Is The Bottom Almost Here?

[Sinbius]

According to Druckenmiller never happened that if inflation goes over 5% we didn't have a recession...

 

...also never happened that if inflation went over 5% it went down without the fed funds rate going over CPI... (this second thing actually can not happen or the world will implode  )

Edited June 26, 2022 by Sinbius

[Gregmal]

20 minutes ago, crs223 said:

How much did AAPL drop when Steve Jobs died?

IIRC ~4-5%.

[Spekulatius]

My own one experience is that infatuation with buying at the bottom is likely not going to work and leads to subpar results. Stock market bottoms are only known after the fact and as much an result of mass psychology than of economical data.

You see this again and again when the perms bears actually correctly predict a decline but then double up on their bearish beliefs and predict much more declines and then totally miss the turn when the market turns up again. Then it’s s dead cat bounce or bear market rally and in the end  when it’s clear they missed the turn they blame it the money printing from the Fed or something else that bails everyone out.

 

Its much better just to buy stocks that one can identify as cheap knowing full well they can get cheaper on the near term and just live with the fact that you get reasonable results without ever finding the bottom.

[Red Lion]

22 hours ago, Gregmal said:

I think if you want to see “break” look at the segment(didn’t get a lot of attention of course) on MBS selling with Powell testimony. Already adapting because what? Market froze up or was manipulated for a day?

 

I too am holding out hope for cheap private market real estate, but as the days go on the odds of that get smaller. I have yet to see a single intelligent and relevant bear argument for housing getting whacked big. It’s all stupid “look at the chart, 2005 again!” which misses every underlying fundamental. Or contradictory shit like 6% mortgage will kill housing prices(as prices continue to set records) but then talk up inflation and high housing prices lol. Or how rents are gonna soar forever but there s a glut of multifamily being built. Can’t have it both ways. Or “there’s lots of price drops in my market!” And it’s like yea so what? Remember all the “Zillow paid too much!” And then they offload everything at better than expected prices in a couple months. I see tons of price cuts in lots of markets I follow. 95% of them are just listings that were not based in reality in the first place.

The overall core of the housing market is insanely strong. I said a couple years ago we were in the first or second inning of a housing super cycle. One that would follow the tech bubble cycle, IE 1990s first wave followed by 2010-2020 act 2 that dwarfs act 1. Imagine selling the Nasdaq at the 4000 mark or whatever earlier this decade when it hit that cuz you were an idiot who just said “look at the chart, 1999 all over again!”? So maybe now we are in the 3rd inning. It’s never straight up with no pullbacks. This phase looks like the one where all the folks with 2008 PTSD think they’ve got it figured out and get smoked. By the end of the cycle everyone in the world will think housing is indestructible just like they did with the FANGs last year. Gonna be fun.

 

I think you've called the whole housing thing better than anyone else on this board or elsewhere, so I certainly have a lot of respect for your opinion on where housing is going. I tend to agree that we have an insanely strong core housing market. Although, I'm not so sure where things are headed. I don't think it's for a big drop like we had before. I do think there may be some individual markets that are more susceptible to downside, and that's where I might want to be investing. Honestly, I want a damn vacation house, and it pisses me off to no end that they've doubled in price everywhere I want to own one (Tahoe or Hawaii or a sweet ski destination with a major airport). 

 

I personally think the most likely outcome for housing is that we have a fairly flat pricing environment for the next few years while rents catch up. Too many tailwinds for prices to drop significantly, but I think 6% interest and the highest house price to household income in memory. 

 

I sure wish I had the skillset to build concrete multi family dwellings myself. I love the idea of building 100 year assets at discount that I can depreciate over 27.5 years and change my rents annually. If I could get a 5-6% CAP rate on asset like this I would be in a position to retire. Not that I'm interested in retiring, I'm only 38, and I still want a vacation house in Tahoe, Hawaii, or preferably both, and I have a bunch of kids that I'd like to help out. It's all a moot point since I don't know how to build, and I can't find deals this good probably for all the reasons you cite above. 

 

 

On the other hand, there are a lot of strong businesses trading in the 10-15X FCF range now, and as much as I really want to own real assets directly so I can enjoy huge depreciation benefits along with cash flow resiliency with full control, valuation matters, and some stocks in multiple sectors are starting to look pretty damn attractive in comparison to direct real estate. 

 

I do think the homebuilders will do quite well if you're right that housing remains resilient and doesn't crash. I know building costs are coming down finally, volume is down with higher mortgage rates, but as long as house prices stay up it seems like the homebuilders can just print money and are trading at stupid low earnings multiples. 

 

[Thrifty3000]

14 hours ago, Dinar said:

A very good friend of mine has known Sokol for nearly two decades.  (Sokol was an investor in the business that he started nearly twenty years ago and finally sold two years ago.)  Sokol told my friend that he thought Abel was very good, that in his opinion, BRK is very cheap on sum of the parts basis, and the time to buy it is when Buffet dies and the stock sells off.  Then it will be an insane bargain.

That’s good insight. That tells me two things.
 

First, Sokol still endorses Abel even when he has little to gain. (Sokol is one of only a handful of people in the world who has really had to consider what would be required to run BRK post Buffett.) Sokol could have just as easily told your friend that he doesn’t envy anyone having to take on BRK post Buffett.

 

Second, Sokol saying it will be worth buying BRK on the death dip assuming Abel will be in the captain’s seat is another implicit Abel endorsement.

 

If Abel follows Sokol’s ruthless management by objectives approach, Ajit keeps the insurers humming, and if Todd and Ted ably source and evaluate deals, we may be able to replicate much of the Buffett brain. 

[Thrifty3000]

19 minutes ago, RedLion said:

 

I think you've called the whole housing thing better than anyone else on this board or elsewhere, so I certainly have a lot of respect for your opinion on where housing is going. I tend to agree that we have an insanely strong core housing market. Although, I'm not so sure where things are headed. I don't think it's for a big drop like we had before. I do think there may be some individual markets that are more susceptible to downside, and that's where I might want to be investing. Honestly, I want a damn vacation house, and it pisses me off to no end that they've doubled in price everywhere I want to own one (Tahoe or Hawaii or a sweet ski destination with a major airport). 

 

I personally think the most likely outcome for housing is that we have a fairly flat pricing environment for the next few years while rents catch up. Too many tailwinds for prices to drop significantly, but I think 6% interest and the highest house price to household income in memory. 

 

I sure wish I had the skillset to build concrete multi family dwellings myself. I love the idea of building 100 year assets at discount that I can depreciate over 27.5 years and change my rents annually. If I could get a 5-6% CAP rate on asset like this I would be in a position to retire. Not that I'm interested in retiring, I'm only 38, and I still want a vacation house in Tahoe, Hawaii, or preferably both, and I have a bunch of kids that I'd like to help out. It's all a moot point since I don't know how to build, and I can't find deals this good probably for all the reasons you cite above. 

 

 

On the other hand, there are a lot of strong businesses trading in the 10-15X FCF range now, and as much as I really want to own real assets directly so I can enjoy huge depreciation benefits along with cash flow resiliency with full control, valuation matters, and some stocks in multiple sectors are starting to look pretty damn attractive in comparison to direct real estate. 

 

I do think the homebuilders will do quite well if you're right that housing remains resilient and doesn't crash. I know building costs are coming down finally, volume is down with higher mortgage rates, but as long as house prices stay up it seems like the homebuilders can just print money and are trading at stupid low earnings multiples. 

 

 

The home builders have already been whacked. Down 40%. That’s a strong leading indicator of recession.

[Gregmal]

17 minutes ago, Thrifty3000 said:

 

The home builders have already been whacked. Down 40%. That’s a strong leading indicator of recession.

Homebuilders in general just aren’t a great way to play housing because you need both volume and price. Then you also need somewhat of a decent captain on the ship.
 

I think you can(and I have done so myself with what I’m invested in) refine all of these things into simpler ways to express a robust housing market. Homebuilders went down because the paper pushing WS guys always try to front run a theme and if higher rates materially slows volume then how does it make sense to own something you bought on the basis of pumping out homes like hotcakes? Should they trade at 5-7x? Probably not. I mean from what I’ve seen they’ve all met and mostly raised guidance. The folks shorting them are making money despite being totally wrong. Which is one of the beauties of the public markets. So many ways to win. You can often make money even when you are wrong, as long as you get the important variable correct, which the past 6 months has been to just be short anything.
 

But it’s important not to confuse the public market stocks with the real assets. Private market for real estate is the real market. What’s public makes up like a sub 10% portion so it’s not really all that relevant. The real players are swallowing up everything that’s modest or better on the quality side.
 

Throughout the entirety of my investing life, the public markets have been largely wrong and all over the place on traded real estate because it’s the only way for most to express their real estate disdain or enthusiasm. Can we actually imagine the dumbasses who sold their MF REITs bc of COVID? Fuckin retards. Did the private market panic? Nope. No one I’m aware of sold anything the way the public dopes did.  Same thing is happening now. Everyone is lining up their cash piles and praying for deals and raising money for distressed funds. Just like Q2/3 2020. Outside of office and blue state retail I just don’t think they get anything to buy. Unlike with stock, where most people have no clue what they are buying, even with ticker symbols they know like Costco or Apple, real estate everyone has confidence in buying the dip on because it’s tangible. Costco pulls back 30% and they freeze even though they were waiting for the pullback. If a house you are eying so you can get out of that shitty rental and start a family gets a 20% price cut? You probably get a semi boner.

[Viking]

10 hours ago, Parsad said:

 

I would imagine it would be at least a 10% drop the day the news is announced and 20-40% drop over a period of time as hedge fund managers, small investors mull it over and sell.

 

It will also depend on how much cash Berkshire has and how much support the stock gets from BRK buybacks when it starts dropping.  As well as value fund managers probably buying stock too.

 

It would be back up near fair value within 12-18 months once sellers clear and equilibrium returns and people realize the stock will still do reasonably well long-term.  Cheers! 

The biggest challenge for Berkshire post Buffett will be the scrutiny of every decision AND THE FREE PASS BUFFETT GETS WILL BE GONE (decisions, corporate structure, governance etc).
 

Sub par returns for a decade? With Buffett around you tolerate it (even celebrate it)… because it is managed by Buffett. Sub par return for a decade post Buffett? Why would a rational investor hold it any more? 
—————

For years now Buffett has been primarily focussed on preserving the wealth of existing shareholders (the ones who bought in early). This is very different from how most companies are managed today. 

Edited June 26, 2022 by Viking

[LearningMachine]

2 hours ago, Spekulatius said:

My own one experience is that infatuation with buying at the bottom is likely not going to work and leads to subpar results. Stock market bottoms are only known after the fact and as much an result of mass psychology than of economical data.

You see this again and again when the perms bears actually correctly predict a decline but then double up on their bearish beliefs and predict much more declines and then totally miss the turn when the market turns up again. Then it’s s dead cat bounce or bear market rally and in the end  when it’s clear they missed the turn they blame it the money printing from the Fed or something else that bails everyone out.

 

Its much better just to buy stocks that one can identify as cheap knowing full well they can get cheaper on the near term and just live with the fact that you get reasonable results without ever finding the bottom.

One framework to think about it would be to pay the price that will give you your required rate of return, say 15%, assuming you could buy the whole company while market is shutdown forever. 

 

With the new reality post Buffett and Ajit, assume float has risk of becoming positive cost, float continues to carry risk of regulators/courts rewriting contracts in event of a big calamity that Ajit already admitted to in the last meeting, and that investment returns won't go far.  

 

Assume other operating businesses continue to hum along.  Even though they will consume FCF to replace big amounts of PP&E, assume that eventually inflation will go down, and FCF will start being available to shareholders. 

 

In such a case, FCF yield of 10% could be fairly valued, i.e. on $40B operating FCF, market cap of $400B.  Cheaper than that would help you absorb risk of rewriting of insurance contracts, etc.  Splitting between 10% and 15%, at FCF yield of 12.5% on $40B FCF, market cap would be $320B.

 

So, you don't want to be paying $613B at today's price knowing that upon Buffett's and Ajit's passing, you probably won't make your required return if you pay today's price. 

Edited June 26, 2022 by LearningMachine

[Dinar]

9 hours ago, Sinbius said:

I think that Ted and Todd if they are extremely good ( likely) should become the new Berkshire...and I think that if they will not....they will just say...it was a nice experience, bye bye (and I will move my BRK money to them).

I think Ted is extremely good.   As for Todd, I cannot figure out for the life of me why Buffett decided that he is good.  

[Parsad]

7 hours ago, Spekulatius said:

I think a decline of 20-40% just on Buffett’s passing isn’t plausible. Do you really think a large part of the investor base will just sell? I don’t think so, there is no Buffett premium in the stock price currently, based in SOP or any other ratio.

 

Interesting discussion and the vast divergence of views is always valuable to see. We won’t know until it actually happens.

 

Yes.  There is a hardcore loyalty to Buffett and all things Buffett.  That subgroup, many will choose that Berkshire without Buffett, is no longer Berkshire.  40% would be on the extreme side...but a 20-25% drop is more than plausible and probably likely.  Cheers!

[Parsad]

4 hours ago, Spekulatius said:

My own one experience is that infatuation with buying at the bottom is likely not going to work and leads to subpar results. Stock market bottoms are only known after the fact and as much an result of mass psychology than of economical data.

You see this again and again when the perms bears actually correctly predict a decline but then double up on their bearish beliefs and predict much more declines and then totally miss the turn when the market turns up again. Then it’s s dead cat bounce or bear market rally and in the end  when it’s clear they missed the turn they blame it the money printing from the Fed or something else that bails everyone out.

 

Its much better just to buy stocks that one can identify as cheap knowing full well they can get cheaper on the near term and just live with the fact that you get reasonable results without ever finding the bottom.

 

Perma bears are perma bears...just like perma bulls.  They will never see the upside or downside of stocks.  Cheers!

[Thrifty3000]

2 hours ago, Viking said:

The biggest challenge for Berkshire post Buffett will be the scrutiny of every decision AND THE FREE PASS BUFFETT GETS WILL BE GONE (decisions, corporate structure, governance etc).
 

Sub par returns for a decade? With Buffett around you tolerate it (even celebrate it)… because it is managed by Buffett. Sub par return for a decade post Buffett? Why would a rational investor hold it any more? 
—————

For years now Buffett has been primarily focussed on preserving the wealth of existing shareholders (the ones who bought in early). This is very different from how most companies are managed today. 

Yes! I thought about mentioning that in one of my rants. It’s not going to be easy to contend with.

[Gregmal]

18 minutes ago, Thrifty3000 said:

Yes! I thought about mentioning that in one of my rants. It’s not going to be easy to contend with.

I actually view this as a positive. Buffetts made some good moves but has also made a lot of mistakes the past 10+ years. Sitting on cash and selling stocks bc of COVID fears for instance. Accountability and something to prove mentality from the new guys would be more than welcomed. 

[Guest]

21 hours ago, Parsad said:

 

I outperformed by about 7 percent annualized in the personal accounts in aggregate between November 1999 and the end of May 2022...14.2% annualized including dividends...a couple of times there was like just one stock in the portfolio (BRK in 1999/2000 and FFH in 2003) as well as a nearly 60% holding of FFH again between late 2020 and mid-late 2021...so the concentration at times helped. 

 

The fund on the other hand, had a lot of PDH for the last 8 years and the concentration there did not help...so well...SPY or BRK easily did better!  

 

Cheers!

 

 

Excellent performance, Sanj. Very solid given the high cash stack and generally difficult market for value stocks.

 

[Guest]

23 hours ago, Thrifty3000 said:

Thank you for sharing this. I just read it. I'm still processing it.

 

I think the comments about Abel's work ethic from Ron Olson probably added the most color to my perception. (Sokol said the same about Abel's work ethic, and I know Sokol is a Killer with a capital K, but Sokol Always has an agenda. So I take his input on this with a grain of salt.)

 

My gut is when it comes to Abel we're looking at an affable fella who appears to be a top 1 percentile operator. In terms of likability, work ethic and competence I'm sure he compares favorably to most Fortune 500 CEOs. And, that in itself ain't a small deal.

 

But! Here's what's strange. Buffett is a god - Full Stop. He is capitalism's-da Vinci-meets-Michaelangelo-meets-Mozart-genius-Freak-Of-Buffett damned-Nature).

 

Is it too much to ask for his successor to at least be a demi-god?

 

The mark of a great individual is an organization that fails in their absence. The mark of a great leader is an organization that is stronger 5 years after their gone.

 

Do I think Berkshire will be stronger after 5 years with Abel at the helm? Meh, maybe, but almost certainly thanks to momentum, and not because of Abel.

 

What does being a god look like?

 

In the height of the tech bubble Buffett acquired one of the world's largest and most respected reinsurers (Gen Re), and its massive bond portfolio, using extremely overvalued shares of Berkshire Hathaway as the currency. It was one of the most ingenious business deals of all time. As part of the acquisition, Buffett bagged a gigantic portfolio of bonds for 50 cents on the dollar right before

 

a) the financial world crumbled

b) equity prices tumbled back to Earth

c) demand for safe haven bonds skyrocketed

 

Not long after the acquisition he recognized Gen Re had a large cache of financial weapons of mass destruction in the form of derivatives, and he forced Gen Re to unwind all of them - no matter what it took. He made that call well in advance of the Great Financial Crisis - starring, you guessed it, financial weapons of mass destruction!

 

Furthermore, Buffett, drawing from his nearly Unmatched encyclo-fu@king-pedic memory recognized Gen Re's numbers were starting to lag the industry and Buffett fired the CEO - mind you, of one of the most respected insurers on the planet! (Buffett has historically been pretty ruthless about obvious underperformance. See Todd Combs being sent in to rescue Geico.)

 

^That is how a god manages a conglomerate worth hundreds of billions of dollars. It IS absolutely as befuddling and miraculous as rocket surgery.

 

I don't know Abel personally. I have nothing against the guy. But, I'm still pretty certain he ain't a god. I'm not yet convinced he's even a demi-god.

 

And, so, similar to @Parsad's BRK reservations, I believe BRK will outperform the S&P 500 as long as WEB is lucidly in the captain's seat. I'm not anywhere close to convinced it's "humanly" possible for BRK to outperform the S&P 500 for the next 3 or 4 decades. And, certainly not with Abel running the show.

 

Is it possible to find someone better than Abel? God only knows.

 

Does your wife know about your other love interest?

[Guest]

Personally, I wouldn't be surprised at all if Berkshire is up a day or two after Buffett retires/passes.

 

I mean, how is a 91 year old CEO change not already factored in?

[Xerxes]

Great topic @Parsad

 

I tend to agree with your view, eventough I prefer that you were wrong as I am capped out for the year hahahah. And have to wait till 2023 to buy more. 
 

I like to think one big bear market rally once the market “smells” softening of inflation data in 2022, followed by a “mild” leg down in 2023 reflecting a mild recession as the “e” of the p/e drops out. 
 

The market and general public are used to see “recession” connected with major exogenous events. Covid, Sept-11 and not so exogenous of the banking leverage. 
 

nothing is wrong with a mild 1994 style recession. 

 

PS: It is hard to put one self out there publicly at portfolio-level. Thanks for doing that. 

[Thrifty3000]

3 hours ago, stahleyp said:

 

Does your wife know about your other love interest?

I have a hall pass.

[Guest]

10 minutes ago, Thrifty3000 said:

I have a hall pass.

 

I suppose Buffett would be the best use of that then. 

[Parsad]

3 hours ago, Xerxes said:

Great topic @Parsad

 

I tend to agree with your view, eventough I prefer that you were wrong as I am capped out for the year hahahah. And have to wait till 2023 to buy more. 
 

I like to think one big bear market rally once the market “smells” softening of inflation data in 2022, followed by a “mild” leg down in 2023 reflecting a mild recession as the “e” of the p/e drops out. 
 

The market and general public are used to see “recession” connected with major exogenous events. Covid, Sept-11 and not so exogenous of the banking leverage. 
 

nothing is wrong with a mild 1994 style recession. 

 

PS: It is hard to put one self out there publicly at portfolio-level. Thanks for doing that. 

 

Howard Marks is buying, so we can't be that dumb!  He's a pretty bright guy.  Cheers!

 

https://www.ft.com/content/a3f14c51-0b1c-416e-84db-0fa0fc842f1f?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev

[changegonnacome]

32 minutes ago, Parsad said:

Howard Marks is buying, so we can't be that dumb!  He's a pretty bright guy.  Cheers!

 

https://www.ft.com/content/a3f14c51-0b1c-416e-84db-0fa0fc842f1f?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev

Mark’s/Oaktree,as you know, play in the credit markets…..there are different risk reward dynamics at play here vs. equities…..especially in this part of the cycle with clear impending IMO dangers to earnings.
 

Creditors will still get paid if Apple’s earnings drop 20%, equity holders will have a different result.
 

Goldman Says Signs Are Here of Belt-Tightening Impact to Profits https://www.bloomberg.com/news/articles/2022-06-26/goldman-says-signs-are-here-of-belt-tightening-impact-to-profits 

[Gregmal]

My summary of Howard Marks.

 

 

Mr Marks, what do you think of the current 2+2 issue? 

Well, borat pause, it could be something centering on something in the area of 3-5, but if it breaks the other way, all bets are off. 

[CorpRaider]

Yeah, ain't nobody got time for that.  I finally un-subbed.  It's fine, he sold out and retired a few years ago.  

 

I vote probably no on the bottom thing BTW.  Time series price momentum is negative in all equity and bond markets AFAIK and CAPE (30) and Q are still high while inflation and rates are rising.

Edited June 27, 2022 by CorpRaider

[modiva]

Obviously, it is hard to predict the bottom.  However, let's look at the math of where the bottom might be.   

 

Assume S&P PE of 16 and earnings of 210 (estimates are lowered by 5%), S&P trades at 3360.  It's ~14% drop from here.  That's the likely bottom. 

 

If we argue that the interest rates will be low by historical standards by the time the FED is done raising rates, we can assume S&P PE of 18.  So, S&P trades at 3780. 

 

Generally, things swing before normalizing, so the market might not bottom until S&P reaches 3500-3600 range.  

Edited June 27, 2022 by modiva