Is The Bottom Almost Here?

[Parsad]

2 hours ago, Gregmal said:

I also think just blanketing total debt figures lacks context. How much is fixed rate? Also why isnt it relative to EV? Business debt 10T to 19 over 15 years, so what? I have massively more debt than I did in 2007. I’m also 35 vs 20 then. But my debt/net worth ratio was way worse in 2007. 

 

I would also check cash balances and net worth balances.  Apple has $140B in debt, but they have $180B in cash.  Apple had little to no debt 10-12 years ago, but they also did not have $180B in cash or $100B a year in earnings.  I think most companies in the S&P500 have far more cash today than they did 12-13 years ago...so while debt increased, they have more in cash and equity generally.  Consumers also have more equity in their homes, larger 401Ks and lower cost debt overall.  Now that may not be the case as they rollover debt, but they can absorb more in inflationary costs and interest costs than they could historically.  Cheers!

[Simba]

2 hours ago, mcliu said:

Can the market really be at a bottom when GameStop is still worth over $7B..?

 

Humans are greedy and short-sighted, so it's not surprising that when borrowing money was free (like the last 10 years), people will go out and borrow too much.

 

It's just like if alcohol was free, people will drink more than they should. Maybe now we're getting to the hangover.

IMO the best outcome is a long played out bottom - which is exactly what's happening. 

We've been in a downtrend for almost 10 months now.

The GFC was ~1.5 years in downtrend, while the dot-com bubble was ~2.0 years 

 

Hard to think this lasts more than dot-com bubble (IMO), unless some unknown macro factors throws a wrench into the mix. 

[TwoCitiesCapital]

1 hour ago, Parsad said:

 

I would also check cash balances and net worth balances.  Apple has $140B in debt, but they have $180B in cash.  Apple had little to no debt 10-12 years ago, but they also did not have $180B in cash or $100B a year in earnings.  I think most companies in the S&P500 have far more cash today than they did 12-13 years ago...so while debt increased, they have more in cash and equity generally.  Consumers also have more equity in their homes, larger 401Ks and lower cost debt overall.  Now that may not be the case as they rollover debt, but they can absorb more in inflationary costs and interest costs than they could historically.  Cheers!

 

The big tech companies have more cash. And maybe commodity companies after a bumper year. But I don't think elevated cash balances is true in general. Companies have been 'optimizing' balance sheets for a long time and I don't think that meant holding tons of idle cash.  

 

Consumers ability to handle increased inflation is already tapped out. Yes, cost of debt is lower than it was from 10-years ago. But any benefit of that went to servicing inflation which outpaced their wages for most of that same decade. And now the cost of service that debt is rising.

 

The massive increase in cash balances and savings from Covid stimulus has already evaporated and credit card balances are increasing. We're less than 12 months into this inflationary pressure and any buffer consumers had is already gone. 

 

As far as equity in homes is concerned? Largely on paper - much of it'll disappear if mortgage rates stay anywhere near 6%.  Prices have sustained right now because sales activity has halted. You have no new comparables to 'mark to market'. Sellers can't sell at these prices and buyers don't want to buy at these prices so the market stalled. The advertised price has become a lagging indicator of the conditions of the market weeks/months back

 

Prices appear to be giving before rates so I expect that'll be the trend that dominates. Once they've fallen enough, you'll get a reasonable amount of sales volume and we'll know where the comparables price to get properties 'marked to market'.  Much of the equity gain in the last 12-18 months will disappear. 

Edited October 13, 2022 by TwoCitiesCapital

[IceCreamMan]

31 minutes ago, Simba said:

IMO the best outcome is a long played out bottom - which is exactly what's happening. 

We've been in a downtrend for almost 10 months now.

The GFC was ~1.5 years in downtrend, while the dot-com bubble was ~2.0 years 

 

Hard to think this lasts more than dot-com bubble (IMO), unless some unknown macro factors throws a wrench into the mix. 

 

Is it possible that the length and depth of the stock market's drawdown is more closely related to the extremity of the preceding bubble than to the severity of the crisis?

 

How many years did it take for U.S. stocks to surpass their 1929 peak?

Edited October 13, 2022 by IceCreamMan

[Gregmal]

10 minutes ago, IceCreamMan said:

 

Is it possible that the length and depth of the stock market's drawdown is more closely related to the extremity of the preceding bubble than to the severity of the crisis?

 

How many years did it take for U.S. stocks to surpass their 1929 peak?

1929 was a bubble and also a depression in between wars. The popular thing to do right now is to revisit the “valuation short” neighborhood but I think the tea leaves have already said that’s bullshit and stupid same as it has been. Pepsi showed some inflation resilience and is trading not far from highs at 25x. Costco too. WM too. AAPL as well. Premium world class businesses still demand premiums. So even if we look at FANG, which I hate and have since January, what’s the argument? 10x trough earnings? 
 

There’s enough marginal businesses with cracks showing and poor metrics, like airlines/cruises/automakers, Tesla, that worrying about index multiples and valuation shorts I think is pointless. Market will still pay up for quality businesses and those are fairly valued especially the ones that don’t mind inflation.
 

Bag of Cheetos or Doritos at Shop rite just went from $3.99-$5.49 last week. Looks like we need to hike another 150 bps so people with pre diabetes can afford the whole enchilada. 

[UK]

Last hope standing for team transitory:)?

 

https://www.bloomberg.com/news/articles/2022-10-12/kuroda-vows-to-keep-easing-to-support-still-recovering-economy#xj4y7vzkg

 

[Parsad]

I've found that the bottom in the past was always when more and more boardmembers (whether on COBF or the FOOL BRK Board) think there is no bottom or start to feel the despair.  We aren't there yet, but I've certainly noticed more boardmembers thinking the world is about to blow apart.  Cheers!

[UK]

[changegonnacome]

3 hours ago, UK said:

 

Right the P/E is low and then think about European stocks on purchasing power parity basis for a USD investor entering into the position unhedged........you've got two ways to win (potentially)........and obviously one big way to lose if the BIG ONE gets dropped in Europe.

 

It should also be noted and its lost on some people as they think about 8% inflation prints in Europe and 8% inflation prints in the USA as everyone being in the same boat........they aren't............the US has monetary inflation mixed with some modest remaining supply chain/energy inflation but its predominately monetary domestic inflation bedeviling the USA .........Europe didn't print trillions and send it to people..... if the Ukraine/energy crisis were to be resolved it would see its inflation problem resolve rather quickly........what would remain would be the inflation that the USA is effectively exporting to Europe via the strong dollar........'our currency, your problem' as the fella once said.

 

As I've said for months Europe remains an interesting risk/reward relative to the structural beta problem thats likely to remain in US markets for the next 6 - 12 months.

Edited October 13, 2022 by changegonnacome

[changegonnacome]

Social Security benefits to rise by 8.7 percent in 2023

https://www.washingtonpost.com/us-policy/2022/10/13/social-security-cola-inflation/

This is how you DONT fix inflation……

 

[UK]

43 minutes ago, changegonnacome said:

 

Right the P/E is low and then think about European stocks on purchasing power parity basis for a USD investor entering into the position unhedged........you've got two ways to win (potentially)........and obviously one big way to lose if the BIG ONE gets dropped in Europe.

 

It should also be noted and its lost on some people as they think about 8% inflation prints in Europe and 8% inflation prints in the USA as everyone being in the same boat........they aren't............the US has monetary inflation mixed with some modest remaining supply chain/energy inflation but its predominately monetary domestic inflation bedeviling the USA .........Europe didn't print trillions and send it to people..... if the Ukraine/energy crisis were to be resolved it would see its inflation problem resolve rather quickly........what would remain would be the inflation that the USA is effectively exporting to Europe via the strong dollar........'our currency, your problem' as the fella once said.

 

As I've said for months Europe remains an interesting risk/reward relative to the structural beta problem thats likely to remain in US markets for the next 6 - 12 months.

 

I do agree, that EU is much more like Japan, than US, however during covid episode, they also printed a lot and fiscal spending was huge, including Hamilton moment and actually these rescue funds from joint borrowing only now are reaching the countries. Spending was mainly done to business, instead of people though. Meanwhile EU has some other big problems and if markets are going crazy about GB, I am not sure how things will go for Italy. If you think that raising rates is crazy or going to fast in US, than it is madness to do the same in Europe, which it seems they will try anyway:). Will be interesting to see how it plays out. And this 10 vs 15 PE, actually if you look more closely it mostly because SNP includes better companies/industries. Nestles or LHVMs are not much cheaper than KO or Apple, and you do not want to touch DB or CS.

 

 

 

 

 

 

Edited October 13, 2022 by UK

[Dalal.Holdings]

13 minutes ago, changegonnacome said:

Social Security benefits to rise by 8.7 percent in 2023

https://www.washingtonpost.com/us-policy/2022/10/13/social-security-cola-inflation/

This is how you DONT fix inflation……

 

Maybe Joe can provide more loan “forgiveness”

[Gregmal]

That’s a totally separate and interesting dynamic. So on one end you have the White House fighting tooth and nail to avoid the recession, while apparently the Fed is trying to create one. White House is trying to create more jobs, the Fed wants to see them disappear. Fed wants to curtail spending, the White House doubles down on spending. Who will win?

[DooDiligence]

13 minutes ago, Dalal.Holdings said:

Maybe Joe can provide more loan “forgiveness”

 

www.statesman.com/story/news/politics/politifact/2022/09/06/fact-check-ppp-loans-forgiven-republicans-matt-gaetz-marjorie-taylor-greene/65470173007/

[Dinar]

32 minutes ago, UK said:

 

I do agree, that EU is much more like Japan, than US, however during covid episode, they also printed a lot and fiscal spending was huge, including Hamilton moment and actually these rescue funds from joint borrowing only now are reaching the countries. Spending was mainly done to business, instead of people though. Meanwhile EU has some other big problems and if markets are going crazy about GB, I am not sure how things will go for Italy. If you think that raising rates is crazy or going to fast in US, than it is madness to do the same in Europe, which it seems they will try anyway:). Will be interesting to see how it plays out. And this 10 vs 15 PE, actally if you look moreclosely it mostly because SNP includes better companies/industries. Nestles or LHVMs are not much cheaper than KO or Apple. 

 

 

 

 

 

 

How do you figure?  KO is at more than 22x EPS, while LVMH is probably closer to 13, KO has debt while LVMH will have zero net debt by 12/31/2022.

[UK]

5 minutes ago, Dinar said:

How do you figure?  KO is at more than 22x EPS, while LVMH is probably closer to 13, KO has debt while LVMH will have zero net debt by 12/31/2022.

 

I see LVMH 2023 EPS estimate 31 EUR?

[TwoCitiesCapital]

5 hours ago, UK said:

 

Disclaimer - I'm slowly trickling in buys to foreign stock funds and real estate related names, but it's hard to get super excited even with single digit P/E multiples. 

 

Valuations are cheap, but they've been cheap for years. I expect Europe heading towards an energy crisis that is NOT reflected in global energy market prices which is going to continue to have a negative impact on forward looking economic activity. 

 

So while 8-10x earnings looks fair on some of these international stock funds, I expect those earnings may contract fairly significantly in the face of higher energy prices and lower economic activity. Still buying because multiples are attractive on both relative and absolute basis, but I think it still gets worse before it gets better and am not dividing head first just yet. 

Edited October 13, 2022 by TwoCitiesCapital

[Dinar]

22 minutes ago, UK said:

 

I see LVMH 2023 EPS estimate 31 EUR?

I cannot imagine how they are correct.  Here is why:

 

a) H1 2022 EPS = E 15, and H2 is typically the more profitable half, so call it E 31 2022 EPS?

b) Euro is roughly down 10%+ since H1 average  2022 and the company had hedges on top of that, so once hedges roll off, I would expect roughly 15%-20% impact on EPS, so at 1 E = 0.96, 2022 EPS run-rate assuming no hedges would be closer to 35-37.  

c) La Samaritaine, Belmond and travel retail have barely contributed.  The first two are 3bn+ euro assets that should generate another 0.5-1 E in annual EPS.  Travel retail is not back to full strength, so that combined should contribute another 1-1.5 E in EPS.

d) Tiffany's profitability is going up very fast.  I remember when Arnault announced the acquisition, he said that he expected the business to increase profitability the same way that Bulgari did post acquisition (5x increase.)  That means increase in E 4bn in EBIT and 3bn in after-tax net income or E 6 per share.  Now I expect that to take time, but several times since acquisition, executives commented that Tiffany's is doing better than projections.  My channel checks also confirmed that profitability can be increased sharply.  So call it E 3 from Tiffany's?

e) Impact of buy-backs - company should be able to reduce s/o by 1% = 0.3

f) Chinese demand was impacted heavily by Covid-19 lockdowns - impact?  

 

Total: E 31 + 6 (currency) + 1.25 E (Belmond+Samaritaine+travel retail) + 3 E (Tiffany) + 0.3 from buy-backs = E 41.5.  However, this is 2022.  

 

You may have some additional pricing benefit in 2023 vs 2022, + recovery of Chinese demand from Covid-19 shocks so I do not see how 31 Euro EPS is the right estimate for 2023, unless the world economies completely implode.

[Spekulatius]

1 hour ago, Dalal.Holdings said:

Maybe Joe can provide more loan “forgiveness”

SS follows a formula indexed to inflation. It has nothing to do with Joe.

 

FWIW these continued hot core inflation prints are proof that the inflation is not all that transitory. We said transitory in 2021 and the Fed acted upon this being transitory, yet here we are with 2022 with almost done and the inflation dragon is still alive.

 

The most important thing the Fed needs to do once it's done raising (which may be soon) is to keep the interest rates high for a while. In my opinion, until the interest rates are noticeable positive after inflation. That's probably the only way to slay the inflation dragon.

 

Of course I do not run the Fed and don't have a Nobel price in economics. I do remember enough about the 70's and my toys getting noticeable more expensive every year.

Edited October 13, 2022 by Spekulatius

[mcliu]

5 hours ago, UK said:

 

 

The chart might not be comparable due to IFRS13 right?

[UK]

35 minutes ago, Dinar said:

I cannot imagine how they are correct.  Here is why:

 

a) H1 2022 EPS = E 15, and H2 is typically the more profitable half, so call it E 31 2022 EPS?

b) Euro is roughly down 10%+ since H1 average  2022 and the company had hedges on top of that, so once hedges roll off, I would expect roughly 15%-20% impact on EPS, so at 1 E = 0.96, 2022 EPS run-rate assuming no hedges would be closer to 35-37.  

c) La Samaritaine, Belmond and travel retail have barely contributed.  The first two are 3bn+ euro assets that should generate another 0.5-1 E in annual EPS.  Travel retail is not back to full strength, so that combined should contribute another 1-1.5 E in EPS.

d) Tiffany's profitability is going up very fast.  I remember when Arnault announced the acquisition, he said that he expected the business to increase profitability the same way that Bulgari did post acquisition (5x increase.)  That means increase in E 4bn in EBIT and 3bn in after-tax net income or E 6 per share.  Now I expect that to take time, but several times since acquisition, executives commented that Tiffany's is doing better than projections.  My channel checks also confirmed that profitability can be increased sharply.  So call it E 3 from Tiffany's?

e) Impact of buy-backs - company should be able to reduce s/o by 1% = 0.3

f) Chinese demand was impacted heavily by Covid-19 lockdowns - impact?  

 

Total: E 31 + 6 (currency) + 1.25 E (Belmond+Samaritaine+travel retail) + 3 E (Tiffany) + 0.3 from buy-backs = E 41.5.  However, this is 2022.  

 

You may have some additional pricing benefit in 2023 vs 2022, + recovery of Chinese demand from Covid-19 shocks so I do not see how 31 Euro EPS is the right estimate for 2023, unless the world economies completely implode.

 

Well it seems you are much better informed than me, I just looked at the estimates, assuming they are somewhat right for such a large and well known business and cannot argue and hope you are right. Nothing agaist LVHM, seem wonderfull well performing business. 

[Dalal.Holdings]

SS might not be under Biden’s decision but his administration has led fiscal policy that had poured fuel on the inflationary fire. Hence the loan “forgiveness” and the ironically named “inflation reduction act”. Reminds me of “patriot act”

[Gregmal]

Wabuffo sees what’s happening. 

[Spekulatius]

1 hour ago, Dinar said:

I cannot imagine how they are correct.  Here is why:

 

a) H1 2022 EPS = E 15, and H2 is typically the more profitable half, so call it E 31 2022 EPS?

b) Euro is roughly down 10%+ since H1 average  2022 and the company had hedges on top of that, so once hedges roll off, I would expect roughly 15%-20% impact on EPS, so at 1 E = 0.96, 2022 EPS run-rate assuming no hedges would be closer to 35-37.  

c) La Samaritaine, Belmond and travel retail have barely contributed.  The first two are 3bn+ euro assets that should generate another 0.5-1 E in annual EPS.  Travel retail is not back to full strength, so that combined should contribute another 1-1.5 E in EPS.

d) Tiffany's profitability is going up very fast.  I remember when Arnault announced the acquisition, he said that he expected the business to increase profitability the same way that Bulgari did post acquisition (5x increase.)  That means increase in E 4bn in EBIT and 3bn in after-tax net income or E 6 per share.  Now I expect that to take time, but several times since acquisition, executives commented that Tiffany's is doing better than projections.  My channel checks also confirmed that profitability can be increased sharply.  So call it E 3 from Tiffany's?

e) Impact of buy-backs - company should be able to reduce s/o by 1% = 0.3

f) Chinese demand was impacted heavily by Covid-19 lockdowns - impact?  

 

Total: E 31 + 6 (currency) + 1.25 E (Belmond+Samaritaine+travel retail) + 3 E (Tiffany) + 0.3 from buy-backs = E 41.5.  However, this is 2022.  

 

You may have some additional pricing benefit in 2023 vs 2022, + recovery of Chinese demand from Covid-19 shocks so I do not see how 31 Euro EPS is the right estimate for 2023, unless the world economies completely implode.

I agree on LVMH. For a lot of exporters, the current estimates in Euro have not baked in the exchange rate changes (weaker Euro). I expect to see some surprises, especially for companies like LVMH that see no direct impact from higher energy prices.

 

Even BASF's earnings yesterday weren't that bad even though they sit in the middle of the problem as far as energy prices are  concerned.

[Dalal.Holdings]

So where is the Bottom? I'm looking at some of the tech bro favorites-- 
 

SHOP

SE

COIN

 

All down >80% from their ATH hit less than 12 mo ago...

 

Can't believe folks went balls deep in these. Is the bottom here? I'm not sure it's here for some of these...