Is The Bottom Almost Here?

[CharlesMunger]

2 hours ago, changegonnacome said:

Hey listen - I report - you decide  

 

You guys remember business cycles right?.....you know the way the majority of major inflationary cycles have played out in the past? So far....

 

Completed:

 

(1) we had a monetary/fiscal fueled spending rally starting in 2020 - unprecedented in scale/scope 

(2) that rally in spending led to jump in savings/incomes/spending which also found its way into financial assets

(3) that spending surge.....resulted in an earnings jump and peak margins for the corporate sector

(4) that additional cash also found its way into financial assets - we had bubble in those....crypto, SPACS, NFT's, no FCF tech.....multiples expanded and they expanded on top of spending fueled record earnings

(4) but............INFLATION arrived......some supply chain (no biggie) but alot that was monetary....because we had a full employment economy going into COVID.......and we sure as hell didn't make much extra STUFF (productivity) during COVID?....we just created extra money to buy stuff.!...and so we got good old fashioned monetary inflation 

(5) The monetary authorities had to tighten aggressively to try to reduce the inflation

(6) Financial Assets get hit first - and multiples contracted 

(7) Real economy looks OK & corporate sector has a little weakness but also looks ok.....its just a DCF multiple adjustment so far 

 

 WE ARE HERE  * - at the maybe we got away with it stage, the wily coyote moment off the cliff.....(its just big tech doing layoffs, they were dumb, they hired too many people)...........we had a boom.....there will be no bust....its those precious few seconds in the morning after the night before when you wake up and think I'm actually ok.....but by the time you get to the bathroom your desperately hunting for pain pills & have ordered take-out on your phone from both Taco Bell AND McDonald's 

 

To be Completed/Whats left (my take):

 

(8) Higher costs of capital (equity/debt) + higher SG&A costs (labor/inputs) + weakening consumer begin to seriously erode corporate margins & profits.......you can only 'make the quarter' a couple of times

(9) Corporations en-masse (not just big tech) either in advance or in response to these earnings weakness try to "cut their way back to prosperity" by instituting "efficiency" lay-offs to protect the bottomline....they also reign in their investments budgets

(10) The problem is that in a circular economy where when one persons income is another persons spending....the corporate sectors chorus of layoffs done in close proximity to each other......doesn't protect their earnings......it actually ensures they get destroyed.......the paradox of thrift

(11) Earnings Fall......Unemployment goes up.......spending falls........earnings fall further..............

(12) Real economy goes into a RECESSION

(13) in financial markets optimism turns to pessimism....remember Mr.Market is manic depressive - multiples contract further on pessimism ESPECIALLY when the Fed is nowhere to be seen.....the Fed Put is gone.......and now that multiple is on an even lower earnings number than before.

(14) But.......and here's the good news........inflation falls back to two as growth in income/spending comes back in-line with productivity growth....inflation is no longer the primary concern...the Fed can re-focus on its other mandate employment

(15) Fed and/or fiscal authorities ease/stimulate......multiples on equity capital expand.......cheaper debt encourages investment.......companies start to hire again.......spending increases........earnings recover etc etc

 

* possibly I'm just a guy on the internet......ChatGPT writes all my posts  ......

 

Anyway the way the movie plays out in the negative version of things is the above.....lets see I've given more credence because you have too, based on the data, to the idea of a soft landing...maybe inflation is actually done for..............you can add in there somewhere for extra giggles that the Fed eases too soon and inflation returns and it requires another tightening cycle and more pain.

 
Or as Burry put it

[Parsad]

1 hour ago, CharlesMunger said:

 
Or as Burry put it

 

Burry has also missed the 30-40% rally in many tech, finance, retail and restaurant stocks.  When I started this thread, no one could imagine we hit bottom.  Not THE bottom, but a bottom.

 

You buy when cheap, sell when dear.  Average down on good businesses as they get cheaper and average out as they go up in value to right size the position.  Wash and repeat!  These simple truths work!

 

No one wanted to own FFH, META, TSLA, OSTK, SHOP, GOOGL, etc.  Now everyone is clamoring to buy.  I've right sized the positions and am in 30%+ cash again.

 

Worrying about all of these macro issues is a fool's game!  Be aware, but also take advantage of opportunity.  When a sector collapses 80%, that's generally close to bottom!   Cheers!

 

 

[UK]

https://www.bloomberg.com/news/articles/2023-01-31/black-swan-s-taleb-warns-disneyland-is-over-for-investors

 

https://www.wsj.com/articles/black-swan-manager-preps-for-financial-mega-tinderbox-timebomb-11675177877?mod=lead_feature_below_a_pos1

 

The upshot for ordinary investors is faintly reassuring, though, according to Mr. Spitznagel. Rather than trying to replicate a Universa-style safe haven strategy or moving into some “safe” asset class like gold bars, the least-bad alternative might be to just to buy and hold stocks passively through the cycle, as Warren Buffett and others have advised. He has suggested that, absent the opportunities he has as a mathematically-sophisticated hedge-fund manager, that is probably the least bad course of action to preserve wealth in the conflagration that he foresees.

 

Edited February 1, 2023 by UK

[formthirteen]

9 hours ago, CharlesMunger said:

 
Or as Burry put it

 

Sell what? I don't know what Burry's pronouns are, but to me he's an M.D., trader, macro guy, and market timer. ”Sell” is incorrect advice, even if you identify with those pronouns. You need to know what to sell. Personally, I would sell terminally unprofitable shitcos. I have some QRTEP and PARAP which are up 25% and have a dividend of ~20%. I can consider selling them.

 

Burry was almost completely out of the US stock market in Q3, 2021. From Q2 2020 until Q2 2021 he was heavily invested. During Q1 2022 something scared him enough that he exited the US stock market, probably the war in Ukraine. He's trying to time the market again, possibly shorting the market and/or in cash. Michael Burry is like a broken clock. His predictions will some day be correct again, nobody knows when but we will probably hear about it from the media.

Edited February 1, 2023 by formthirteen

[CharlesMunger]

1 hour ago, formthirteen said:

 

Sell what? I don't know what Burry's pronouns are, but to me he's an M.D., trader, macro guy, and market timer. ”Sell” is incorrect advice, even if you identify with those pronouns. You need to know what to sell. Personally, I would sell terminally unprofitable shitcos. I have some QRTEP and PARAP which are up 25% and have a dividend of ~20%. I can consider selling them.

 

Burry was almost completely out of the US stock market in Q3, 2021. From Q2 2020 until Q2 2021 he was heavily invested. During Q1 2022 something scared him enough that he exited the US stock market, probably the war in Ukraine. He's trying to time the market again, possibly shorting the market and/or in cash. Michael Burry is like a broken clock. His predictions will some day be correct again, nobody knows when but we will probably hear about it from the media.

 

That was meant as a joke - sorry if it came across wrong. 

I believe in being invested in good companies/assets over the long term and spare myself any kind of short-term predictions.

[Sweet]

1 hour ago, formthirteen said:

 

Sell what? I don't know what Burry's pronouns are, but to me he's an M.D., trader, macro guy, and market timer. ”Sell” is incorrect advice, even if you identify with those pronouns. You need to know what to sell. Personally, I would sell terminally unprofitable shitcos. I have some QRTEP and PARAP which are up 25% and have a dividend of ~20%. I can consider selling them.

 

Burry was almost completely out of the US stock market in Q3, 2021. From Q2 2020 until Q2 2021 he was heavily invested. During Q1 2022 something scared him enough that he exited the US stock market, probably the war in Ukraine. He's trying to time the market again, possibly shorting the market and/or in cash. Michael Burry is like a broken clock. His predictions will some day be correct again, nobody knows when but we will probably hear about it from the media.

Yeh Burry I would count more as a trader.  Another guy who is nearly always negative when you hear from him is Stanley Druckenmiller, wrongly advertised as an investors, he’s actually a trader that, among other things, uses technical analysis to try and time markets.  Both of them wrong on big stock market macro calls the past 10 ish years.  Ironically Druckenmiller, despite sounding bearish, is very often long lol.

[Sweet]

13 hours ago, changegonnacome said:

Hey listen - I report - you decide  

 

You guys remember business cycles right?.....you know the way the majority of major inflationary cycles have played out in the past? So far....

 

Completed:

 

(1) we had a monetary/fiscal fueled spending rally starting in 2020 - unprecedented in scale/scope 

(2) that rally in spending led to jump in savings/incomes/spending which also found its way into financial assets

(3) that spending surge.....resulted in an earnings jump and peak margins for the corporate sector

(4) that additional cash also found its way into financial assets - we had bubble in those....crypto, SPACS, NFT's, no FCF tech.....multiples expanded and they expanded on top of spending fueled record earnings

(4) but............INFLATION arrived......some supply chain (no biggie) but alot that was monetary....because we had a full employment economy going into COVID.......and we sure as hell didn't make much extra STUFF (productivity) during COVID?....we just created extra money to buy stuff.!...and so we got good old fashioned monetary inflation 

(5) The monetary authorities had to tighten aggressively to try to reduce the inflation

(6) Financial Assets get hit first - and multiples contracted 

(7) Real economy looks OK & corporate sector has a little weakness but also looks ok.....its just a DCF multiple adjustment so far 

 

 WE ARE HERE  * - at the maybe we got away with it stage, the wily coyote moment off the cliff.....(its just big tech doing layoffs, they were dumb, they hired too many people)...........we had a boom.....there will be no bust....its those precious few seconds in the morning after the night before when you wake up and think I'm actually ok.....but by the time you get to the bathroom your desperately hunting for pain pills & have ordered take-out on your phone from both Taco Bell AND McDonald's 

 

To be Completed/Whats left (my take):

 

(8) Higher costs of capital (equity/debt) + higher SG&A costs (labor/inputs) + weakening consumer begin to seriously erode corporate margins & profits.......you can only 'make the quarter' a couple of times

(9) Corporations en-masse (not just big tech) either in advance or in response to these earnings weakness try to "cut their way back to prosperity" by instituting "efficiency" lay-offs to protect the bottomline....they also reign in their investments budgets

(10) The problem is that in a circular economy where when one persons income is another persons spending....the corporate sectors chorus of layoffs done in close proximity to each other......doesn't protect their earnings......it actually ensures they get destroyed.......the paradox of thrift

(11) Earnings Fall......Unemployment goes up.......spending falls........earnings fall further..............

(12) Real economy goes into a RECESSION

(13) in financial markets optimism turns to pessimism....remember Mr.Market is manic depressive - multiples contract further on pessimism ESPECIALLY when the Fed is nowhere to be seen.....the Fed Put is gone.......and now that multiple is on an even lower earnings number than before.

(14) But.......and here's the good news........inflation falls back to two as growth in income/spending comes back in-line with productivity growth....inflation is no longer the primary concern...the Fed can re-focus on its other mandate employment

(15) Fed and/or fiscal authorities ease/stimulate......multiples on equity capital expand.......cheaper debt encourages investment.......companies start to hire again.......spending increases........earnings recover etc etc

 

* possibly I'm just a guy on the internet......ChatGPT writes all my posts  ......

 

Anyway the way the movie plays out in the negative version of things is the above.....lets see I've given more credence because you have too, based on the data, to the idea of a soft landing...maybe inflation is actually done for..............you can add in there somewhere for extra giggles that the Fed eases too soon and inflation returns and it requires another tightening cycle and more pain.

No offence, but this is exactly the type of mental masturbation Hussman did as he sat out of the market while it ripped 100s% higher.

 

It’s also exactly the type of thing I used to think too.  I gave up on market timing long ago because it cost me so much money.

[formthirteen]

47 minutes ago, CharlesMunger said:

That was meant as a joke - sorry if it came across wrong. 

 

No misunderstanding. I wasn't clear that the question was retorical and directed at Michael Burry. I hope he's active on the forum

 

Michael B, what's your current view on the market, I'm also guessing you're completely out of the market now that you have tweeted ”sell”? Your public portfolio's value in Q3 2022 was almost zero compared to, for example, Q2 2021. I'm looking forward to your reply. Thanks in advance. YOLO.

Edited February 1, 2023 by formthirteen

[Ulti]

https://podcasts.apple.com/us/podcast/viktor-shvets-declares-victory-for-team-transitory/id1056200096?i=1000597529020

 

excellent interview with someone who has been in the consistent transitory econ.

[dealraker]

I recently went around my town and told all the local owners to sell their thriving businesses, join my "business is overvalued" online macro forum, and go to cash chanting fear (and of course grievance of the fed) while repetitively citing the upcoming collapse - most ever forcased downturn.   The model states emphatically that we/they will buy all these businesses back in a few months from the new owner idiots when today's trendy/expert fund runners (you know the names....they are posted here every day) vision of Armageddon arrives.

 

That said, 40 years ago Clemo Glosson sold his local large local trucking business for $13 million, the new owner quickly went bankrupt, and Clemo and his son Doug (my age) bought it back for a far lesser amount.  Unfortunately it went down yet again under the Glosson ownership after a few years of struggle.

 

And then my family sold the local newspaper to the NY Times, the NY thing was struggling and the small towns were thriving.  And...(you know the story!)  

 

For the life of me I can't figure this crap out.  Life is great...if you can stand it!

 

 

[Gregmal]

I just continue to be amazed by the hypocrisy and general contradictions. “The market” is really not much changed and as far as levels go…STILL just meagerly sitting around 4000 SPY. Yet people are acting like we have had some wild, rip roaring rally, and their evidence?…now they wanna talk individual stocks…

[CorpRaider]

My trend rules in trend + value "strategy" are set to force me to buy soon...feels like a whipsaw is in my future.

[formthirteen]

I hope I'm interpreting the replies after my latest post correctly, it seems either dealraker, Gregmal, or CorpRaider is Michael B

Edited February 1, 2023 by formthirteen

[dealraker]

Or is it capital allocation?  Somewhere around 35-40 years ago the oldest owner of our builders supply businesses said, "We should sell-out all but the original location, sell all our rental stuff, and invest in Lowe's because they are going to beat the living hell out of us."  

 

That's business, the successful version.  Wasn't my idea, but man-oh-man have I benefitted from it.  We tried to get Lowe's to buy us; they weren't interested.  

 

And sell Lowe's when?  The bottom?  I'll call Burry and ask him.

[CorpRaider]

You're gonna' love the way you look....in cash. I guarantee it!

 

(Not a guarantee.  Not investment advice.)

Edited February 1, 2023 by CorpRaider

[Castanza]

2 hours ago, Sweet said:

No offence, but this is exactly the type of mental masturbation Hussman did as he sat out of the market while it ripped 100s% higher.

 

It’s also exactly the type of thing I used to think too.  I gave up on market timing long ago because it cost me so much money.

 

Sometimes you have to embrace the market irrationality with some healthy skepticism. Too much of one or the other leads to poor returns. The world does not exist in a textbook. What @changegonnacome said makes sense from a technical/fundamental standpoint. But it doesn't capture the other side of the coin "sentiment, emotion, hype, motives" that can also act as market moving influencers or more accurately exacerbate, draw out, delay, or negate expected moves in the market. 

 

 

The market moves on sentiment, fundamentals and technicals. There is a bit of irrationality behind all of them in my opinion. 

 

 

[thepupil]

I tend to avoid the macro threads, but I'll contribute this as my overall view re stocks vs other alternatives.

 

The global stock market trades for a reasonable P/E and offers an earnings yield of approximately 6% which is about in line to slightly higher than the past 20 or so years. I think the past year or so took a fair bit (potentially not all) of the excess valuation out of the stock market. 

 

Below are charts that show the global stock market's earnings yield vs CLO AAA yield, 10 yr TIPS, and 10 yr Nominals over the last 8 years or so (I went back as far as there was data for CLO AAA). You can do the 10 yr govvy one for a far longer period. It will show very high risk preems in the early '10's and very low ones in the late 90's / etc. 

 

Despite a de-rating over the last 12 months, the global stock market yields a below average amount relative to risk free bonds over the last 8 years or so, but not crazily so. We're talking an equity risk premium of 240 bps vs 330 bps (using the nominal 10 year) or 470 bps vs 530 bps (using the 10 yr TIP). The stock market is moderately more expensive than it has been because rates have gone up. 

 

What is most stark (and illustrated in the top left graph) is that one can invest in 2-3 year "risk free" floating rate securities (CLO AAA) and earn a yield in line with that of the global stock market's earnings. This is what's most unusual. The return on cash and short to intermediate duration spread products is unusually high relative to the stock market. By this metric the stock market looks very expensive relative to the most recent past. 

 

So for me from a valuation perspective, you have to choose your risk. You can choose to hide out in short term stuff and earn an equity like earnings yield BUT take lots of reinvestment risk, because the second rates/spreads fall you're just gonna have cash/whatever yielding 1-3% and not have made any money. Or you can choose to invest in stocks/risk assets and bear the risks of declines in earnings/valuations. 

 

If we saw very low risk premiums against the longer terms FI (which was happening last fall, for example when you could buy 20 yr Phillip Morris bonds for 7.5% for a hot second), I'd be more bearish of equity risk and more inclined to put even more incremental $$$ to bonds/FI.  

 

I for one love that you can get decent cash yield in low risk stuff these days. It's great. Probably won't last forever. it's a nice tool to have in the toolkit though. Carrying 5-10-20% cash is less costly today than it was 1-2 years ago. this is a boon to conservative savers. It's also a bit of a zero sum phenomenon. Conservative floating rate lenders are sucking up earnings power / taking greater percent of pie than they were. Just ask RE guys w/ 3 yr floating rate debt or PE guys w/ 5-6 yr floating rate debt. for now there's a pretty giant sucking sound in favor of the lenders. 

 

And of course you can buy individual stocks and stuff and ignore overall market levels, but I think about this stuff in part because own assets that only have  index options and for other reasons as well.

 

EDIT: Overall, I'm more conservatively positioned than I was to begin 2022. I didn't make/lose much money and took the opportunity to earn a little more in AAA, bonds, etc by shifting a little more toward that stuff. I'm still ~80% long. All incremental $'s still flowing to fixed income via 401k but probably stop soon. Also some personal matters at play. I'm not super bulled or beared up and don't see clear reasons to be either. 

 

Edited February 1, 2023 by thepupil

[Dinar]

@thepupil, what's the best way to play CLO AAA?  Thank you.

[thepupil]

CLOA is Blackrock's new one, but only has a market cap of $30mm right now. 

 

I own JAAA which has a market cap of $2B and a fee of 0.26%. So CLO AAA Index yields 5.5%, minus 0.26% fees minus 0.25% for shits and gigs (who knows if there's some reason you don't get the exact index yield) = 5.0% floating rate yield. Not bad parking spot. Important to keep in mind for taxable though that it's state taxable so that may take away bulk of the advantage over a 2 yr note. 

 

https://www.janushenderson.com/en-us/advisor/product/jaaa-aaa-clo-etf/

[changegonnacome]

1 hour ago, Castanza said:

But it doesn't capture the other side of the coin "sentiment, emotion, hype, motives" that can also act as market moving influencers or more accurately exacerbate, draw out, delay, or negate expected moves in the market. 

 

Agree - I remain pretty much fully invested......my macro framework helps me not to walk into punches on the company side.....we had and are still in a very unusual time for markets.....I think it requires a little macro overlay....for example I think lots of companies over-earned during COVID as a result of stimulus.....there was earnings bubble for some......so with that knowledge I look at more normalized earnings from 2016-2019 and inflation adjust............I know "thou shall not macro" commandment......but I think you'd be fool coming out COVID with inflation like we had, a severe tightening cycle (on the heels of 2010's ZIRP) and with fixed income providing a competitive alternative to equities as @thepupil perfectly points out..................not to let a little macro into your life!

[Viking]

At the end of the day, people need to find an investment strategy that works for them. Their intellect, their emotional make-up and their life situation. Not that complicated (in theory
 

If following macro (just one of many examples) doesn’t help you then don’t do it. But if it doesn’t work for you, does that mean it doesn’t work for other people? Other people shouldn’t use it because it doesn’t work for you? Or you don’t understand it so they are stupid for using it?

 

When it comes to investing my view is there is no ‘one way’ that works for everyone. That is what makes the game so interesting and fun. Be inquisitive. And open minded (to quote that dummy Druckenmiller).

—————

Please note, the picture below is NOT directed at older board members… rather it is directed at the mind set…

 

 

 

 

 

Edited February 1, 2023 by Viking

[dealraker]

If you are a value investor focused on historical valuations, cycles, and the resulting most likely stock prices then surely you'd be selling some things today and adding cash.  If you are more business focused and believe - and see easily or clearly - that strong businesses or "good" businesses gain over competition or simply gain when there is less competition hopping onboard (during recessions) - and thus less stock price/earnings focused?   Well, it is a sound plan to just hold your interest in the businesses, particularly if you do not own the things that go balistic nuts on the upside during upcycles.

 

I'd sell AJ Gallagher, Lowes, CME, ICE...basically all of them with a GE of year 2000 PE of 45-50.  But the growth stocks I own tend to top out in the low 20 pe's and in taxable accounts selling and coming up with new ideas or wating for a re-buy is beyond my ability.  

 

"Hey man, I sold it when the PE was 23...waited 5 years and bought back when the PE finally fell to 15...although earnings had doubled."  And, "Oh...and one more thing, my fed and state taxes were..." (so I lost my ass on that one).  

 

Avoiding lower quotes or staying on a forum where when things fall in price there's an endless parade of "I'm 20% cash" or "I'm 40% cash" or "I'm 100% cash" can get a tad over in envy-ville.  I've been on forums now for 30 years reading posters chant up their cash levels.

 

My cash level during all this time?  As close to zero as I can possibly get it.

 

 

 

 

Edited February 1, 2023 by dealraker

[dealraker]

And lastly as I'm in rant mode obviously...

 

The blast isn't likely to be expected.  I think whether it is some kind of extended grid outage or bomb in a populated area - that everyone who can should have cash on hand to last a while...hopefully cash will be accepted (or maybe it will only be Bitcoin).

 

But the "event" isn't likely this most ever predicted upcoming recession of 2023.  The market blow-up event will be something you aren't reading long seemingly near panic sounding narrations here about.  

 

Life is great...if you can stand it.  Prepare to be surprised when you least expect it.  

 

Rembember budgets were balanced in the year 2000 and tech stocks were soaring while Buffett was the biggest idiot loser in the history of investing.  Jack?  Jack was the world's hero...as was Johnny (Chambers) and Ace (Greenberg).  All the outcomes of that were expected, right?   Kudlow's "Cinderalla Economy" and nirvana for bank stocks?

 

This upcoming recession is the end of the world as we know it and Burry briefly said (before he deleted it) "sell."

 

 

[thepupil]

Just to try to put some rough numbers on it. Let's say you expect a portfolio of stocks to make 8% nominal over the next 20 years.

 

if cash/bonds/whatever bonds yield 1.5%, putting 30% of your money in that stuff, leads to having 31% less money in 20 years (this assumes no monetary benefit from rebalancing/decrease in volatility). That's the equation everyone did when deciding to be 100% stocks. 

 

if the safe stuff yields 5.5%, then having 30% of your money in that stuff leads to having 13% less money in 20 years (this assumes no monetary benefit from rebalancing/decrease in volatility). If you assume just a teensy bit of benefit from rebalancing, then the drag becomes even less. If I can get 90%+ there with <70% of the gyrations, it becomes more interesting to me to own some cash/fixed income etc. The events of the past year have made bonds/cash/spread products great again and decreased the opportunity cost of holding them substantially. 

 

Of course it's different if you're a baller and can maker 15% (or more or whatever) nominal on your risk assets. then carrying 30% in cash/bonds/safe stuff at 5.5% is going to lead to you having 40% less money than being fully invested. 

Edited February 1, 2023 by thepupil

[mattee2264]

History sometimes rhymes. January 2001 also saw double digit NASDAQ returns. And a big factor in that move was the Fed cutting rates. Now 22 years on a big factor is the idea that the Fed is ready to pause.