Is The Bottom Almost Here?

[Valuebo]

 

 

 

[changegonnacome]

5 hours ago, Valuebo said:

 

 

 

 

The relative piece is important here....we are at an interesting juncture. Depending on your return requirements on a go forward basis there is indeed an alternative to equites....TINA is gone (for now).....and we've got a hell of lot of boomers that enjoyed a basically uninterrupted fall in interest rates from 1981 to 2022 twinned as it was with a wonderful period for asset/equity holders........who might blame those boomers for pulling their pile of chips from the volatile equity table for the final stretch of their life journey....buying some peace of mind, comfort & predictability found in owning treasury's & such........this boomer demographic is a very large cohort of wealth everywhere........how they choose to allocate capital will be interesting to watch.

 

I wonder if another 2022 like drawdown with even higher yielding treasury alternatives around vs 22....might see a bunch more boomers throw in the towel in the next large downdraft & jump ship in greater numbers to T-bills/CD's/savings accounts/MM funds & not return......in a way aren't secular bear markets defined by relief rally's where each subsequent rally has less and less people return to bid back up assets to anywhere close to their previous highs....resulting in those charts we know from 1999 & 2008....of lower lows & reversals that fail to take out the the highs of the last rally........the next correction in the equity market will happen with the backdrop of alternatives like this - https://www.bankrate.com/banking/cds/cd-rates/ - 5.1% yielding certificate of deposits.

 

I've been privy to one or two boomer chats that played with this idea of 'going to treasury's'......that perhaps it was time to cash in the chips at the equity casino "its been a good run" & head for the fixed income exits.....and these folks aren't dummies either they understand full well the limitations we've discussed of fixed income instruments vs. equites in growing wealth against the backdrop of inflation....but they also understand what a fabulous run they've had & when to leave a party.

Edited April 18, 2023 by changegonnacome

[Dinar]

This may all be true, however:

 

a) How representative are these boomers and how wealthy are they?  It may very be that 5% of boomers hold 90% of the equities held by boomers, and these people with say median net worth of $30MM+ may not see their lifestyle  impacted by market fluctuations or bear market.  So they might then choose to hold equities to bequeath more wealth to their descendants.  After all, Buffett & Gates may be worth $100bn plus and hold more equities than even ten thousand somewhat wealthy boomers.  I, by the way, know a number of 70 year olds with seven digit portfolios 100% in equities because between dividends, Social Security and pensions, all of their expenses are covered.   Why would someone own 10 year treasury at 3.6% when PM pays a 5% dividend yield and it is growing?

b) Say you are correct, what will be the amount of stock sold per annum by the boomers, and who/what will buy it?  If companies generate say USD 1 trillion of free cash flow per annum in the US, and return it all to shareholders, then assuming $300bn is in the way of dividends, $700bn is available for share repurchases.    

c) What will happen to asset allocation at endowments and pension funds?  That may be more important than what boomers do.  

d) Inflation is not likely to go to 2%, more likely to stay at 3-4% per annum for the foreseeable future.  How will boomers react in this case? [Christine Lagarde yesterday laid out why.  I would add to her points two other things: everything that the Biden administration does discourages work and encourages welfare, which leads to higher inflation, and green new deal also means higher inflation. Generally, putting race/sexual orientation over competence does not lead to lower costs and higher quality.]

 

[Gregmal]

Yea successful investors certainly do not look at their investments and think of things within the framework of "cashing out" LOL. Thats like literally a degenerate gambler mentality. Successful investors simply "accumulate". 

[changegonnacome]

10 minutes ago, Dinar said:

This may all be true, however:

 

a) How representative are these boomers and how wealthy are they?  It may very be that 5% of boomers hold 90% of the equities held by boomers, and these people with say median net worth of $30MM+ may not see their lifestyle  impacted by market fluctuations or bear market.  So they might then choose to hold equities to bequeath more wealth to their descendants.  After all, Buffett & Gates may be worth $100bn plus and hold more equities than even ten thousand somewhat wealthy boomers.  I, by the way, know a number of 70 year olds with seven digit portfolios 100% in equities because between dividends, Social Security and pensions, all of their expenses are covered.   Why would someone own 10 year treasury at 3.6% when PM pays a 5% dividend yield and it is growing?

b) Say you are correct, what will be the amount of stock sold per annum by the boomers, and who/what will buy it?  If companies generate say USD 1 trillion of free cash flow per annum in the US, and return it all to shareholders, then assuming $300bn is in the way of dividends, $700bn is available for share repurchases.    

c) What will happen to asset allocation at endowments and pension funds?  That may be more important than what boomers do.  

d) Inflation is not likely to go to 2%, more likely to stay at 3-4% per annum for the foreseeable future.  How will boomers react in this case? [Christine Lagarde yesterday laid out why.  I would add to her points two other things: everything that the Biden administration does discourages work and encourages welfare, which leads to higher inflation, and green new deal also means higher inflation. Generally, putting race/sexual orientation over competence does not lead to lower costs and higher quality.]

 

 

I definitely put this in my too hard pile - its like trying to predict the weather....way too many variables and the chaos associated with investor behavior two or three derivatives out. It was kind of musings on what I'd do as a boomer presented with the current environment.

 

I'm on shakey enough prediction ground with my musings on what inflation does next (& the Fed & the economy).....so I wont go any further........it just struck me as an interesting thought......and one the likes of KKR & Blackstone have likely already had!......given volatility laundering inside PE/RE funds offered to retail/wealth management clients seem to be the next growth wave for the folks in alternative asset managers.....very clever and good timing by them!

 

 

[mattee2264]

I think demand/supply are factors we often forget in investing.

 

Retail participation is still a lot higher than normal as a lot of retail investors discovered stocks during the pandemic and are very confident buying the dips. 

 

TINA as well as a long long bull market probably has caused most retirement portfolios to drift towards much higher equity allocations relative to bonds. That was the express purpose of unconventional central banking policies. But if we do see a proper bear market (rather than the V shaped ones that have characterised this long cycle) that accompanied with higher bond yields might encourage people to take less equity risk. 

 

Obviously we all know equities do a lot better than bonds in the long run. But sequence of return risk and other factors do not make 100% equities or even 80% equities optimal for many investors especially retired investors trying to live off their savings and having to withdraw more than usual because of the elevated cost of living. 

 

But I think this will all play out in a sideways market over the next decade or so as enthusiasm for equities slowly wanes. 

 

 

[Parsad]

On 4/18/2023 at 10:00 AM, Gregmal said:

Yea successful investors certainly do not look at their investments and think of things within the framework of "cashing out" LOL. Thats like literally a degenerate gambler mentality. Successful investors simply "accumulate". 

 

Or "acclimate".  Both work!  Cheers!

[tng]

Low levels of investor allocation of equities to bonds doesn't really mean too much in my opinion. That could simply be interest rates going up from near zero.

[james22]

On 4/18/2023 at 12:00 PM, Gregmal said:

Yea successful investors certainly do not look at their investments and think of things within the framework of "cashing out" LOL. Thats like literally a degenerate gambler mentality. Successful investors simply "accumulate". 

 

William Bernstein: "When you've won the game, stop playing."

[Gregmal]

PEP starting to show how sinister that inflation is on the bottom line. They call it “organic growth” these days.

[dealraker]

17 minutes ago, Gregmal said:

PEP starting to show how sinister that inflation is on the bottom line. They call it “organic growth” these days.

Inherited a tiny bit of PepsiCo or whatever LOL the hell it was called in 1975.  It's been "YUM(my)" along the way.  To make a long story short, the geniuses in my investment club decided to sell Pepsi (this is just before the spin off of the Tricon stuff) and buy the hypergrowth Worldcom which of course was run by a former pro wrestler Ebbers...quite the "man" of macho business of the time.  I was the 1 of 25 "no" vote.

 

They rubbed it (with good nature) in my face for a short time.  But...humble little me just held fast with my slow-mo Pepsi/YUM stocks.

 

The long story here is that the tiny-tiny-tiny-tiny bit of Pepsi I inherited?  If it was the only stock I owned I could feel comfortable in retirement with it.  Yep, just this one stock...and of course the hyper-successful spin-offs.

 

All while we must buy/sell Ben Graham style to "beat the market" and as I've been told on COBF "you'd have done better buying zero coupons" or whatnot.  All is fine I guess, but that's the wrong world someone is speaking of, one I don't live within.

 

The investment club, after the tech blow ups of the early 2000's including Worldcom going to zero, decided (forced me to be) to elect me president of the club again.  They did that twice through the 40 years I was in the club, both times when their obsessions sent the club portfolio to living hell.

 

Life is great...if you can stand it.  Now they (the club) are all over the place with "value" investing and land purchases (leasing mining rights).  I'm trying to exit the club these days, the young guys are flying high!

 

Morning ramble.   The Pepsi/YUM thingy is worth double digit times what it was when the club sold it to go to zero with Wroldcom.  These things?  Well, they do actually count in the long run.  

 

[tede02]

WSJ had an article on falling diesel prices as a sign that demand for durable goods (and therefore freight) has significantly slowed. The data is noisy but I charted it. There's clearly correlation between recessionary periods and diesel prices. That said, the drop probably wouldn't be as fantastic had the Ukraine war never occured. 

[Spooky]

@dealraker Great insights as always. What were the characteristics that you saw in Pepsi to be confident holding for the long term? What is your process for finding / evaluating companies to invest in generally?

[Jaygo]

In WB's talk in Japan he mentioned how some business units were surprised by the slowing down of things. He mentioned the rail as well as some smaller units. I'm sure PC and the industrial guys are still humming but I could see others start to feel a bit of a slowdown.

 

Id say we are at the point in the economy where we will be seeing drib and drabs of bad data start to come in. 

 

Pepsi volumes were down 2% with a 16% increase in prices. That tells me everything I need to know, the consumer is fed up. Lower prices and pinch margins or drop volumes and hope for the best. Not where you want to be at 27PE imo.

 

I have had a few items in my daily business life pop up cheaper than the last couple years and almost back to 2019 prices. Also where last summer I would get laughed at about machine order I now hear "oh yeah we've got lots available"

 

I am personally taking the lead with my customers and offering very competitive prices and even a couple incentives to take share. I want to head into a recession with shit loads of money this fall! If the recession doesn't show up that that's fine, Than I ( Chicken Little ) took some market share and made a lower margin. If it does show up I will have more money to invest and withstand a slower season the next year.

 

I would anticipate that what I am doing will also happen across the business landscape soon enough. In a thread I started a couple months ago I mentioned a possible mild deflation this fall. My mind is still chewing on that possibility.

 

 

 

 

[Masterofnone]

Twenty years ago we wanted to start a little fund for a newborn nephew. In addition to eventually being perhaps some higher ed. funding, we wanted it to be a teaching tool on compounding. Figured chips, oatmeal and Gatorade would be understandable at any age and had a very high probability of continued success over twenty years. Wouldn't be much of a lesson otherwise. That PEP drip has modestly outperformed the S&P over the two decades. Actually in the scope of all businesses, Pepsico is perhaps one of the easiest to figure out. Regardless of what you think of carbonated sugar water and combinations of grains and fat, they will grow with the economy plus a little bit because they have leading world brands in products that light up human pleasure centers. That "little bit", compounded over decades, amounts to substantial out-performance- especially for the effort required.

[changegonnacome]

6 hours ago, Gregmal said:

PEP starting to show how sinister that inflation is on the bottom line. They call it “organic growth” these days.

 

Its impressive - the power of brand........and a triumph for the food scientists at Pepsi to create such brand/flavor addicted customers......the vast majority of companies outside of Tobacco, unfortunately, don't have such a direct line into peoples dopamine receptors and so you have vastly inferior pricing power relative to a Pepsi/Coke/Altria.......and so you get the mighty 3M today....revenue/volume declines....and the inevitable layoffs to try to get ahead of margin declines.

 

Its very clear at this point that the economy is deteriorating.....everywhere you look the sources of funds, (1) Credit (2) Employment Income - for spending in the economy are drying up........

 

Credit contracting significantly (I focus on small firms...but medium large firm data is just as bad)....inverted yield curve + SVB crisis has created exactly what the Fed wanted -

 

 

 

Credit availability, as discussed previously is the mechanism by which the Central Bank gets to influence spend in the real economy first..........a credit contraction precedes & then creates a relatively modest spending contraction (modest relative to the total quantum of spend in the economy where income is actually the largest source of funds).....the modest credit contraction begins to effect at the margins employment, leading to increasing unemployment claims.....which has a much larger effect on aggregate spend ......given one persons spending is another person income.......the first 0.5% rise in unemployment above trough low, given the circularity of employment & spending & the momentum inherent in it, pretty much always goes on to complete a full 2% rise above trough....Sahm's rule......so 3.4% is 'our' low.......jump to 3.9%.....pretty much ensures a trip to 5.4% unemployment levels is in the offing.

 

Employment levels go up on on an escalator & down on an elevator....try hiring a 1000 people and then try firing a 1000......the latter is a much speedier process.

 

Credit contraction is beginning to feed into the outlook for small firms job creation plans but happens with a lag against the credit contraction backdrop (NFIB chart below)

 

 

So we are getting elevated layoffs (3M etc.) but up until recently laid off folks were getting re-absorbed quickly by other firms hungry for workers.....we all know the JOLTS stuff and all that........but more interestingly given the supply of laid of workers vs. the demand for workers and the ability for other firms to absorb them..... that has started to show a negative mis-match....the so called continuing unemployment claims below.....steadily rising MoM

 

 

 

In some respects an economies health is either improving or dis-improving....improvement being driven by credit creation & growing incomes and MTM wealth ....this unfortunately everywhere you look is a 'dis- improving' economy...............there are no new incremental sources of funds coming..........credit is contracting against a deeply inverted yield curve......continuing claims are rising and so incomes look like they are next to go.......if you work in 3M or Disney or similar firm......your pay rise next year is you get to keep your job....so no extra funds coming from pay rises soon.......everybody already refinanced their houses & house prices at best have stopped appreciating in real terms on a nationwide basis....no extra funds for 'fun' to be found in bricks & mortar........and SPY is stuck around 4100 at best....stubbornly ~15% below its highs of 4800....so no extra wealth effect or wealth wealth leaking out of 401k/IRA's gains right now into the real economy.

 

With all that said.......this is EXACTLY what the inflation problem requires & what the Fed wants to happen.......the soft landing scenario is one where a small uptick in unemployment to ~4 or 4.5% in the next few months is enough to scare the hell out of those with a job to seek exceptionally modest or no pay rises into the back half of this year.....while also incentivizing them to dial back spending & increase their savings by enough that spending growth & by extension inflation moderates. 

 

Its possible it happens......but unlikely.......the chain reaction nature and speed by which employment deteriorates always catches Central bankers off guard & flat footed.......4.5% unemployment might be all thats needed to get us 'back to 2'....but the impreciseness of monetary tools relative to the complexity of hitting & holding a defined unemployment number........is like asking a cardiac surgeon to operate with a machete instead of a scalpel.....your gonna end up with blood and guts......and unfortunately we will, for a time, cause Powell is a mere mortal with a limited toolkit & deep seated fear of becoming Arthur Burns.... we will end up with 'unacceptable' levels of unemployment....and a recession that justifies a lightly shaded grey bar on future FRED charts.

 

Edited April 25, 2023 by changegonnacome

[backtothebeach]

24 minutes ago, Masterofnone said:

Twenty years ago we wanted to start a little fund for a newborn nephew. In addition to eventually being perhaps some higher ed. funding, we wanted it to be a teaching tool on compounding. Figured chips, oatmeal and Gatorade would be understandable at any age and had a very high probability of continued success over twenty years. Wouldn't be much of a lesson otherwise. That PEP drip has modestly outperformed the S&P over the two decades. Actually in the scope of all businesses, Pepsico is perhaps one of the easiest to figure out. Regardless of what you think of carbonated sugar water and combinations of grains and fat, they will grow with the economy plus a little bit because they have leading world brands in products that light up human pleasure centers. That "little bit", compounded over decades, amounts to substantial out-performance- especially for the effort required.

Great story. When I first became interested in equities in the late 80s, the local bank gave us printed charts (on paper - no internet at the time), with all these different time frame charts, and a lot of them went from the bottom left to the top right. I remember thinking "If only one could get in at the bottom left". Congrats on choosing one of those! Funny how time heals even 2008-2009 when you have a stable, boring compounder.

 

[dealraker]

3 hours ago, Spooky said:

@dealraker Great insights as always. What were the characteristics that you saw in Pepsi to be confident holding for the long term? What is your process for finding / evaluating companies to invest in generally?

Spooky, parents dead early in my life and this was in a trust.  I was in my teens and the trust accessible when I turned 30.  By then I was distracted and busy...

 

...and it is now 48 years later.  So there was no imput from me except lack of action.  

 

Here though is what you might find both helpful and insightful:  After exiting the insurance business I mostly built houses (52 of them) and some fast food restaurants.  But for a short time I was an exec. vp head of investment services of LSB Bankshares based in Lexington NC (since merged), as they needed me and I had all the credentials to get it started for them.  So what I'm alluding to is that I am, or in the past was, out-and-about as to business and investing.  And that leads me to say with what I'd call a rational guess...

 

So I know very few who didn't at one time or another buy Pepsi, as Pepsi was often the conversation of those discussing investments for years.  But I'll bet you some serious cash that most, the great majority, have sold their stock--- or did not keep it for long.  I do remember people discussing selling it as well.

 

It is just a part of my biased ramble here on COBF that stocks can actually be kept for the long run and not just bought and sold.   When a business like Pepsi gets to 22-23 times earnings?   To me it isn't over-priced at all, not even close.

Edited April 25, 2023 by dealraker

[dealraker]

22 minutes ago, backtothebeach said:

Great story. When I first became interested in equities in the late 80s, the local bank gave us printed charts (on paper - no internet at the time), with all these different time frame charts, and a lot of them went from the bottom left to the top right. I remember thinking "If only one could get in at the bottom left". Congrats on choosing one of those! Funny how time heals even 2008-2009 when you have a stable, boring compounder.

 

I was amazed at how far PepsiCo fell in 2009.  Wasn't at all fearful nor willing/able to add (I had little cash on hand), just amazed what happened to the price of such a dominant business.

[TwoCitiesCapital]

I dunno. Despite companies' "beating expectations" those expectations were only recently lowered and still tracking for -7 or -8% YoY on earnings which is an acceleration down from last quarter. 

 

At the index level, I do NOT want to be paying 19-20x earnings for trailing earnings that are getting smaller when I can get 5-7% in short duration bonds. 

 

Still picking and choosing my spot in the equity markets, but in general prefer to own fixed income that pays low-ish equity returns without the risk while the economy keeps slowing. 

 

In a receding tide, most boats will go lower with it. Am just fine getting monthly income at attractive rates waiting for that tide to go to something that more reasonably reflects the environment. 

Edited April 25, 2023 by TwoCitiesCapital

[Spooky]

17 minutes ago, dealraker said:

It is just a part of my biased ramble here on COBF that stocks can actually be kept for the long run and not just bought and sold. 

 

This is where I'm trying to get to although I don't know what I will do with all my spare time :).  Been thinking of taking 40% of my portfolio and allocating it to very long term Phil Fisher type growth investments and then just sitting on my ass(ets). The only problem is how do I identify these businesses that will stand the test of time.

 

[Masterofnone]

Spooky-The only one I have ever recommended to anybody who has asked is Berkshire. There is nothing close when it comes to risk/reward, even with the certainty that WEB will eventually not be running it. At that point, there will be a 5% dividend and a superior group of businesses, the vast majority of which have the attributes that you are seeking.

[Masterofnone]

That PEP chart may not actually beat the S&P over the time frame. (Close either way.) But Pepsico has payed a reasonable dividend for the entire duration, and the reinvestment of those dividends (even with the tax drag) creates the out-performance.

[Spooky]

35 minutes ago, Masterofnone said:

Spooky-The only one I have ever recommended to anybody who has asked is Berkshire. There is nothing close when it comes to risk/reward, even with the certainty that WEB will eventually not be running it. At that point, there will be a 5% dividend and a superior group of businesses, the vast majority of which have the attributes that you are seeking.

 

100% agree! BRK is my second biggest position and is going to be in the 60% of my portfolio dedicated to the steady eddies. Wish I could find a BRK earlier in its life cycle.

[Gregmal]

LOL now big tech getting a bid. Every million people trying to be market timers and who does it best? the guy who sold Enphase yesterday!