Is The Bottom Almost Here?

[Xerxes]

@SharperDingaan

 

Say i have a 5-year mortgage (1 year in, so 4 years left) fixed at 3%.

 

Tomorrow, the treasury bonds wobbles and drops pricing in a recession, are you saying that principal/interest ratio on my fixed payment would change ? just so that I understand

 

[crs223]

On 2/24/2023 at 1:46 PM, Gregmal said:

Elon Musk showed everyone what productivity is at Twitter. Imagine what’s possible at the government level?

 

impossible.  first govt workers cannot be fired.  second, govt workers don’t care about their product.  third, even if they did care, govt workers are generally incompetent (the competent ones left for private industry).

[SharperDingaan]

2 hours ago, Xerxes said:

@SharperDingaan

 

Say i have a 5-year mortgage (1 year in, so 4 years left) fixed at 3%.

 

Tomorrow, the treasury bonds wobbles and drops pricing in a recession, are you saying that principal/interest ratio on my fixed payment would change ? just so that I understand

 

 

Nothing changes for you until you get to the end of the mortgage 4 years from now, at which point you will be refinance the balance with a new mortgage at whatever the rate is at that time. If at that time, both the mortgage balance and remaining amortization term remained unchanged, your mortgage payment will be lower if interest rates fall. 

 

Now assume there are 1.2T of 5 yr (60 mo) mortgages outstanding, all at higher rates that in the market today. At an even distribution roughly 200M (1.2B/60) of these mortgages will reset every month, at a lower interest rate. If the o/s mortgage balance and remaining amortization period remained the same, there would be a lower payment every month for the next 60 months. 

 

The reality of course is that mortgage balances and amortization terms will be shorter, and some of the mortgages will reset at rates higher than they were previously. That has to be modelled.

 

SD

 

[Xerxes]

I agree with that (as it concerns the resetting a basket of mortgages that would be coming due every month). That is the view from from a bank point of view that has a large portfolio of mortgages.

 

I am looking at it from a household point of view. If you had no choice but lock-in at 4-year at 4%. That is it for you until you are due, no matter what the inflation does or what the bond market yield is going to be. Unless you break it. 

 

As a homeowner with mortgages (one half due in 2027 fixed at 1.65-1.7% and the other ~3.1% due March 2024), I think the better bet for me in 2024 is actually try variable rate now that the risk-reward has tilted toward in favor. Also legions of variable rate holder had converted to fixed when the rate had gone up, I can bet you that Canadian banks would be offering good discount against the prime to entice people back. 

 

 

[rkbabang]

19 hours ago, SharperDingaan said:

Lot of grocers do local delivery for a $5-10 fee. Similar to instacart, but groceries at the store price, and delivered to your door at a pre-set time - even when it is in the middle of a snow/ice storm. Still seen as a 'convenience' by many, but the real market is the elderly/infirm aging in place at home. Lot different to the Uber Eats, or DoorDash model.

 

Cashiers cost, and their real value is security. Live in a rich neighborhood and there are few cashiers, simply because customers don't steal enough! Customers simply check out their own stuff, and the cost of their theft/hour is less than the cost of a cashier per hour. Paying someone to just scan goods has zero value add.

 

All that is really needed is a warehouse on cheap land, a good on-line portal, robotic loaders/sorters to unload/stack/load, a reliable fleet of electric delivery vans, a roof full of solar panels, and the odd windmills. Charge an average 20% less for everything, keep a small quantity of manual labor on hand for resilience, and ideally don't permit any customer pickups or in-store shopping as well.

 

Combine bigger players together, save 35% and give back 20% in discounts.

 

SD 

 

 

 

 

I think grocery stores will be the last physical retailers to get rid of human cashiers.  I don't mind going through self checkout if I have 3-5 items, but for a weeks worth of groceries, I'd just assume stand there and wait while someone else rings it all in and bags it.

 

 

[Viking]

Bond yields have been spiking higher over the past month. The entire yield curve is now over 4%, including the 30 year treasury. The 10 year Treasury is almost at 4.1% and the 2 year is almost at 5%.

 

When people ask Buffett about the valuation of the stock market (cheap or expensive) he usually says to look at the yield of the 10 year bond. The 10 year is now trading at a 15 year high yield. 
 

What about earnings? Dropping.

S&P500 EPS Estimates

- June 2022 = $252 

- Dec 1 = $231

- Jan 1 = $229

- Today = $222

 

Bond yields are at 15 year highs (and trending higher). Earnings falling (with guidance weak). So where does the stock market averages go from here? Not rocket science. 
 

What should an investor do? Of course, that depends on your situation, strategy, objectives etc. 

 

[changegonnacome]

Its a bitches brew - as I've said for many pages of this thread............conservatism on both earnings forecasts and the multiples you pay for those earnings is important right now........the last decade plus has been characterized by broad multiple expansion.......it flattered a lot of mis-forecasting of underlying earnings power as multiples time and time again bailed out misjudgments on a mark to market basis.

 

Multiples coming in coupled with mis-forecasting of earnings is just devastating to underlying equity returns and so if your gonna play, youve got to play carefully. 

[CorpRaider]

The Davis double wedgie.

[thepupil]

An increasingly great time to be a saver. Starting to be able to lock in decent returns with duration.

 

Short stuff

1 yr bill:    5.0% 

CLO AAA 6.3% 

 

Longer Stuff

10 yr:       4.07%

30 yr        4.01%

MBS Index Yield to Worst: 4.8%

20 yr BBB Corps 6%

 

TIPS

5 yr: 1.7%

10 yr: 1.6%

30 yr: 1.6%

 

Edited March 2, 2023 by thepupil

[mattee2264]

Obviously focus on this thread is primarily S&P 500. 

 

But European markets have been on a tear and are back at all time highs. 

 

Helps that they have a pretty high concentration in commodities and financials which have benefited from the increase in interest rates and growing optimism that there will be a soft landing and they don't have as much exposure to tech stocks and other interests sensitive growth stocks. 

 

How do people rate the prospects? Traditionally if the US has a good decade then EAFE tends to have a good decade the following one 

[Dinar]

1 hour ago, mattee2264 said:

Obviously focus on this thread is primarily S&P 500. 

 

But European markets have been on a tear and are back at all time highs. 

 

Helps that they have a pretty high concentration in commodities and financials which have benefited from the increase in interest rates and growing optimism that there will be a soft landing and they don't have as much exposure to tech stocks and other interests sensitive growth stocks. 

 

How do people rate the prospects? Traditionally if the US has a good decade then EAFE tends to have a good decade the following one 

A lot of European and non-US stocks are very cheap.  A number of excellent businesses priced at low multiples.  

[Luca]

55 minutes ago, Dinar said:

A lot of European and non-US stocks are very cheap.  A number of excellent businesses priced at low multiples.  

Which names would you throw in?

[longlake95]

Have a look at FEVR, small wonderful business. Disclosure: I own it.

[Luca]

21 minutes ago, longlake95 said:

Have a look at FEVR, small wonderful business. Disclosure: I own it.

1.5b marketcap, 80b net income, soft drinks? Doesnt look exciting on a first glance. Whats the thesis?

[longlake95]

Category leader in premium mixer (complementing the premium mixed drink category that's growing fast). Growing fast abroad. High ROIC. No debt. High inside ownership. Dividends (both regulars and specials) Sure, there's cost issues lately, with inflation. That too shall pass...

[Gregmal]

The inflation cost issues are gonna swing back the other way at some point, and then margins across the board get a boost again. This is true for pretty much every company with any sort of structural market advantage. 

[longlake95]

Just now, Gregmal said:

The inflation cost issues are gonna swing back the other way at some point, and then margins across the board get a boost again. This is true for pretty much every company with any sort of structural market advantage. 

absolutely.... Are glass prices and aluminum can prices going to stay elevated for ever? of course not.  It's a money laying on the ground (at the risk of sounding bold....LOL) They have been shipping most of the finished product to the U.S. ( largest market ) from the UK during this period (imagine those costs). Wait till the 2 bottling plants are up and running fully in the U.S. 

[Luca]

They grew revenues the past 5 years yes but it still trades at almost 20x net income. Not a bargain.

[longlake95]

well....a company that has a 40% ROIC, lots of growth and a fortress balance sheet won't trade at 12X if your waiting for that kinda multiple you'll never own it - not that you should if doesn't fit your framework.

[tede02]

This is total conjecture from me but it seems like we're setting up a for a fast sell-off of 10-20% assuming Fed keeps ratcheting up rates and then we get an economic scare. The equity market seems exceptionally sanguine presently. 

[Gregmal]

2 minutes ago, tede02 said:

This is total conjecture from me but it seems like we're setting up a for a fast sell-off of 10-20% assuming Fed keeps ratcheting up rates and then we get an economic scare. The equity market seems exceptionally sanguine presently. 

Ok, but why is it sanguine? The markets literally haven’t gone anywhere. We ve basically just been stuck around 3900-4000 give or take for months despite all the screaming. It’s one thing to say “I don’t think there’s much upside” or that we are stuck, but the entitlement around demanding things trade lower seems to be a bizarre consensus amongst most who care to share their opinion on TV and whatnot.

[Dinar]

2 hours ago, Luca said:

Which names would you throw in?

I would buy Diageo, Campari, Heineken Holdings, Safran, Tel Aviv Stock exchange (Israel, not Europe.)  I own but probably would not add here: Dior, L'Oreal.  

[John Hjorth]

2 hours ago, Luca said:

Which names would you throw in?

 

Take a look at Nordic financial institutions. Some of them  are turning into money machines in this interest rate environment [, and some don't, as always], after they have been in the doghouse and under extreme regulation for a long time by the respective national FSAs ["No - don't kiss that customer!"] in the years since the GFC.

[Dinar]

3 hours ago, longlake95 said:

Have a look at FEVR, small wonderful business. Disclosure: I own it.

I disagree.  It is not growing in the UK in nominal terms despite double digit inflation, competition is intensifying in the US, the company keeps overpromising and overdelivering.  How much more room to grow in the US when you can find its products in Costco on Maui?

[changegonnacome]

1 hour ago, Gregmal said:

It’s one thing to say “I don’t think there’s much upside”

 

I can say the above with a high high degree of confidence - in aggregate across SPY....with the underlying earnings dynamics deteriorating underneath (volume/costs/margins etc.)......then layering on top the fact that bonds are competing with equities such that multiples are very unlikely to expand any time soon (contraction is the more probable path)........you've got two really strong headwinds for SPY levels.....I've traded around this idea now for many months....effectively selling vol.

 

On Europe - I would say it looks very interesting from a valuation perspective......and I've significant amount of my NAV there........Europe unlike the US looks way more like what @Gregmal talks about in regards to the US....which is to say one time event driven inflation (supply chain/energy ec.) that is subsiding as those events roll off & base effects kick in.....Europe doesn't suffer from the same level of monetary inflation issues, I contend, that the US induced via the scale of its COVID largesse.....it has excess labour capacity/immigration on the sidelines that can be induced to increase output........interest rate sensitivity is much more pronounced with much larger proportion of the credit there floating rate.....which means to the extent nominal spending growth is exceeding productivity growth the ECB can meaningfully impact households budgets and put a brake on aggregate spending growth.

 

It isnt all roses of course....being energy independent as the US is just a huge structural advantage.....likewise geography as we've talked about before.....Atlantic & Pacific Ocean/Canada/Mexico.......living in a 'safe' neighborhood with friendly neighbors is an immense advantage over time!