Is The Bottom Almost Here?

[Gregmal]

So Fed policy and rhetoric is now dictated by 4% stock market bounces?

[Gregmal]

Market loses ~20% in 5-6 weeks....Its deserved and theres more pain to come!

Market gains 5% in 2 weeks....this is ridiculous and needs to be stopped!

 

Earnings were supposed to be awful in Q2, and weren't. Now we'll see about Q3, but if they arent awful as predicted, then what? Kick the can down the road and double down on super duper bad Q1 earnings? Or admit the E hasn't fallen and maybe the pessimism is just a little bit overdone?

 

In either event, this has been a twilight zone year for sure. 

[Spekulatius]

I don t think the Fed is looking at the stock market at all at this point. They are looking at credit markets (as they are obviously tightening), but as long as credit risk spreads are relatively moderate, I don't see much of an issue.

 

The bigger issue is international and especially EM's as indicated by the USD rising against pretty much any currency.

 

Looks at this:

https://www.etftrends.com/disruptive-technology-channel/arkk-takes-in-nearly-half-billion-in-september-flows/

 

I don't think private &retail  investors are panicking, the stock market selling is probably from institutional investors rebalancing.

 

 

[changegonnacome]

49 minutes ago, Spekulatius said:

I don t think the Fed is looking at the stock market at all at this point. They are looking at credit markets (as they are obviously tightening), but as long as credit risk spreads are relatively moderate, I don't see much of an issue.

 

They look at it all in its totality.......the stock market....is just another capital market....debt, equity.......one coin, different sides......the cost of said equity capital must be raised to engineer the slow down in the real economy they need......SPY at say a 5% FCF yield is still pretty cheap equity capital cost in an economy printing 8% inflation....one should think of things in terms of the hurdle rate for investment......stock market assigns a 3% FCF yield to your company....or 20x sales multiple.....well its saying continue to 'grow, grow, grow' and here's the cost of equity capital we'll charge for you to do that, find something with a higher IRR than 3% and you can capture the spread.....business investment decision 'go/no go' are fed through these prisms. Then of course there is the simple wealth effects that get transmitted by someone looking at their 401k/brokerage balance & making purchasing decisions.

 

I'm not saying its the only thing, please dont take that from what I say....its complicated and an orchestra of factors feed into 'Financial Conditions'......but all things being equal..........does SPY at 3800 help Jay Powell achieve his aims?....or does SPY3000?......the answer is the later.

[changegonnacome]

2 hours ago, Gregmal said:

So Fed policy and rhetoric is now dictated by 4% stock market bounces?

 

Does the stock market constitute one factor in a multitude of factors called 'financial conditions'. The answer is YES. Is it the ONLY thing. Absolutely not.

 

Put a few whiskeys in Jay-P and ask him to 'fix' inflation would he prefer SPY at 3000 or 4000.......he'll say "pass the whiskey kid, 3000 all the way"

 

If you truly want the best for your brokerage returns over the next 3yr, 5yr period...........everybody should be cheering on the TEMPORARY slump in SPY to 3000........what we have is a very sticky band-aid called inflation plastered on to the economy......its better its ripped off swiftly.......than peeled off slowly. SPY 3800 is slowing the removal of the bandaid.

[Gregmal]

Why 3000 though and not 2500 or 1200? Or 4100 which is still off the highs earlier? It just seems like people are pulling things out of thin air with these sort of things. For instance, there’s been way more instances in US history where we had strong job and wage growth and no inflation but without any evidence whatsoever and only academic theory, people are matter of factor stating “wage growth=inflation”. 

[changegonnacome]

30 minutes ago, Gregmal said:

Why 3000 though and not 2500 or 1200?

 

yep 2500 would be better, 1200 even better.......if your optimizing for ONLY the speed of getting back to 2% inflation, that would work great .....of course the Fed is optimizing for a few more things than that..........but you get my point.

 

46 minutes ago, Gregmal said:

For instance, there’s been way more instances in US history where we had strong job and wage growth and no inflation but without any evidence whatsoever and only academic theory, people are matter of factor stating “wage growth=inflation”. 

 

In the globalization era 1980 - 2021 (RIP). The answer is yes. 

 

Those periods of time were characterized by incremental productive capacity coming online globally.....it was the goldilocks era.......whether it be through immigration to the USA, global labor pools being added in China/India/E.Europe or the application of technology allowing us to produce more with less........however every easy productivity enhancing investment/project got funded during ZIRP......the lousy productivity numbers we are seeing now in the context of being beyond FULL employment in the US + every easy productivity lever having been pulled already......has got us to here......old fashioned monetary inflation. See you can only automate a production line once.....the productivity gain acrues in that year only...not every subsequent year.

 

Nominal spending growth is bumping up against the edges of the US economies ability to produce goods and services and so you get inflation. I dont see anyone rushing to help...........near-shoring, safe shoring, trade wars with China, US chip export controls, southern border, immigration being a hot button political issue, East Asia/Taiwain strait, war in Eastern Europe such that US companies are de-risking that part of the world too.......these are not disinflationary trends.......its King Midas in reverse for the period your holding on to in your example above.

[LC]

I don't buy (yet, at least) the death of globalization. 

 

Global politics has had plenty of setbacks over the past 30 years. But I think underlying demographics are too strong to ignore. Billions of people have had a taste of a higher standard of living, and that genie is hard to put back in the bottle. I think the only way governments can meet this desire is by playing nice together. 

[Spekulatius]

3 minutes ago, LC said:

I don't buy (yet, at least) the death of globalization. 

 

Global politics has had plenty of setbacks over the past 30 years. But I think underlying demographics are too strong to ignore. Billions of people have had a taste of a higher standard of living, and that genie is hard to put back in the bottle. I think the only way governments can meet this desire is by playing nice together. 

I think Peter Zeihan's view is correct, except I don't think the US (or any other nation) can go it alone. In the future, you have to pick sides.

 

The US is going to be a huge trade block with North America (CA, Mexico, US), Europe, Australia and Japan, Taiwan etc) and then there is the "Axis" with China, Russia, North Korean, Cuba  Venezuela (?) and Iran trying to lure some more in via Belt and Road. there will be iron curtains between the "Axis" and the Western block.

 

Not sure where Saudi Arabia,. India, Brazil & South America, and others like South east Asia and Africa will go.

 

Trade between these blocks will still continue, but is purely opportunistic and rules can change or trade in parts could be shut down on a moments notice. This will not globalism's in terms of trade and market access as we know it any more.

[dealraker]

1 hour ago, changegonnacome said:

 

yep 2500 would be better, 1200 even better.......if your optimizing for ONLY the speed of getting back to 2% inflation, that would work great .....of course the Fed is optimizing for a few more things than that..........but you get my point.

 

 

In the globalization era 1980 - 2021 (RIP). The answer is yes. 

 

Those periods of time were characterized by incremental productive capacity coming online globally.....it was the goldilocks era.......whether it be through immigration to the USA, global labor pools being added in China/India/E.Europe or the application of technology allowing us to produce more with less........however every easy productivity enhancing investment/project got funded during ZIRP......the lousy productivity numbers we are seeing now in the context of being beyond FULL employment in the US + every easy productivity lever having been pulled already......has got us to here......old fashioned monetary inflation. See you can only automate a production line once.....the productivity gain acrues in that year only...not every subsequent year.

 

Nominal spending growth is bumping up against the edges of the US economies ability to produce goods and services and so you get inflation. I dont see anyone rushing to help...........near-shoring, safe shoring, trade wars with China, US chip export controls, southern border, immigration being a hot button political issue, East Asia/Taiwain strait, war in Eastern Europe such that US companies are de-risking that part of the world too.......these are not disinflationary trends.......its King Midas in reverse for the period your holding on to in your example above.

 

I'm enjoying the comments.  Change is predicting with "absolute absolutes"...a long-long list of them... and Greg is stating "maybe, and maybe not".  It's a market!

 

Enjoying the posts is what I am saying.

[Gregmal]

Greg is just stating that it’s a little preposterous to just say take the stock market to hell, credit markets to hell, unemployment up 50-100%, because we have no evidence but just a hunch/theory that inflation is gonna go on forever if we don’t, and that 2% inflation is perfect but 3% is bad, and 5% equivalent to 20% unemployment rate or whatever. It’s one of the more unique theories I’ve ever come across. 

[changegonnacome]

1 hour ago, LC said:

I don't buy (yet, at least) the death of globalization. 

 

Not sure you have too.......you simply have to accept that perhaps the disinflationary benefits it provided reached its peak in the last decade and the incremental benefits are diminshing/decreasing YoY.

 

As mentioned earlier the productivity gains/benefits from automating a production line happen once, not every year.

 

Why would globalization be any different?.......once you do it, enjoy the surge in productivity the dis-inflation, its then done.

[changegonnacome]

34 minutes ago, dealraker said:

Change is predicting with "absolute absolutes"...a long-long list of them... and Greg is stating "maybe, and maybe not".  It's a market!

 

Enjoying the posts is what I am saying.

 

Should say that I'm playing devils advocate a bit......nothing is absolute.

 

Bear case always sounds smarter......thats what makes it so seducing for many....and I watch for its siren song.

 

I think the evidence in support of the bear case is mounting however, day by day, week by week. I'm desperately looking for reasons the US doesn't go into a recession with inflation such that we have stagflation and I cant find many/if any reasons why SPY, broad market indxes will do well. Lots of things have to go right for that to be case....

[Gregmal]

I think one just needs to chuckle at how barely 2 years after the fact, we run into some stupid and temporary issue and again the establishment and finance gurus are proposing the answer is to intentionally pull the plug on the economy. Is this really gonna be a new thing we do every 3-4 years just cuz?

[Parsad]

The one thing I've learned is that there are two different components to what the market sees:

 

- Short-term dynamics - changes to interest rates, growth, earning reports, developments, news, speculation, politics, etc

- Long-term dynamics - actual directional changes in policy, long-term crisis, debt, stability, bubbles, disruption, etc.

 

Short-term dynamics run independent of long-term dynamics.  Just because market prices are high, doesn't mean they will correct themselves short-term.  A war in Ukraine is a short-term issue, but may escalate into a long-term crisis.  Debt burdens can have lasting long-term effects and changes, but may be ignored for years before they come to the fore...not unlike other bubbles. 

 

So while market prices may not recede immediately to risk-free comparable valuations, long-term they probably will...via a drop in market prices or growth in earnings.  These short-term fluctuations in between can be attacked opportunistically, or they can be ignored based on an investor's decisions on the long-term.  Neither is necessarily right, neither is necessarily wrong.  Just different and different choices of accepted risk! 

 

It may mean investor's miss short-term opportunities where markets drop dramatically and then recover quickly, even though they have not returned to realistic valuations.  It may mean that those that seek opportunity could lose capital long-term as markets do return to proper valuations. 

 

To steal a phrase more appropriate here, than on the actual book or deserving of the author:  That is the art of the deal!  Cheers!

[dealraker]

There's some calming factor in trying to value business, placing your own measure, then tolerating others pricing it for you through the years.  The tolerating part is of course frustrating at times, but the older you get and the more information that is out there (we just brought some of that up on this site) as to who is likely pricing your business far too high and far too low at times does relieve some of that frustration.

 

By time and luck two stocks dominate for me, AJ Gallagher and Berkshire.  I just can't fathom selling either at today's prices.  No they aren't cheap as to average, nor are they expensive, but they are solid and I'd sleep well with all my money in either- which is odd given I prefer to diversify (in the stock market).   

 

We merged (I owned 51%) with Gallagher in 1993.  My basis is $8 and the stock is valued about the same today (free cash flow wise) at $175 ish or so.  I'm getting a 33% dividend on my basis.   Interestingly my investment club has owned Gallagher twice, buying at excellent times and selling based on "valuation" at no-so-good times.  I think it was 2017 we bought at $34 when it yielded 4%, then the club (value oriented) sold in the $80's a couple of years ago, again based on valuation.

 

Of course being human...I do bring that up occasionally to them because AJ just runs by sell prices repeatedly.  But anyway what I'm saying is that to me there are two things:

 

The fears of the world.

Business.

 

Figuring out when to bail on business is not easy.  My guess is that many of the hedge fund operators are more focused on macro, what investors are going to do and what the fed will do and so forth which leads to unbelievable outcomes for 1 of 10,000.  But I'm not interested in 30% annual returns, I simply couldn't handle it if I got it.  I'd rather just participate in business over time.  

 

Still wanting to buy JOE so I can rant back and forth with Greg.  Problem is my brother in law's brother seemed to do well as a local property developer, he was a big one.  But although he didn't spend a lot of money he ended up with his brothers helping him.  And he began with a silver spoon!  

 

 

 

 

 

 

[LC]

21 minutes ago, dealraker said:

Figuring out when to bail on business is not easy.  My guess is that many of the hedge fund operators are more focused on macro, what investors are going to do and what the fed will do and so forth which leads to unbelievable outcomes for 1 of 10,000.  But I'm not interested in 30% annual returns, I simply couldn't handle it if I got it.  I'd rather just participate in business over time.  

 

 

Do you own anything currently at super high valuations (let's call it 35+ times your estimate of normalized earnings)?

 

I at really bad at selling - I would have been the guy selling Gallagher at $80/sh to my future disappointment - so I am curious how you think about near-term "overvaluation" when it comes to the sell decision.

 

Or, do you buy based on valuation and sell based on business viability (e.g. only selling once the underlying business has been permanently compromised)?

[mattee2264]

I think the risk to the bear thesis (at least for now) is that Q3 earnings hold up better than expected. 

 

Most companies in the S&P 500 index have pricing power so at least for a while can pass on price increases which increases nominal earnings.

 

Consumers for a while can stretch to bear the price increases especially with unemployment still low 

 

Some companies are benefiting from higher interest rates e.g. financials 

 

 

[changegonnacome]

https://www.bloomberg.com/news/articles/2022-10-25/microsoft-alphabet-lead-tech-stocks-lower-as-results-disappoint?srnd=premium&sref=7zqHEcxJ

 

Things slowing down..........I mean we shouldn't be surprised......DXY where it is & Jay-P telling you he's gonna slow it down.....and even if Jay-P did jack.....inflation destroying purchasing power would slow the sucker down anyway.

 

Microsoft moaning about strong dollar

 

Google talking about weakening consumer/ad market

 

The above excuses are completely valid and i expect them to be repeated ad nauseam, by lesser lights than GOOG/MS, for the next number of quarters......

[Castanza]

2 hours ago, changegonnacome said:

https://www.bloomberg.com/news/articles/2022-10-25/microsoft-alphabet-lead-tech-stocks-lower-as-results-disappoint?srnd=premium&sref=7zqHEcxJ

 

Things slowing down..........I mean we shouldn't be surprised......DXY where it is & Jay-P telling you he's gonna slow it down.....and even if Jay-P did jack.....inflation destroying purchasing power would slow the sucker down anyway.

 

Microsoft moaning about strong dollar

 

Google talking about weakening consumer/ad market

 

The above excuses are completely valid and i expect them to be repeated ad nauseam, by lesser lights than GOOG/MS, for the next number of quarters......

Haven’t had time to look but how do they compare to pre crazy covid peak? 

[UK]

10 hours ago, Castanza said:

Haven’t had time to look but how do they compare to pre crazy covid peak? 

 

Googles 3q cc sales +11 on +39 last year. Wouldnt called it terrible:)

[changegonnacome]

10 hours ago, Castanza said:

Haven’t had time to look but how do they compare to pre crazy covid peak? 

 

38 minutes ago, UK said:

Googles 3q cc sales +11 on +39 last year. Wouldnt called it terrible:)

Only thing you need to note - this is the slowest revenue growth for GOOG since 2013…..2013…..like pretty much a decade.
 

If that doesn’t given you pause I’m not sure what will. Advertising & GOOG is the canary in the coal mine for the economy and the canary in this case has stopped chirping.

[dealraker]

On 10/24/2022 at 4:52 PM, LC said:

 

Do you own anything currently at super high valuations (let's call it 35+ times your estimate of normalized earnings)?

 

I at really bad at selling - I would have been the guy selling Gallagher at $80/sh to my future disappointment - so I am curious how you think about near-term "overvaluation" when it comes to the sell decision.

 

Or, do you buy based on valuation and sell based on business viability (e.g. only selling once the underlying business has been permanently compromised)?

LC I am not aware of any stock that I own that has a 35+ valuation.  I am sucked in to reasonably valued businesses that can sustain sales and profit growth over time and when they get moderately over valued I don't sell them.  Some are cyclical to some degree of course.  Probably one of the most over valued but never sold entitiy I own is Tootsie Roll, bought in the 1980's and (I think but don't hold me to it because it was a stock cirtificate basis) my $300,000 of stock has a four figure basis.  About 30 PE?  I just watch and think, "Well, that's not a smart buy" for the price today or for the last 20 years actually.

 

The investment world, particularly active value and growth investors, are seeking alpha while my little world is one of buy something seeking not to lose.   I do know my portfolio, of course very value based, has about a 14.5% annual gain since the year 2000 (of course a very good starting point for such a portfolio) because that's when I began the accounts I use today and the figures are there staring at me).  Think insurance brokers, Berkshire, and railroads...that's what developed for me over time.  I am not claiming expertise, this was accidental.

 

And my guess is the returns forward will be mid single digits for a long time.  But for me that's excellent if I live into my 80's.  This outcome, the journey, in my view will be much like a drunk driver who gets to his destination with no bumper, fenders, outside mirrors and a flat tire...all over the place.

 

The railroads have gotten their outperformance by cutting cap ex, people, routes.  Era over!

Insurance brokers are eventually going to get their 12 percent commissions cut so they are fully priced and maybe eventually in for a jolt.  But damn Gallagher is one hell-of-a-business.

Berkshire will plod along but in my view is also now likely have far less loyalty once Greg's in charge, so reluctantly I must believe it is fully valued.

 

Rambling, the morning coffee spurs it.

Edited October 26, 2022 by dealraker
clarification

[dealraker]

21 minutes ago, changegonnacome said:

 

Only thing you need to note - this is the slowest revenue growth for GOOG since 2013…..2013…..like pretty much a decade.
 

If that doesn’t given you pause I’m not sure what will. Advertising & GOOG is the canary in the coal mine for the economy and the canary in this case has stopped chirping.

Google is the newspapers of 50 years ago, that was one of the family businesses I grew up in - so my opinion of course in my wild-ass guestimate.  It inevitablly becomes cyclical growth, that is until some NEW NEW THING rips it to shreds like the web did to the newpapers.

[Dinar]

35 minutes ago, dealraker said:

LC I am not aware of any stock that I own that has a 35+ valuation.  I am sucked in to reasonably valued businesses that can sustain sales and profit growth over time and when they get moderately over valued I don't sell them.  Some are cyclical to some degree of course.  Probably one of the most over valued but never sold entitiy I own is Tootsie Roll, bought in the 1980's and (I think but don't hold me to it because it was a stock cirtificate basis) my $300,000 of stock has a four figure basis.  About 30 PE?  I just watch and think, "Well, that's not a smart buy" for the price today or for the last 20 years actually.

 

The investment world, particularly active value and growth investors, are seeking alpha while my little world is one of buy something seeking not to lose.   I do know my portfolio, of course very value based, has about a 14.5% annual gain since the year 2000 (of course a very good starting point for such a portfolio) because that's when I began the accounts I use today and the figures are there staring at me).  Think insurance brokers, Berkshire, and railroads...that's what developed for me over time.  I am not claiming expertise, this was accidental.

 

And my guess is the returns forward will be mid single digits for a long time.  But for me that's excellent if I live into my 80's.  This outcome, the journey, in my view will be much like a drunk driver who gets to his destination with no bumper, fenders, outside mirrors and a flat tire...all over the place.

 

The railroads have gotten their outperformance by cutting cap ex, people, routes.  Era over!

Insurance brokers are eventually going to get their 12 percent commissions cut so they are fully priced and maybe eventually in for a jolt.  But damn Gallagher is one hell-of-a-business.

Berkshire will plod along but in my view is also now likely have far less loyalty once Greg's in charge, so reluctantly I must believe it is fully valued.

 

Rambling, the morning coffee spurs it.

Any reason why you do not own Aon?  Thank you.