedly up 8.6%.  What universe do the clowns who gather statistics live?  Where is 8.6% inflation in shelter costs?  

[Santayana]

Last month my daughter had a 10% rent increase on her apartment in Seattle.  So there's at least one place.

 

I just looked at the breakdown of the numbers more closely, and the one that really stands out to me is the claim of a ~10% decrease in health insurance cost.  Now that's the one where I want to know what universe these clowns live in.

[Dinar]

3 minutes ago, Santayana said:

Last month my daughter had a 10% rent increase on her apartment in Seattle.  So there's at least one place.

 

I just looked at the breakdown of the numbers more closely, and the one that really stands out to me is the claim of a ~10% decrease in health insurance cost.  Now that's the one where I want to know what universe these clowns live in.

When did she sign her previous lease?  Sure, my buddy had a 35% rent increase a few months ago in NYC on his apartment, but after a 25% decline in prior rent when he renewed his lease in fall of 2020. 

[Gregmal]

2 minutes ago, Santayana said:

Last month my daughter had a 10% rent increase on her apartment in Seattle.  So there's at least one place.

 

I just looked at the breakdown of the numbers more closely, and the one that really stands out to me is the claim of a ~10% decrease in health insurance cost.  Now that's the one where I want to know what universe these clowns live in.

Isn’t Seattle like one of the hardest hit real estate markets? Rent is goofy because you have 12-24 month contracts so theoretically a lot of people are still due for increases but in reality that’s not a price that’s going up but rather ones that’s catching up to where it got to a while ago. 
 

And yea, most of these things are totally bogus and dumb. Who chose a fresh whole chicken and breakfast sausage….what about the beyond meat sausage links lol. 

[Santayana]

1 year ago.

[TwoCitiesCapital]

50 minutes ago, Dinar said:

Actually, we do not have inflation at 5%.  Look at shelter which makes up more than 30% of the CPI, and it is supposedly up 8.6%.  What universe do the clowns who gather statistics live?  Where is 8.6% inflation in shelter costs?  

 

It's up 8.6% if you lag the rising prices over the course of 12-months AND look back 12-months for that YoY comparison. 

 

It's a legacy of how imputed rents are calculated and is also precisely WHY inflation/CPI is a lagging indicator and not a leading one. Just because home prices go up 25% overnight doesn't mean rents go up overnight - so the Fed trickles on that price impact over the course of the next 12-18 months to more accurately reflect the monthly rising costs to renters. 

 

So yes, by the way the Fed lags in the impact of rising home prices, you're still seeing the prior housing price rises being accounted for NOW when they were previously NOT accounted for. But in coming months you'll see the impact of falling prices start to filter through, like we've been seeing now, as implied by my post. 

 

Nobody is lying about inflation - they just calculate it looking in the rear view instead of looking concurrently or on a forward looking basis. 

Edited April 12, 2023 by TwoCitiesCapital

[changegonnacome]

31 minutes ago, Gregmal said:

Where’s the payoff? Or at least a way to massively lever a bet to todays figures? Is there anyone out here who thinks that July numbers will be equal to or higher than these? 

 

Massively levered maybe not.

 

But selling PUTS when the Fed wanted the market and economy to go up worked out very well.......they never got exercised and if they did (on the right companies) I was cash/margin covered & you got put the stock & they invariably rallied upwards anyway & you exited at profit + your premium.....in this situation IMO you sell OTM Calls......safe in the knowledge that the Fed needs the economy to go down/slow to fix inflation and the market going down is a consequence of that and a help too to their aims......don't fight the Fed!.....sell OTM calls on economically sensitive companies/index....& if you ever get called....and your now short the shares....you sit safe in the knowledge that the beta sucks, the economy is slowing and you'll get to exit........selling vol essentially.....rinse, repeat.

 

This morning especially I opened up an ultra bearish option spread.....selling 6 month 15% OTM calls on SPY/QQQ......recycling the net premium and buying equally priced 6 month OTM puts on same ......its a direction bet clearly.....and pretty levered on the assumption that I'm using what I consider 'free' call premiums (other people's money) to buy bear puts.....high high probability IMO the bet costs me nothing at worst....at best it pays handsomely with high returns on equity. It feels asymmetric...but for peeps reading this the notional bets your taking can be large...you need these options covered by cash IMO or modest shock absorbing margin if you do indeed get called or put....it just so happens that I get paid 4%+ holding cash or 5% for 3M treasurys to cover such little exercises....and again for those that have me confused with a perma-bear I'm up to my tits in a bunch of longs with maybe 80% gross market exposure.....so this short stuff as a % of NAV is small-ish for me....I'm not betting the house on SPY 3000 and dont suggest you do either.....I do way better with SPY at 5000 than 3000 thats for sure (for full full disclosure I do way better with the FTSE rallying if I'm honest)

[Gregmal]

Yea idk I feel there’s always a million reasons to be bearish. Real wars or fake ones(Ukraine is a bs war and Iraq lasted what 20 years?)….viruses, recessions, energy problems….that’s life. But the catalysts for higher rates imo have evaporated. The argument for going 5+ is far easier with inflation 5+. The banking problems, slowing economy, and well, guaranteed collapse of the major inflation indicators over the next 6 months basically remove any sort of bridge for going much higher. Even, if as you argue burgers and mixed drinks at a restaurant cost too much, we re going to be in “restrictive” territory(using the lazy definition of cpi vs FFR)… so that whole game is now over. 
 

Im all for low out of pocket, high leverage trades…but the declarations have a cost if you put it to work. Internet predictions are awesome because shelf life is infinite. But anyone buying options, shorting, margining up, has costs and decay to worry about. Especially with the options, it has and seems to largely be a suckers bet.

Edited April 12, 2023 by Gregmal

[Paarslaars]

21 hours ago, Parsad said:

https://finance.yahoo.com/news/bank-america-shares-12-charts-004727999.html

 

Cheers!

Even a broken clock...

 

I wonder if they can make chart to correlate 'talk about an upcoming recession in financial media' VS 'time until they recession occurs'. 

[TwoCitiesCapital]

46 minutes ago, Paarslaars said:

Even a broken clock...

 

I wonder if they can make chart to correlate 'talk about an upcoming recession in financial media' VS 'time until they recession occurs'. 

 

I suppose the argument is that all of the economic data that correlates with historical recessions, job losses, and declining earnings should simply be ignored because people are talking about it?

 

Or is it that by talking about it, the impact of  negative PMIs, contracting home prices, contracting credit, declining manufacturing, and etc is more muted than if the same data weren't talked about? 

 

 

[Gregmal]

The problem with broken clocking it is that it’s not really unique or insightful because it’s almost always occurring just in differing forms. Of things mentioned:

 

51 minutes ago, TwoCitiesCapital said:

historical recessions, job losses, and declining earnings

 Again, context…historical recessions…there is not really a precedent for what occurred during COVID. So historical recessions IMO don’t carry much weight.

 

Job losses? At 3.5% unemployment and still near 2:1 jobs for available person? This is bad if we go to 1.7:1? 1.5:1?

 

Declining earnings. Again, from historical highs? That everyone(minus punters of course) knew were influenced by one offs? So we get the headline “declining earnings” and revert to what? Still rather “historically” reasonable and healthy number which are now a base?
 

So then we take all these bad boogeyman words and phrases that could very well be true but not as impactful as advertised and then hit it over the head with the hammer of “I’m just making a valuation call” and voila everyone should bid things down 30-50% just cuz? 
 

The larger argument really I think involves the fact that this whole damn this has been so expected and orchestrated that it’s not exactly surprising anyone. Which to a degree hints at more being priced in than possibly a scenario where everyone is off in lalala land. In contrast to today where realistically the only relevant lala land I see is the one people fabricate as an excuse for the market trading at a valuation that “they” don’t agree with.

 

 

[dealraker]

Once the best selling market predictor ever, yet again Harry is making his case...which in my view is as relevant and likely as any:

 

https://news.bitcoin.com/economist-harry-dent-expects-biggest-crash-in-our-lifetime-to-hit-between-now-and-mid-june/