Is The Bottom Almost Here?

[Dalal.Holdings]

On 10/10/2022 at 5:47 PM, Spekulatius said:

Checked out the Blockwork Macro channel and found the episode with Aswath Damodaran  pretty good:

Aswath is really a clear thinker and explain how to think about inflation , the impact on equity prices etc. Highly recommended.

 

Some of his points~ stable high inflation is not a problem for business. Companies could easily deal with let say 7% constant inflation. However, high inflation is almost never stable. When inflation is 7% it could be that next year inflation is at 5%, 2% or 10%. That’s what happened in the 70‘s.

 

Needless to say, this uncertainty is toxic for most business. Thats why the 70‘s were all over the place.

 

 

Wow. This guy is arrogant worthy of an academic. He confidently says that index earnings don't go down more than 30% to the interviewer (even in deep crises) and seems ticked that the young interviewer implies as such. Starting at 16:50 on the video.

 

"It's not hard to estimate fwd earnings for the S&P 500"

 

"In my 30 years of tracking the index earnings, you will not be off by more than 5% unless you have a true shock like 2008...earnings collectively for 500 companies will not drop 30% below expectations even in 2008 and 2009 the collective earnings of index were down 20%" LOL....

 

And yet: S&P earnings were down:

 

75% in '08

 

50% '01-'02

 

~33% in 2020

 

https://www.multpl.com/s-p-500-earnings/table/by-year

 

He's dead wrong yet very confident...

 

That's the thing about academics. They're not practitioners. No accountability for being wrong. Add in the macro focus and it gets even murkier.

 

Hope those DCF models and "cost of capital" framework of thinking work out for him...

Edited October 13, 2022 by Dalal.Holdings

[Spekulatius]

@Dalal.Holdings Actually Aswath invests as well, partly based on what he teaches. I also think he is talking about operating earnings, not GAAP earnings. Operating earnings indeed don't change as much than GAAP earnings.

 

His equity premium framework is very helpful to understand the impact of higher interest rates on valuations, imo.

[thepupil]

I think rather than assume Aswath is ignorant, the easier explanation is you all are defining things differently. 

 

where i work we typically focus on diluted earnings from continuing ops, which declined about 25%, 33% and 20% in the early oughts, 2008, and 2020, respectively.

 

I think most market practitioners would as well given the noise created by writedowns. GAAP purists may protest.

 

Edited October 13, 2022 by thepupil

[Dalal.Holdings]

45 minutes ago, Spekulatius said:

@Dalal.Holdings Actually Aswath invests as well, partly based on what he teaches. I also think he is talking about operating earnings, not GAAP earnings. Operating earnings indeed don't change as much than GAAP earnings.

 

His equity premium framework is very helpful to understand the impact of higher interest rates on valuations, imo.

 

 

I think Aswath is just wrong. In '08 big bank operating earnings (which were large S&P constituents) went in the negative 10's of billions from positive billions the year prior. Companies like AIG and GM and F were way down too. To say index earnings can't decline more than 30% and forward analyst projections for the index aren't off by 5% or so is plain hubris. 2020 is another example. Earnings down 33%. If Fed hadn't intervened in Mar 2020 what then ? Did analysts coming up with 2020 S&P earnings projections late in 2019 foresee covid 19?

 

I don't think adjusting for operating earnings makes a difference. What were Citigroup's/GM's/F's operating earnings in '08? I think there are a few things where he is wrong, but when you are an academic, there is no real accountability.

 

I also don't make investment decisions based on operating earnings. What matters to me, the shareholder, is the after tax income/FCF that flows to me. Even if I buy the index that's what matters.

 

I have no idea what Aswath's investing track record is and I'd love to see an unadulterated performance record. I do know this guy used DCF to model things like TSLA 10 years ago which struck me as Man with Hammer Syndrome

Edited October 13, 2022 by Dalal.Holdings

[Dalal.Holdings]

34 minutes ago, thepupil said:

I think rather than assume Aswath is ignorant, the easier explanation is you all are defining things differently. 

 

where i work we typically focus on diluted earnings from continuing ops, which declined about 25%, 33% and 20% in the early oughts, 2008, and 2020, respectively.

 

I think most market practitioners would as well given the noise created by writedowns. GAAP purists may protest.

 

 

Lehman Bros became a "discontinued op" in '08. It doesn't mean it didn't hurt those owning indices that had LEH as a constituent. I'm sure Citi and AIG and GE also labeled their blowups as discontinued ops.

 

Management can just have a business unit that does badly, call it "discontinued" or "bad biz" and then adjust them out of your earnings...

 

I don't care about backward looking indicators like "continuing ops". After all, what matters to me is what happens from this point going fwd. I can't adjust out future blowups in my portfolio.

Edited October 13, 2022 by Dalal.Holdings

[thepupil]

i think most just want to use a more stable basis for comparing various time frames and don't want their lehman writedowns mucking up the P/E on Apple or whatever...it's just one data point. you are free to use whatever metric you prefer. 

[Dalal.Holdings]

I think the overall point is that fwd earnings (even at the index level) can be highly unpredictable which Aswath seems to dismiss arrogantly.

 

I'm more in the Taleb school. No one knows nothing. Trust forward projections at your own peril.

 

Ignoring LEH is like the portfolio manager who ignores their losers when calculating performance ("my overall investments are down, but this one account I manage has beaten the market!")

Edited October 13, 2022 by Dalal.Holdings

[changegonnacome]

I was out of the loop for the day just saw CPI print in the morning then was off grid. Horrible print.

 

Can someone explain to me why the market rallied during day to end higher? I'm genuinely confused print seems to confirm higher for longer, persistent inflation etc etc.? What am I missing?

[adesigar]

8 minutes ago, changegonnacome said:

I was out of the loop for the day just saw CPI print in the morning then was off grid. Horrible print.

 

Can someone explain to me why the market rallied during day to end higher? I'm genuinely confused print seems to confirm higher for longer, persistent inflation etc etc.? What am I missing?

 

Only guess would be bear market rally. I was hoping to buy more today and was out when the stocks dropped early. By the time I got back home everything had rocketed. :(. I've started buying individual companies last few weeks but am hoping for a drop to get companies I like at cheaper prices.  

[Guest]

All the bears. 

[changegonnacome]

It’s quite amazing - I guess old habits die hard….will go through data later but even a quick glance shows nothing to suggest that what the Fed is doing has started to ‘work’, put this on top of jobs data and it’s kinda scary how little financial conditions tightening have fed through into the real economy….oh and Uncle Joe just increased pay for people who agree to exit the workforce (i.e. retire)

[Gregmal]

Well, 1) does the market need to go down 3-5% every CPI or job report? This is like the bogus shit we saw in March 2020 where every new case of the sniffles gave people an excuse to sell off stocks another 500-1000 points. This is almost impossible to justify using any sort of long term model. 2) Biden said inflation has gotten to the 2% level!-sarcasm of course(the same day he raised SS benefits 8%) 3) maybe too many people are just unhealthily focused on day to day bs and things just got oversold? It is possible to have earnings with 5% inflation. So much of the number is still influenced by lagging housing data, especially OER. Or maybe it’s just a bounce and tomorrow gives it all back and next week is new lows? Who cares?

 

This guy cleans up the analysis. 
 

 

Edited October 13, 2022 by Gregmal

[Parsad]

1 hour ago, Dalal.Holdings said:

 

 

I think Aswath is just wrong. In '08 big bank operating earnings (which were large S&P constituents) went in the negative 10's of billions from positive billions the year prior. Companies like AIG and GM and F were way down too. To say index earnings can't decline more than 30% and forward analyst projections for the index aren't off by 5% or so is plain hubris. 2020 is another example. Earnings down 33%. If Fed hadn't intervened in Mar 2020 what then ? Did analysts coming up with 2020 S&P earnings projections late in 2019 foresee covid 19?

 

I don't think adjusting for operating earnings makes a difference. What were Citigroup's/GM's/F's operating earnings in '08? I think there are a few things where he is wrong, but when you are an academic, there is no real accountability.

 

I also don't make investment decisions based on operating earnings. What matters to me, the shareholder, is the after tax income/FCF that flows to me. Even if I buy the index that's what matters.

 

I have no idea what Aswath's investing track record is and I'd love to see an unadulterated performance record. I do know this guy used DCF to model things like TSLA 10 years ago which struck me as Man with Hammer Syndrome

 

You can't compare '08 to today.  You had massive leverage from MBS and CDS that precipitated the financial system collapse...100-1 asset to equity leverage in some cases.  You don't have that today and the banks have excess capital to absorb normal operating losses from rising rates.  You also don't have Jumbo ARM mortgages in the magnitude we saw back then.  Combine that with equity in homes, cash on the books for corporations, they will absorb some of the current expected losses fairly well. 

 

Doesn't mean operating earnings won't be hurt, but comparing it to '08 is not an apples to apples comparison.  The difference here will be prolonged belt tightening to absorb inflationary pressures and higher interest rates for the average consumer...when they shop, when they buy cars, when they travel, when they renew their mortgage, when they carry revolving debt, etc.  Cheers!

[Gregmal]

Although again noteworthy and perhaps on the day to day obsessing for folks, the VIX was a pretty big tell. Even at the lows to open, VIX was down 2%

[Parsad]

12 minutes ago, Gregmal said:

Well, 1) does the market need to go down 3-5% every CPI or job report? This is like the bogus shit we saw in March 2020 where every new case of the sniffles gave people an excuse to sell off stocks another 500-1000 points. This is almost impossible to justify using any sort of long term model. 2) Biden said inflation has gotten to the 2% level!-sarcasm of course(the same day he raised SS benefits 8%) 3) maybe too many people are just unhealthily focused on day to day bs and things just got oversold? It is possible to have earnings with 5% inflation. So much of the number is still influenced by lagging housing data, especially OER. Or maybe it’s just a bounce and tomorrow gives it all back and next week is new lows? Who cares?

 

This guy cleans up the analysis. 
 

 

 

Greg, I agree that the interest rate hikes are having some effect on the goods and service side.  But the FED will act on overall inflation...so they will probably continue to be proactive until they see a broad decline in inflation.  Food, energy, etc are still under inflationary pressures.  It will end eventually, but will probably be longer than you expect, but shorter than most others expect.  Cheers!

[Gregmal]

More on the topic

 

 

 

 

So as Sanjeev mentioned, no this is nothing at all like 2008. The only way it ever even gets there is if they recklessly jack up rates too high. But I guess this is what the hedge fund bro trade is….scream inflation is too high and that they MUST raise to stop it, while being positioned for them blowing up the economy by doing so…..

 

 

[backtothebeach]

https://finance.yahoo.com/news/why-stocks-swung-nearly-5-170540004.html

 

"Institutions bought more than $10 billion in puts on individual stocks last week, a record for that group and close to the most ever by any cohort of traders, according to Sundial Capital Research.

There was circumstantial evidence those wagers paid off in the immediate aftermath of the government’s report on consumer prices, which showed hotter-than-expected inflation. While equity futures sold off, the Cboe Volatility Index, a gauge of market anxiety tied to options on the S&P 500, actually fell, potentially a sign of profit-taking by hedged traders. And as those positions were monetized, that prompted market makers to unwind short positions they had put on to maintain their neutral market stance."

[Blugolds]

Just an interesting tidbit regarding inflation, I don’t remember if I mentioned before but I have a close friend in the cattle business. Every year they split the herd, sell off maybe half and retain the breeders, anyone around ranching in general knows how this works. 

 

I think everyone has noticed how beef prices have climbed over the last year or so, its been in the news, you see it at the market. 

 

Yesterday his “buyer” called him asking if he would be willing to sell early this year and lock in price per pound. He asked what they were paying…$2.10/lb. For comparison, last year they got $1.20/lb. So if that is any indication of what to expect in the next year at the supermarket, take it for what its worth. My buddy said, come pick ‘em up! 

 

If the buyers are paying almost double what they were last year, if we can use that as a leading indicator…..

[Sweet]

^ sounds unsustainable.

[Dalal.Holdings]

2 hours ago, Parsad said:

 

You can't compare '08 to today.  You had massive leverage from MBS and CDS that precipitated the financial system collapse...100-1 asset to equity leverage in some cases.  You don't have that today and the banks have excess capital to absorb normal operating losses from rising rates.  You also don't have Jumbo ARM mortgages in the magnitude we saw back then.  Combine that with equity in homes, cash on the books for corporations, they will absorb some of the current expected losses fairly well. 

 

Doesn't mean operating earnings won't be hurt, but comparing it to '08 is not an apples to apples comparison.  The difference here will be prolonged belt tightening to absorb inflationary pressures and higher interest rates for the average consumer...when they shop, when they buy cars, when they travel, when they renew their mortgage, when they carry revolving debt, etc.  Cheers!

i’m not comparing to ‘08. The whole point was re: Aswath’s contention that index earnings cannot decline more than 30%…they have in 2001, 2008, and 2020. I found 3 counterexamples to his statement in the past 20 years. I think it shows how academics are often wrong in this field.

 

We are not in 2008, but it might be 1973-74…

Edited October 13, 2022 by Dalal.Holdings

[changegonnacome]

2 hours ago, Gregmal said:

Well, 1) does the market need to go down 3-5% every CPI or job report? This is like the bogus shit we saw in March 2020 where every new case of the sniffles gave people an excuse to sell off stocks another 500-1000 points. This is almost impossible to justify using any sort of long term model. 2) Biden said inflation has gotten to the 2% level!-sarcasm of course(the same day he raised SS benefits 8%) 3) maybe too many people are just unhealthily focused on day to day bs and things just got oversold? It is possible to have earnings with 5% inflation. So much of the number is still influenced by lagging housing data, especially OER. Or maybe it’s just a bounce and tomorrow gives it all back and next week is new lows? Who cares?

 

This guy cleans up the analysis. 
 

 

Sympathetic to this take if accurate (& without doing a deep dive).

 

However first objection straight out the gate and shooting from the hip- is as follows - stripping out FOOD! costs and some element of HOUSING costs (as imperfect a measure as OER is)…to get an inflation graph to go down and to the right on twitter…..when a lot of non-FinTwit ‘normal’ people would tell you in fact they spend damn near ALL their income on FOOD and HOUSING!…….makes the above feel like an exercise in torturing the numbers to get them to confess to a world that doesn’t exist.

 

But will admit - I’m not sure I’m entitled to an opinion having spent almost ZERO time reviewing the data today. Need to do a deeper dive.

[Gregmal]

Idk but even with a poor report you have to wonder what kind of jackass is bidding down Berkshire to $250? Someone with a 2 week time horizon? At some point this stuff is absurd and overdone. Is there anyone who really thinks next summer we re printing 5-10% CPIs? 

[Gregmal]

What’s the Fed paying attention to in CPI? Last year or this year? Just curious. Anyone paying attention to rentals could see this beginning in August. All those COVID boost rolls have finally been brought to market and now stabilize or modestly regress as supply comes to market.

 

[LC]

No clue Greg but I was selling 255 calls all week

[changegonnacome]

22 minutes ago, Gregmal said:

At some point this stuff is absurd and overdone.

 

Totally agree….but not quite there yet I think….I expect things to get a little more absurd tbh….and VIX @ 40 is my sense of the numbers which would give the Fed pause…..SPY 3000 too

 

23 minutes ago, Gregmal said:

Is there anyone who really thinks next summer we re printing 5-10% CPIs? 

 

Yeah if the Fed keeps it up……the answer is NO……

 

However as the calendar turns to 2023……the BLS non-farm payroll data is going to be very interesting in Q1…..2022 is a year when INFLATION occupied a large part of peoples minds, its really entered into the lexicon…..……the social security bump of 8.3% today, wow…..…has just created a benchmark wage increase in an economy that could have done with something more modest that showed a little more mettle, leadership and pragmatism……………..the middle managers of the world who’ve been told to go into performance review and comp discussion season with “4% on the table and 6% if they really push it”….started crying this morning at that social security pay increase news……..if the labor market stays this tight into the new year, productivity growth doesn’t magically double in Q4 & social security like pay bump gets transmitted into the US economy heading into the new year….….well you’ve got a real problem in Q1 inflation could actually start accelerating on you…….