Is The Bottom Almost Here?

[changegonnacome]

 

Russell 2000 & stuff like NFIB above is where you need to look for the health of the real US economy...........I'll admit the resiliency of large cap tech but really Google, Microsoft, Apple have surprised me somewhat.......but then when I think about it some more......why the hell am I surprised when monopolists display monopoly like business performance.....its the equivalent of being surprised that the atlantic ocean is cold.....Apple remains IMO the most vulnerable being as it is still a predominately hardware transacting business where the product purchase can be deferred for a year or two very easily bringing volatility to its earnings.....recession in H2 2023 & the iPhone 15 could seriously & surprisingly underperform the iPhone 12, 13 & 14.

 

 

[TwoCitiesCapital]

18 hours ago, Simba said:

If you bought the S&P 500, basically pre covid high (i.e. Feb 2020) and held till today, your annual return w/ dividend, is 7.5-8%? (using round figures, assuming minimal taxes). That assumes round trip from peak mania to today. Gold is up a similar portion, while long-term bonds seem to be down.

 

IMO 8% historical return is in-line with historical, and I'll take that compounded over the next 50 years, easy.

 

 

Nobody is limiting you to long term bonds. Or fixed rate notes. Why are those the only consideration you're giving here?

 

Plenty of people did fine in short term paper, iBonds, etc and have done well with intermediate bonds once rates had risen sufficiently high. Why just long duration instruments that are similar to equities on their duration of cash flows? 

 

Why assume that this is the bottom of the biggest equity bubble we've seen since the tech bubble imploded? 

 

15 hours ago, Paarslaars said:

 

The irony is, doing nothing is the easiest of all and the media does it very best to make it the hardest thing. 

 

I tend to agree that investors biggest hurdle is themselves. And the constant feeling of needing to DO or change something. I don't typically believe in day trading or weekly/monthly type trading with the bulk of your portfolio. 

 

That being said, I do believe that the bulk of equity performance occurs in certain environments and that they do not perform well, on average, for very long periods of time outside of those environments. 

 

Secondly, I recognize how difficult it is to pick individual stocks for the long term period and have a reasonably diversified portfolio doing it to hedge if you're wrong. Let alone trying to pick these stocks in an environment that isn't really suited for most equities. 

 

See quote from WSJ article today: 

"Another eye-opening research paper, this one by Hendrik Bessembinder, shows that most stocks tracked over decades don’t produce any return at all in excess of risk-free Treasury bills. About half of all positive returns were generated by 83 companies between 1926 and 2019, or less than one-third of 1% of all stocks tracked."

 

https://www.wsj.com/articles/this-strategy-beat-the-worlds-top-hedge-fundsdont-try-it-c673a039

 

 

Recognizing that this is likely NOT an environment conducive to equities as well as how hard it is to find companies that outperform over the long term, I prefer to be diversified into some fixed income investments to our perform the T-Bills rate that I expect will outperform most equities.

 

That held true for 2022. I expect it might hold true for 2023-2024 period too, pending when the recession narrative actually becomes priced in. 

Edited May 9, 2023 by TwoCitiesCapital

[Luke]

I watched an interview today of an economist who wrote a Book about China and their System+why there is little inflation compared to the west, i will link the book she wrote and then tell you what her points where. I think @Gregmal will like it. Sorry but its only in german but just to understand it: Titel is: ,,The ghost of inflation and how china escaped shock therapy,,. 

 

 

Her theory of why we have inflation: 

 

1. Covid and the pandemic caused supply chain shocks which let prices in some areas spike.

2. War in Russia caused price shocks in multiple sectors energy etc which also lead to higher prices. 

3. Businesses immediately increased prices to cover margins. This lead to an interesting effect, since lots of businesses had these higher prices there was a price increase across multiple companies that would not have been possible without the initial price shock because customers would just change supermarkets or specific food brand. This only worked because across industries prices were raised (not possible in a normal market environment). Thats the inflation we see now. 

4. Price shocks decreased, costs are lower again now (alternative energy solutions in place, restructuring of supply chain) but prices are still high and no business is decreasing (nvidia decreasing their GPU prices slowly, gotta face reality that nobody is willing to pay 1500€ for a GPU anymore). 

5. China never faced this problem because they have systems that prevent price shocks (energy supplies that can be activated by state if there is a price shock, to prevent inflation) (food supplies (pork meat) that can prevent food inflation when there is a supply chain shock etc). Their economy is also very diversified and more autonomous than a germany as an example-->less inflationary economy. (chinese leadership very aware that inflation could kill their power, the revolution that lead to the downfall of the nationalists which then fled to taiwan was due to hyperinflation and bad economic situation in china, therefore they have all sorts of systems in place that try to prevent inflationary triggers)

6. She also thinks raising rates is not the right tool@Gregmal because the problem were price shocks that slowly go away now and raising rates wont really solve the initial problem. 

7. Thinks that states and governments in the west should prepare for further inflationary triggers and build up some supplies to prevent further price shocks.

8. Stimulus money had a weak effect. 

9. Off shoaring foreign industry (taking semiconductor production to US) is highly inflationairy due to higher costs-->higher prices for devices-->general higher inflation and could be a massive problem. 

 

Edited May 9, 2023 by Luca

[Luke]

Always enjoy the discussions with you guys here!

[Luke]

Her credentials: 

 

https://www.isabellaweber.com/about

 

Two PHDs, one in economics one in development studies, she is also fluent in mandarin/chinese. 

[gfp]

52 minutes ago, Luca said:

6. She also thinks raising rates is not the right tool because the problem were price shocks that slowly go away now and raising rates wont really solve the initial problem. 

 

Yeah this is an important point.  There are two types of "Inflation" and two types of "Deflation."

 

Type 1 Inflation, call it "temporary inflation," is the type caused by Covid-era supply shocks.  In a free market system these work themselves out in due time.  This type of inflation cannot be helped much by Fed action and raising rates may make it worse.

 

Type 2 Inflation, call it "real monetary inflation," is caused primarily by increases in the amount of "money" circulating in the system, primarily because of fiscal policy deficit spending (but also for many years pre-2008 to the enormous and very fast growing eurodollar market for offshore dollar assets - they don't even try to calculate M3 anymore!).  Fed changes to overnight rates are not the best way to handle this type of inflation and might not work at all.  Moderating the size of fiscal deficits can work here but do not directly control the entire supply.

 

Type 1 Deflation, call it "wonderful deflation," is a wonderful byproduct of economic efficiency.  My microprocessor gets better and cheaper every year, offshore labor reduced prices on consumer goods at Walmart, etc.  Nobody complains about this type of deflation most of the time.  It's great.

 

Type 2 Deflation, call it "deflationary monetary conditions," is the worst of the worst.  This is what causes severe recessions and depressions.  This is when money tightens up and if it isn't temporary (in order to rein in a too-hot economy or soak up some over-done monetary inflation of the recent past) it will cause a lot of problems in a modern monetary economy.  2008 was a good example.  There are reasons to worry that we are going into a deflationary monetary conditions period now, despite 7% of GDP deficit spending in the US pouring stimulus on the US economy.

[changegonnacome]

Leaked email from Microsoft CEO says salaried staff will not get raises this year due to macroeconomic conditions:

https://finance.yahoo.com/news/leaked-email-microsoft-ceo-says-160307908.html?guccounter=1

 

This is what a soft landing result inside a rate hiking, inflation fighting cycle could/would look like.......a spontaneous break-out of wage restraint with de minimis uptick in unemployment.......its still possible IMO but history says its the outlier outcome....Microsoft & other 'thought leading' companies can really help set the tone as per the linked.......so many other companies ape FANGMA's every move......this in a way is a public service by Microsoft......ironically being done by a company with outrageously strong pricing power bordering on monopoly (so potentially self-serving).......which is choosing in some respects to show restraint on pricing & maintain margins holding down its OpEx.....very interesting move by them they are almost pretending like they couldn't get away with a $0.50 increase per Office365 seat sub!

[changegonnacome]

Along with Druck....Tudor Jones speaks and I listen:

 

Note he says stocks higher at the end of this year in longer clip........and talks about a halcyon period that continues & lasts around 6 months after the last Fed hike has happened...guess the argument is May 3rd was the last hike........Sorkon never asked about what happens after that halcyon period is over........the book says markets dont really reach their bottom (OP title of this thread) until sometime AFTER the Fed starts cutting......my guess is if Tudor Jones was encouraged to continue he likely would have touched on this......that post the haylcon period and after the Fed starts cutting into a weakening economy do you get the true bottoming of stocks....but conscious I might be putting my words in his mouth.......he's also a trader and I'm not........and for all those who take this posts as somebody sitting 100% in cash and waiting for the apocalypse......I'm up to my eyeballs in equities.......just not in equites over my head, thats all.

Edited May 15, 2023 by changegonnacome

[dealraker]

change, in the late 1990's we had a connection such that we got little Jimmy Rogers formerly of Quantum/Soros to come right on down here to little Lexington, NC to our investment club meeting/seminar (we had others too).  Jimmy was big into commodities, he'd just set up his own commodity index fund.  Riding that motorcycle all over the world too...he was hot!  On CNBC...again from all over the world once a week or so.  The global thing was on his mind.

 

We, the club that is, were towards the end of a 10-year run of holding almost all tech stocks...so you can guess how much attention we paid to Jimmy or anybody else.  Baby, we were crusin' high...and getting kind of well-known around these parts, you know the Beardstown Ladies type fame.   By 2000 our ten year annual was 35%, yep thirty-five percent a year for a full decade!  

 

By 2001, later on in 2001, you probably guessed correctly that we'd blown-up our portfolio, ended up barely beating Mr. Market.  Jimmy had too blew a fuse I think.  Jimmy today?  He's out selliing that commodity thing again!  He's old school now, not in the high profile CNBC guest mode/status any longer.

 

Hotshots all around, interesting to me as to which ones you choose to post about and follow.  What's making the ones you follow and post about more attractive than others?  We had a guy (we have some mega wealthy club members) associated with Dalio come to the club a couple of years ago.  Of course you know that story, it was China.  But we only had a couple of members with any interest in that - at least for the club.  

Edited May 15, 2023 by dealraker

[Dinar]

1 hour ago, dealraker said:

change, in the late 1990's we had a connection such that we got little Jimmy Rogers formerly of Quantum/Soros to come right on down here to little Lexington, NC to our investment club meeting/seminar (we had others too).  Jimmy was big into commodities, he'd just set up his own commodity index fund.  Riding that motorcycle all over the world too...he was hot!  On CNBC...again from all over the world once a week or so.  The global thing was on his mind.

 

We, the club that is, were towards the end of a 10-year run of holding almost all tech stocks...so you can guess how much attention we paid to Jimmy or anybody else.  Baby, we were crusin' high...and getting kind of well-known around these parts, you know the Beardstown Ladies type fame.   By 2000 our ten year annual was 35%, yep thirty-five percent a year for a full decade!  

 

By 2001, later on in 2001, you probably guessed correctly that we'd blown-up our portfolio, ended up barely beating Mr. Market.  Jimmy had too blew a fuse I think.  Jimmy today?  He's out selliing that commodity thing again!  He's old school now, not in the high profile CNBC guest mode/status any longer.

 

Hotshots all around, interesting to me as to which ones you choose to post about and follow.  What's making the ones you follow and post about more attractive than others?  We had a guy (we have some mega wealthy club members) associated with Dalio come to the club a couple of years ago.  Of course you know that story, it was China.  But we only had a couple of members with any interest in that - at least for the club.  

I spoke with Jimmy a couple of times, once he came to lecture at my school, and it was a small turnout so I got to talk to him for half an hour, incredible for me in 1998 I think, the second time was he was having dinner with his wife, my friend and I were sitting a couple of tables away, and I came up to say hello.  He offered us to join him, and it was a very interesting conversation (for me at least), that must have been 2003-2005 time frame.  Very interesting character.

[Parsad]

https://finance.yahoo.com/news/a-sign-of-trouble-why-more-americans-are-missing-their-debt-payments-193605635.html

 

Cheers!

[changegonnacome]

49 minutes ago, Parsad said:

https://finance.yahoo.com/news/a-sign-of-trouble-why-more-americans-are-missing-their-debt-payments-193605635.html

 

Cheers!

 

Yep - https://www.bloomberg.com/?sref=7zqHEcxJ

"Consumers typically build up more credit-card debt at the end of the year, during the holiday season, and then reduce those balances at the start of the following year, sometimes with the help of tax refunds. But for the first time in 20 years, that wasn’t the case this year, suggesting some households are under strain from higher prices and may be relying on credit cards to maintain their spending."

[Parsad]

1 minute ago, changegonnacome said:

 

Yep - https://www.bloomberg.com/?sref=7zqHEcxJ

"Consumers typically build up more credit-card debt at the end of the year, during the holiday season, and then reduce those balances at the start of the following year, sometimes with the help of tax refunds. But for the first time in 20 years, that wasn’t the case this year, suggesting some households are under strain from higher prices and may be relying on credit cards to maintain their spending."

 

You can also see huge strains at food banks across North America, the UK, etc.  Where they are near the breaking point!  

 

But it's still a world of two economies...one where pain is being inflicted on individuals and corporations from higher interest rates, inflation and lower margins...and the second where employment is low, spending remains robust and certain sectors are rebounding with strength like hotels, travel, restaurants, shopping, airlines, etc.

 

Hard to tell what the eff is going on...so I just don't really try!  Focus on finding cheap stocks and if you can't...buy high yielding T-bills until you do find something.  Cheers!

[changegonnacome]

3 minutes ago, Parsad said:

Hard to tell what the eff is going on...so I just don't really try!  Focus on finding cheap stocks and if you can't...buy high yielding T-bills until you do find something.  Cheers!

 

Absolutely - and the index themselves have become a bit of a headfake.......SPY gains from last October's bottom are driven by a tiny sliver of companies with monopoly or oligopoly like positions......S&P 500 minus the 10 massive outperformers.......has some reasonably priced stocks where you'll do fine.........I own a big position in an Irish home builder for god's sake.....the stereotypical permabear couldn't bring themselves to do that.....but when something is cheap & competitively advantaged for the long term then you've got to act.

[Spekulatius]

Bottom was in for tech at least. QQQ / big tech is quite on a run:

[changegonnacome]

18 hours ago, dealraker said:

Hotshots all around, interesting to me as to which ones you choose to post about and follow.  What's making the ones you follow and post about more attractive than others?

Yeah gurus come and go…..like fashion…..I listen or am swayed by the following….ultimately it’s the ones with long run track records that matter

 

Druckenmiller on Macro

 

Tudor Jones on what you might call short term market gyrations/market psychology

 

Dalio on cycles…..think Dalio’s most important concept outside of big cycle stuff…..is the concept of not just intrinsic value…..but rather flows…..which is to say who are the holders or prospective holders of what assets & why….and what do their balance sheets & future obligations look like…..the price of assets isn’t always determined by just their intrinsic value…..but rather what is the audience of folks interested in or capable of holding that asset….as that will determine the price……for example…..EM was considered the riskiest of risk assets….it’s audience grew in “risk on” periods and the valuations went up…so you had these big historical swings up in that asset class…that didn’t happen last cycle of zero interest rates & QE when it should….Why? Cause the audience that would have gone into EM actually directed their ‘risk on’ funds into VC,PE and Crypto…which all got juiced by super low interest rates…..the natural audience/flows of EM holders shrank….as other even riskier  asset classes sucked up flows. It’s an interesting concept.
 

Demographically the US has an investment audience shift happening right now…..baby boomers are retiring……maybe not folks on this board…..but baby boomer retirees (a massive cohort of wealth) are or are soon to be cycling out of equites….target date funds are reaching their date….no baby boomer, having experienced the last 13yr equity boom…wants to be left holding the bag so to speak…..as somebody once said the only skill required at a party is knowing when to leave…..baby boomers don’t need or wants to stay on the equity rollercoaster……especially when they know that ballpark equity like returns are now available in fixed income. It’s a big group and big potential rotation and why the Druck & Tudor seem fairly happy to predict a kind of lost decade for the indexes.

 

I’m somewhat interested in this stuff……but fundamentally am a bottoms up guy……as I’ve said before I own in big quantity a home builder…..this is not what a macro driven doom monger does….I look for idiosyncratic micro opportunities. I dial up or down my market exposure with a macro cycle overlay…..there’s times to swing for the fences….and times to move forward with caution as Howard Mark’s says…..I like the wind at my back when getting aggressive.

 

[changegonnacome]

14 minutes ago, Spekulatius said:

Bottom was in for tech at least. QQQ / big tech is quite on a run:

Yeah it’s phenomenal- still feels a little pavlovian to me…….and ignores the ‘sea change’ we’ve talked about in terms of secular shift in interest rates and inflation…..QQQ rally is another expression of the Fed is cutting soon and it’s back to 2010’s ZIRP world……I was certain of this sea change theory up until recently…..but to be fair some of these LLM’s and their potential impact on productivity & therefore inflation have certainly created a counter narrative.

 

It’s beyond interesting what happens next……and the winners and losers from AI/LLM’s is going to be fascinating to watch

[Spekulatius]

@changegonnacome Since I am almost a baby boomer, I can tell you that you are almost certainly wrong assuming that baby boomer all of a sudden drastically reduce their equity exposure. I am sure some of the funds go into bonds right now, but I think they will keep equity exposure much longer and to much later stage  in their live.

 

One of the reasons is that they have been trained that it works out in the long run. I intend to do the same.

 

On the big tech rally, I think it's two things:

1) Big tech is a safe haven - they all beat earnings, great balance sheets etc.

2) Big tech gives you Exposure to the AI boom.

 

Edited May 16, 2023 by Spekulatius

[rkbabang]

On 5/8/2023 at 10:17 PM, Gregmal said:

The problem is that all those returns are based on hopium and money printing. Then add in 9% inflation and really you need to discount them bigly! 
 

Jokes aside, the biggest issue is largely that many have very inflexible framework. For much of the last decade or so, every time the market goes up, we have people claiming it’s undeserved. Like how many times recently have we seen every downturn met with “I knew it” and every updraft met with skepticism? An underlying belief that the market “should not be up”. And I mean if that’s always the subjective analysis, then what’s the point of even paying attention to the market? Shit should just always be down and when it goes up it’s invalid…. I don’t get it. 

 

You just have to ignore those people.  Most people are pessimists.  Study after study shows that the average person thinks that things were better at some point in the past and the world is going to shit.  It isn't a surprise that they always think the market will drop from whatever point it is at today and if it has recently gone up it won't last.  This is why optimists are not only happier, but richer.

 

[changegonnacome]

10 minutes ago, Spekulatius said:

@changegonnacome Since I am almost a baby boomer, I can tell you that you are almost certainly wrong assuming that baby boomer all of a sudden drastically reduce their equity exposure. I am sure some of the funds go into bonds right now, but I think they will keep equity exposure much longer and to much later stage  in their live.

 

One of the reasons is that they have been trained that it works out in the long run. I intend to do the same.

 

On the big tech rally, I think it's two things:

1) Big tech is a safe haven - they all beat earnings, great balance sheets etc.

2) Big tech gives you Exposure to AI boom.

 

Totally and I excluded folks on this board in my post……who are obviously active equity folks…..which means they likely mix in circles of other active equity folks…I think everyone on this board is somewhat in the minority being so interested in stocks…..the exit from equites will be led by disengaged capital that has passively participated in the great returns….whom are risk averse and are very happy to be told that they have “enough” to retire based on their 401k/IRA balances…folks for whom the ‘market’ has remained a kind of mystery their whole lives, a wonderful mystery that has seen their wealth grow….but still a mystery…these folks will instruct their advisors to move them into less risky things…..2022 was a painful downdraft…..if another downdraft occurs this year (with no Fed put, as we’ve become accustomed too) such that we exit 23 with another down year……boomers will head for the equity exits, never to return….which has consequences just given the level of wealth held by that cohort.

[TwoCitiesCapital]

3 hours ago, Spekulatius said:

Bottom was in for tech at least. QQQ / big tech is quite on a run:

 

Between May and August 2000, QQQ rallied 45% before turning back down and continuing it's bear market and losing an additional 70% over the next 8 months. 

 

I'm not suggesting we see a repeat of 2000. Just pointing out 20-30% rallies aren't UNCOMMON as bear market rallies and are hardly evidence of a sustained recovery. 

 

Liquidity is still tightening. High yield spreads are approaching levels from last year where stocks were making lows while stocks are near local highs. Leading indicators continue to be significantly negative. Coincident indicators are rolling over. Consumers are continuing to demonstrate signs of becoming tapped out.  

 

This is hardly an environment that is supportive of assets with uncertain/cyclical cash flows. Particularly assets whose earnings are already falling despite "beating" newly lowered estimates. 

[Spekulatius]

3 hours ago, changegonnacome said:

Totally and I excluded folks on this board in my post……who are obviously active equity folks…..which means they likely mix in circles of other active equity folks…I think everyone on this board is somewhat in the minority being so interested in stocks…..the exit from equites will be led by disengaged capital that has passively participated in the great returns….whom are risk averse and are very happy to be told that they have “enough” to retire based on their 401k/IRA balances…folks for whom the ‘market’ has remained a kind of mystery their whole lives, a wonderful mystery that has seen their wealth grow….but still a mystery…these folks will instruct their advisors to move them into less risky things…..2022 was a painful downdraft…..if another downdraft occurs this year (with no Fed put, as we’ve become accustomed too) such that we exit 23 with another down year……boomers will head for the equity exits, never to return….which has consequences just given the level of wealth held by that cohort.

I am not talking about folks on message board here, but plain vanilla employees that are late in their careers. They are still on autopilot and keep their equity allocation for the most part.

 

I did know somebody who retired in 2007 and had an almost 50% drawdown back then - that was ugly. I recommend to him keep his equities, because if he crystallized his losses back then, he would have had to go back to work anyways. He stuck with his portfolio  and recovered his account and never went back to work.

 

Even if you are retired now in your mid 60's like most, you still have to invest for another 20 years on average.

[Parsad]

6 hours ago, changegonnacome said:

Yeah it’s phenomenal- still feels a little pavlovian to me…….and ignores the ‘sea change’ we’ve talked about in terms of secular shift in interest rates and inflation…..QQQ rally is another expression of the Fed is cutting soon and it’s back to 2010’s ZIRP world……I was certain of this sea change theory up until recently…..but to be fair some of these LLM’s and their potential impact on productivity & therefore inflation have certainly created a counter narrative.

 

It’s beyond interesting what happens next……and the winners and losers from AI/LLM’s is going to be fascinating to watch

 

After the last few years, I decided I wasn't going to focus on macro at all.  I watch it, but I don't focus on it.  So when big tech got cheap, I invested 50% into it.  First time in my life I owned tech stocks other than AAPL years ago. 

 

Now my accounts are stuffed with FFH, META, GOOGL, BRK...and sadly OSTK has not reacted the way I thought it would...still cheap, and we have that call option on the blockchain businesses.  Sold all my SHOP calls and have been buying a couple of retail stocks recently.  Again, you would think retail would killed in a recession, but they are dirt cheap...and may get cheaper! 

 

Cheers!

[Sweet]

24 minutes ago, Parsad said:

 

After the last few years, I decided I wasn't going to focus on macro at all.  I watch it, but I don't focus on it.  So when big tech got cheap, I invested 50% into it.  First time in my life I owned tech stocks other than AAPL years ago. 

 

Now my accounts are stuffed with FFH, META, GOOGL, BRK...and sadly OSTK has not reacted the way I thought it would...still cheap, and we have that call option on the blockchain businesses.  Sold all my SHOP calls and have been buying a couple of retail stocks recently.  Again, you would think retail would killed in a recession, but they are dirt cheap...and may get cheaper! 

 

Cheers!

How do you define as cheap here for the retail segment i.e. p/e etc?

 

I’ve been looking at retail too but nothing slaps me in the face as something I’d want to buy.

 

Banks seem the best value for money right now.

[Gregmal]

Again, there’s always some data point for bearish folks to get hung up on. It never ends. I remember having the “bottom” debate in December with folks and it was like “oh not enough time has passed, bear market rally”…6 months later…same story, different fears. Whatever.