Is The Bottom Almost Here?

[dealraker]

54 minutes ago, changegonnacome said:

 

Maybe Jeremy is right but its very early to be declaring victory.......in a full employment economy.......it doesn't matter what the Fed thinks inflation is or a what Jeremy Seagul's adjusted inflation rate is........its what workers believe it to be & the relative leverage they have with employers.......that cultural 'meme' inflation rate is ~8%......and its forming the foundation of every salary comp discussion I'm aware of....such that 2023 nominal income/spend is going to loaded with 2022 CPI++....anecdotally ~10%+........whats the problem with that?............you cant 'consume' nominal pay increases, you can only consume REAL increases in the aggregate level of actual goods and services produced.........outside of a measly 2% productivity gain where are those real goods and services gonna come from in an economy with 3.7% unemployment and running at what accepted to be full tilt? 

 

I hope we are on a perfect glide path now to 2.x% inflation........but without a significant increase in unemployment in H1 2023.........my guess is we are going to get what happened in the 1970's which was inflations descent hitting stubborn plateau's and/or surprising flares upwards. In fact I would expect in early 2023 BLS data, then subsequently in inflation data to see what I described above.....nominal pay/spend increases hitting measly productivity gains and generating a new cycle of inflation which will be the delta between the two.

 

On the other hand this Christmas we might see enough households leverage up their balance sheet so much that spending collapses into H1 2023.....which would result in what I described above not happening. Its why the Fed I think will continue to act and talk exceptionally tough heading into the December meeting and beyond.....they've got a window heading in 2023 to kick inflations butt.....and to ensure EoY 2023 comp discussions don't incorporate historical CPI.....the way you do that is not nice, the economy has to be put over the hot coals for a little while. I hope I'm wrong......and Jeremy is right and inflation is just gonna magically go away and the Fed can get cutting again in mid-2023.

Yet iffin' yer net worth is less than let's say 50 mil or so you can mess around and (oh my hold the nose and cover the eyes) buy a tad more Facebook (based on Parsad's posts...which will be right but I still struggle...you know the price was down--- Zuck actin' up and such); or...buy some Wallgreens (which I did recently and oh my that one, the business and stock price, sucks); buy some Hope Bancorp (at less than 7 times earnings and oh my loan losses...you know those things are apt to be really bad); and I even bought a few of the other things - actually a whole bunch - written about here ad nauseum by Greg (which is superb stuff)...

 

...or write and obsess (I too obsess, just don't write) about macro...which'll freeze ya up in the middle of crossing the street leaving you in the Mack truck crosshairs.  

 

In any event there's the long run too, which Grantham is superb with...that is, as far as being an investor - which honestly goes against many, if not most, of the articles he posts as to predictions - predictions that don't rhyme with his beat-the-market investing.  I inherited some back in 1975--- these days I calculate that my very diversified part of tiny part of Mr. Market often goes up or/and often d-o-w-n (down-down-down) 30-100 times - or actually more - of what I inherited--- in one day or even several times a day.   Oh my!   As they say, "In the long run..."

[changegonnacome]

30 minutes ago, dealraker said:

Yet iffin' yer net worth is less than let's say 50 mil or so you can mess around

 

Agree but you have to be very careful what you own in this period - and this is kind of what I warn against with my macro talk as the backdrop......I'm not encouraging anyone to freeze, I'm encouraging them to think of a world where savings account pay 4%, corporate credit is at 6% and ask yourself why would someone own the company I'm thinking about buying in that world and at that price..........lots of effective confiscation certificates floating around out there still (sub-4% FCF yields) which peeps need to be really careful about.......and that includes companies with business models & so net income that were bumped up by (1) COVID (2) the biz model actually relies on cheap debt to work .......if.......we are heading into a future that is non-ZIRP.

 

So what your proposing and what @Gregmal talks about is totally right. I'm on board here, we are saying the same thing...........7 times earnings with earnings conservatively estimated such that FCF yield is well above 10%........that makes sense total....and I own a basket of these things to and am buying more even in the last few days.......the danger is folks looking at say tech (not FB) with the falls in some of these companies and thinking they are now 'safe' just because they fell 80%......

 

My lesson - is that current Free Cash Flow is now KING.....when liquidity is being trained from the system financial instruments with no FCF base have no anchor, no foundation.......it needs to be high enough such that (1) equity risk premium contained within makes sense in a world of say 4% 10yr  treasury's (2) it has pricing power such that the company can raise prices in-line with or better than inflation.

[dealraker]

13 minutes ago, changegonnacome said:

 

Agree but you have to be very careful what you own in this period - and this is kind of what I warn against with my macro talk as the backdrop......I'm not encouraging anyone to freeze, I'm encouraging them to think of a world where savings account pay 4%, corporate credit is at 6% and ask yourself why would someone own the company I'm thinking about buying in that world and at that price..........lots of effective confiscation certificates floating around out there still (sub-4% FCF yields) which peeps need to be really careful about.......and that includes companies with business models & so net income that were bumped up by (1) COVID (2) the biz model actually relies on cheap debt to work .......if.......we are heading into a future that is non-ZIRP.

 

So what your proposing and what @Gregmal talks about is totally right. I'm on board here, we are saying the same thing...........7 times earnings with earnings conservatively estimated such that FCF yield is well above 10%........that makes sense total....and I own a basket of these things to and am buying more even in the last few days.......the danger is folks looking at say tech (not FB) with the falls in some of these companies and thinking they are now 'safe' just because they fell 80%......

 

My lesson - is that current Free Cash Flow is now KING.....when liquidity is being trained from the system financial instruments with no FCF base have no anchor, no foundation.......it needs to be high enough such that (1) equity risk premium contained within makes sense in a world of say 4% 10yr  treasury's (2) it has pricing power such that the company can raise prices in-line with or better than inflation.

change...for your humor check out the stock chart and price for Erie Indemnity (ERIE) which is a very odd business such that even I have some difficulty explaining it.  I have held this stock for decades now, bought it because the most agressive, very professional, and successful insurance broker in my area uses ERIE and he is such a person that I literally loaded up with the stock.  I bought the stock when it was to us in the insurance business obviously reasonably valued and in the years since it basically has gone/stayed at such a valuation that I simply do not understand it.

 

But the story is that it is now my third largest holding and along with AJG my net worth (and I am laughing- luck is my theme in this game not skill) has hit all time high's.  All this is written to simply ask: When do you go "macro" and sell?

 

It is a great question to be asked!  And I mean one fantastic question that I decided decades ago that I could not answer and one I really haven't had to deal with because I don't buy the stuff that gets popular for the most part.

 

Erie is valued such...and we both can finish this sentence.  Still, it isn't Tesla or and cult Elon thing, it is a quiet business that thrives with zero fanfare or promotion.   So it fits with me well spiritually.  Still the valuation for years has made little sense to me.   And I always think I should sell!

Edited November 11, 2022 by dealraker
spelling

[mattee2264]

Mike Wilson a Morgan Stanley strategist has a nice "fire and ice" metaphor. Even if markets are correct and inflation has peaked and the Fed is near the end of its rate hiking cycle a 2023 global recession and falling earnings could mean we still haven't seen the bottom. 

 

[SharperDingaan]

On 11/8/2022 at 11:45 AM, RedLion said:

 

That makes sense, I can imagine that the lag can be substantial, and there's always political risk that the regulator may not approve rate cases every when they aren't hitting their regulated limit to avoid crazy electricity prices. 

 

However, I will say that living in Northern California in the PG&E territory, customers could definitely pay 400-500% more for electricity across the United States if they had to. Our electricity rates are just absurd here. 

 

This is the model for almost all utilities, not just the electricity companies.

As P&E is constructed on a cost plus basis, there is incentive to spend as much as possible in the build phase - by overbuilding; 150% of forecast demand, margin of safety at 4x design load vs 2, etc. Thereafter the utility will fill it's excess capacity by offering cheaper rates on higher volumes of throughput, and be looked upon favorably. Goodwill converting into a planned minimum annual rate increase for the next 10-20 years. As long as the technology does not radically change over the P&E design life, the model works. Of course, inflation and upgrades are part of life, and result in additional rate increases as/when required. 

 

The investor risk is a premature strand of the P&E, as either the need no longer exists (o/g pipeline), or the existing technology is about to radically change (EV, blockchain, etc.). The reward is that rates don't reverse - so if inflation declines, or throughput rises, the incremental margin flows direct to the bottom line - as unencumbered distribution. Ideally, a cowboy CEO uses that margin to buy things that the company shouldn't - to inflate current EPS and create a 'growth' P/E multiple. 

 

Eventually the cowboy explodes, the company materially cuts its dividend, and the share price implodes as the investor base churns over (TransAlta Utilities). That's when you buy, and in quantity 

 

SD

 

 

Edited November 11, 2022 by SharperDingaan

[changegonnacome]

6 hours ago, dealraker said:

Erie Indemnity (ERIE)

 

 

 

See what you mean!

[Spekulatius]

8 hours ago, mattee2264 said:

Mike Wilson a Morgan Stanley strategist has a nice "fire and ice" metaphor. Even if markets are correct and inflation has peaked and the Fed is near the end of its rate hiking cycle a 2023 global recession and falling earnings could mean we still haven't seen the bottom. 

 

Except the falling earnings part may not happen, especially if the recession is shallow. I believe margins for several sectors have room to expand.

 

Tech has a lot deadwood and they can cut expenses. It looks like META, AMZN, GOOGL and MSFT all started to do that. Tech salaries may come down as well.

 

Industrials have seen strong input cost inflation and generally have not been able to raise prices quite as much than costs implies. What happens to margins if costs start to come down and prices stay or even go up a bit more. Even if volumes go down, then margins may expand.

 

I could make this exercises for a few more sectors. Banking and insurance will benefit from higher interest rates etc.

 

Anyways, I would  not assume that earning will go down from here because there are quite a few sectors where I can see margins going up.

[TwoCitiesCapital]

1 hour ago, Spekulatius said:

Except the falling earnings part may not happen, especially if the recession is shallow. I believe margins for several sectors have room to expand.

 

Tech has a lot deadwood and they can cut expenses. It looks like META, AMZN, GOOGL and MSFT all started to do that. Tech salaries may come down as well.

 

Industrials have seen strong input cost inflation and generally have not been able to raise prices quite as much than costs implies. What happens to margins if costs start to come down and prices stay or even go up a bit more. Even if volumes go down, then margins may expand.

 

I could make this exercises for a few more sectors. Banking and insurance will benefit from higher interest rates etc.

 

Anyways, I would  not assume that earning will go down from here because there are quite a few sectors where I can see margins going up.

 

I can never say for certain, but earnings have been "beating expectations" only after those expectations were lowered. Earnings at the index level have started to roll over after Q1 which is especially telling for 2 reasons

 

1) the Fed hadn't really started hiking in earnest yet

 

2) inflation was still accelerating suggesting corporations as a whole failed to pass through the rising costs (also confirmed by CPIs vs PMIs)

 

Item 2 might be less of an impact going forward pending what wages do, but 1) still has yet to hit. A global recession caused by the steepest coordinated tightening of global central banks ever hasn't been baked into earnings/revenues IMO. 

 

Would also add, one person's cost cutting doesn't happen in a vacuum. All the "savings" of tech companies comes out expense of someone else's earnings/revenues/spending. 

Edited November 12, 2022 by TwoCitiesCapital

[dealraker]

2 hours ago, Spekulatius said:

Except the falling earnings part may not happen, especially if the recession is shallow. I believe margins for several sectors have room to expand.

 

Tech has a lot deadwood and they can cut expenses. It looks like META, AMZN, GOOGL and MSFT all started to do that. Tech salaries may come down as well.

 

Industrials have seen strong input cost inflation and generally have not been able to raise prices quite as much than costs implies. What happens to margins if costs start to come down and prices stay or even go up a bit more. Even if volumes go down, then margins may expand.

 

I could make this exercises for a few more sectors. Banking and insurance will benefit from higher interest rates etc.

 

Anyways, I would  not assume that earning will go down from here because there are quite a few sectors where I can see margins going up.

I have the same thoughts.

 

[nwoodman]

7 hours ago, Spekulatius said:

Except the falling earnings part may not happen, especially if the recession is shallow. I believe margins for several sectors have room to expand.

 

Tech has a lot deadwood and they can cut expenses. It looks like META, AMZN, GOOGL and MSFT all started to do that. Tech salaries may come down as well.

 

Industrials have seen strong input cost inflation and generally have not been able to raise prices quite as much than costs implies. What happens to margins if costs start to come down and prices stay or even go up a bit more. Even if volumes go down, then margins may expand.

 

I could make this exercises for a few more sectors. Banking and insurance will benefit from higher interest rates etc.

 

Anyways, I would  not assume that earning will go down from here because there are quite a few sectors where I can see margins going up.

 

I agree too.  Time for the next Al “Chainsaw” Dunlap to make his mark and complete the bezzle of retail funds.  

Edited November 12, 2022 by nwoodman

[Parsad]

16 hours ago, mattee2264 said:

Mike Wilson a Morgan Stanley strategist has a nice "fire and ice" metaphor. Even if markets are correct and inflation has peaked and the Fed is near the end of its rate hiking cycle a 2023 global recession and falling earnings could mean we still haven't seen the bottom. 

 

 

When I started this thread, the question was meant as a rhetorical question.  Markets may move sideways for years...we don't know...no one knows.  

 

But if markets offer volatility and cheap investments...swing!  And then when those investments are no longer cheap...sell!

 

That's it!  No trying to figure out the top and bottom, because markets will do irrational things for longer or shorter than you ever expect.  Cheers!

[changegonnacome]

12 hours ago, TwoCitiesCapital said:

Would also add, one person's cost cutting doesn't happen in a vacuum. All the "savings" of tech companies comes out expense of someone else's earnings/revenues/spending. 

 

Yep - one mans spending, is another mans income.

 

One company's expenses, are another companies revenues.

 

Cutting spending/expenses in splendid isolation works very well........the time to tighten your belt and expense account was in 2021.........nobody else was doing it and it would have worked very well........................but if everybody else is also cutting their spending/expenses at the same time (which this economy is starting to feel like).......ironically it means nobody in AGGREGATE across the economy actually gets to save incrementally anything.

 

https://en.wikipedia.org/wiki/Paradox_of_thrift

 

 

Edited November 12, 2022 by changegonnacome
Edited - to make clearer the paradox of thrift relates to aggregate saving

[Spekulatius]

43 minutes ago, changegonnacome said:

 

Yep - one mans spending, is another mans income.

 

One company's expenses, are another companies revenues.

 

Cutting spending/expenses in splendid isolation works very well........the time to tighten your belt and expense account was in 2021.........nobody else was it have worked very well........................but if everybody else is also cutting their spending/expenses at the same time (which this economy is starting to feel like).......ironically it means nobody actually gets to save anything.

 

https://en.wikipedia.org/wiki/Paradox_of_thrift

 

 

Incorrect, there will be winners and losers.

[TwoCitiesCapital]

55 minutes ago, Spekulatius said:

Incorrect, there will be winners and losers.

 

For sure. But the overall change in sentiment = multiple contraction. 

 

Just as a rising tide lifts all boats, the receding tide will lower them. There will be outperformers and underperformers, but it might just be easier to pick a different asset class entirely. 

 

I imagine from here, gold and bonds will do better than equities. Particularly if inflation proves even stickier than it already has been. 

Edited November 12, 2022 by TwoCitiesCapital

[changegonnacome]

35 minutes ago, Spekulatius said:

Incorrect, there will be winners and losers.

 

Agree - there will always be winners and losers. My reference above which I should have made clearer (and I have fixed now), to the paradox of thrift, speaks to the concept of the aggregate economy......and its circular nature.....and how recessions, driven by belt tightening/saving, result in aggregate savings not going up at all across the system. That is the paradox & this is how recessions begin & have their own momentum. Its exactly how a slow down in ad tech, leads to a slow down in luxury condo sales in SF, which results in SF house price falls, which has negative wealth effects such that people decide to hold on to their two year old Tesla a bit longer and not get the new one........and so on and so forth.....it feels like that type of chain reaction has begun.....the title of the thread is 'is the bottom almost here?'.....my answer is NO (as it refers to the indexes)....underneath the indexes is a beautiful world of complexity......its why for example I don't hold Marriott......but I've a huge slug of Hostelworld.....exactly to your point....Marriott's biz & leisure customers are macro economically sensitive....Hostelworld's customers not so much.

 

But yes - another simple winner to your point in the paradox of thrift type economy were stepping into is - trustees and administrators of bankruptcy's. Business will boom.

Edited November 12, 2022 by changegonnacome

[Spekulatius]

15 minutes ago, TwoCitiesCapital said:

 

For sure. But the overall change in sentiment =\= multiple contraction. 

 

Just as a rising tide lifts all boats, the receding tide will lower them. There will be outperformers and underperformers, but it might just be easier to pick a different asset class entirely. 

 

I imagine from here, gold and bonds will do better than equities. Particularly if inflation proves even stickier than it already has been. 

I think it’s hard to make definite predictions. I agree recessions are bad, but how much is priced in and how will certain sectors perform? In my post, I laid out why all may not be doom and gloom.

 

I try not to predict macro as it has been an exercise in futility over the years. Sometimes, you will be right, but the times you are wrong tend to cost you much more.

 

I do agree that using volatility to your advantage. That is one thing that tends to work in volatile bear markets.

[scorpioncapital]

where does money come from? if everyone buys the same stocks, are we all supposed to get rich together *in proportion* to how much savings we can afford to put in the market versus consume for day to day life? Doesn't this imply that the CBs of the world have to sort of make life difficult and not allow too much savings to form by restricting money and credit with higher rates and recessions? Or are we supposed to believe we can all be equally rich by investing in stocks vs work? Why does one person get richer than another? IPO pre-shares? more shares owned somehow? seems early birds will tend to get more capital formation by nature of the system. Then there is the limited number of companies to own at all relative to the sea of all potentially investable alternative and private assets. I wonder if getting wealthy only in public markets is so common. 

Edited November 12, 2022 by scorpioncapital

[changegonnacome]

1 hour ago, Spekulatius said:

I try not to predict macro as it has been an exercise in futility over the years.

 

Your 100% right........macro forecasting 99% of the time is a waste of brain power.........but sometimes the macro environment is just kind of so crazy that the direction of travel is somewhat obvious & the warning signs so clear that I would argue you should pay attention this time..........and then put away your macro books for another 40 years............I can list them.....the COVID fiscal largess in the trillions (not billions), monetizing government debt, inflation where it is, speed & scale of rate hikes......advertising canary in the coal mine stopping chirping....etc etc.

 

(Also self-aware enough to realize that this is what macro guys always say, thats its blindingly obvious.....but I've some form to contrary......I ignored the marco guys in the 2010's....their arguments didn't stack up...I was long, very long). So I'm not a perma bear macro lunatic, though I sound like one . 

 

I also just dont like fighting the Fed.

 

But also not freezing here - I own what I like long term I'm fundamentally long......just bought more MSGE/HSW Thursday.........have bearish hedges sitting around a core long portfolio..........I guess if I was to sum up what I'm doing is that I'm both an owner and a seller of vol right now & cycling through each what I consider to be a bear market rally.......for example......Friday I sold SPY OTM June 2023 Calls......cash covered, not a big chunk of NAV......will materialize into cash at some point with the volatility & I'll turn around and buy more BOI. Kind of recycling short type hedges into core longs but at the margins of the portfolio....nothing of any existential size that would endanger more than a coupe of hundred bps.

Edited November 12, 2022 by changegonnacome

[UK]

2 hours ago, changegonnacome said:

 

Your 100% right........macro forecasting 99% of the time is a waste of brain power.........but sometimes the macro environment is just kind of so crazy that the direction of travel is somewhat obvious & the warning signs so clear that I would argue you should pay attention this time..........and then put away your macro books for another 40 years............I can list them.....the COVID fiscal largess in the trillions (not billions), monetizing government debt, inflation where it is, speed & scale of rate hikes......advertising canary in the coal mine stopping chirping....etc etc.

 

(Also self-aware enough to realize that this is what macro guys always say, thats its blindingly obvious.....but I've some form to contrary......I ignored the marco guys in the 2010's....their arguments didn't stack up...I was long, very long). So I'm not a perma bear macro lunatic, though I sound like one . 

 

I also just dont like fighting the Fed.

 

But also not freezing here - I own what I like long term I'm fundamentally long......just bought more MSGE/HSW Thursday.........have bearish hedges sitting around a core long portfolio..........I guess if I was to sum up what I'm doing is that I'm both an owner and a seller of vol right now & cycling through each what I consider to be a bear market rally.......for example......Friday I sold SPY OTM June 2023 Calls......cash covered, not a big chunk of NAV......will materialize into cash at some point with the volatility & I'll turn around and buy more BOI. Kind of recycling short type hedges into core longs but at the margins of the portfolio....nothing of any existential size that would endanger more than a coupe of hundred bps.

 

By BOI you mean Bank of Ireland or is it something else?

 

[Viking]

2 hours ago, changegonnacome said:

 

Your 100% right........macro forecasting 99% of the time is a waste of brain power.........but sometimes the macro environment is just kind of so crazy that the direction of travel is somewhat obvious & the warning signs so clear that I would argue you should pay attention this time..........and then put away your macro books for another 40 years............I can list them.....the COVID fiscal largess in the trillions (not billions), monetizing government debt, inflation where it is, speed & scale of rate hikes......advertising canary in the coal mine stopping chirping....etc etc.

 

(Also self-aware enough to realize that this is what macro guys always say, thats its blindingly obvious.....but I've some form to contrary......I ignored the marco guys in the 2010's....their arguments didn't stack up...I was long, very long). So I'm not a perma bear macro lunatic, though I sound like one . 

 

I also just dont like fighting the Fed.

 

But also not freezing here - I own what I like long term I'm fundamentally long......just bought more MSGE/HSW Thursday.........have bearish hedges sitting around a core long portfolio..........I guess if I was to sum up what I'm doing is that I'm both an owner and a seller of vol right now & cycling through each what I consider to be a bear market rally.......for example......Friday I sold SPY OTM June 2023 Calls......cash covered, not a big chunk of NAV......will materialize into cash at some point with the volatility & I'll turn around and buy more BOI. Kind of recycling short type hedges into core longs but at the margins of the portfolio....nothing of any existential size that would endanger more than a coupe of hundred bps.

People need to find an investing strategy that works for them. Paying attention to macro has worked out very well for me over a 25 year time frame. It also fits with my interests: business, economics, politics, history, global developments. 

[changegonnacome]

19 hours ago, UK said:

By BOI you mean Bank of Ireland or is it something else?

 

Yep Bank of Ireland - European bank….but unlike other European banks its in a banking market that looks more like an oligopoly than the bloodbath on the continent..….where there are way too many credit institutions competing with each other for deposits/loans…..I’ve written about it in a thread that is confusingly titled AIB on here. AIB being the other Irish bank.

 

19 hours ago, Viking said:

People need to find an investing strategy that works for them. Paying attention to macro has worked out very well for me over a 25 year time frame. It also fits with my interests: business, economics, politics, history, global developments. 

 

For sure - this is the first time I’ve ever let the macro tail really wag the dog……the evidence is simply too overwhelming not to introduce a macro bearish bias…..I dont intend to carry it forward once we move through this period into the new normal (whatever that is/whatever that means).

[UK]

30 minutes ago, changegonnacome said:

 

Yep Bank of Ireland - European bank….but unlike other European banks its in a banking market that looks more like an oligopoly than the bloodbath on the continent..….where there are way too many credit institutions competing with each other for deposits/loans…..I’ve written about it in a thread that is confusingly titled AIB on here. AIB being the other Irish bank.

 

 

Thanks, nice to know. I am quite familiar with this bank and totaly agree with you. Just read another day, how they are now reflecting on how banks are "overearning" and on this oligopoly situation, which was further strenghtened after GFC debacle. I agree that in Ireland and some other countries banks are day and night vs some other EU countries.

[Dalal.Holdings]

Watching YouTube this weekend. 

 

Ads by DoorDash, Lyft, and Peloton. 

 

If you know, you know.

[Spekulatius]

14 minutes ago, Dalal.Holdings said:

Watching YouTube this weekend. 

 

Ads by DoorDash, Lyft, and Peloton. 

 

If you know, you know.

The ads are targeted . Google is very good at finding out what you are interested in. I got a lot of ads from car dealers and car companies because I was researching cars about a month ago for example.

 

I have yet to see an ad from any of those business you mentioned above.

[changegonnacome]

2 hours ago, UK said:

I agree that in Ireland and some other countries banks are day and night vs some other EU countries.

 

Yep too many banks, landesbanken, credit unions........most of which dont earn their cost of capital and would be wound up or merged if in US......in Italy, Spain, Germany....they provide gainful employment and prestige to their leadership teams/boards who are happy to sit on shareholder equity and in a real practical sense torch it over time.