Is The Bottom Almost Here?

[Spooky]

All this doom and gloom still. Sure, another big draw down is possible from here if something breaks but this is always a possibility in the market. Even another down year is possible. However, based on historical annual returns data the odds that the market will be higher in 12 months is greater than 50%. Just keep patiently accumulating equities and in the long run you will outperform those who flee the market to bonds or other assets.

 

 

[StevieV]

12 hours ago, frommi said:

since i am already up so much for the year that i can easily afford it.

 

What?  Really?  It is January 7th.  There have been 4 trading days.

[changegonnacome]

27 minutes ago, Spooky said:

Just keep patiently accumulating equities and in the long run you will outperform those who flee the market to bonds or other assets.

 

Yep agree only addition I'd add is that the price you pay matters more than it has for 20+ years........broad multiple expansion bailed out a lot of bad cash flow forecasting in the last decade.........multiple contraction or even stagnant multiples leaves no where to hide if you've mis-forecast the underlying business fundamentals.......its time to raise ones margin of safety, raise the FCF yield hurdle..... as well as a prioritizing the predictability of those cashflows.

[ValueArb]

5 hours ago, Spooky said:

All this doom and gloom still. Sure, another big draw down is possible from here if something breaks but this is always a possibility in the market. Even another down year is possible. However, based on historical annual returns data the odds that the market will be higher in 12 months is greater than 50%. Just keep patiently accumulating equities and in the long run you will outperform those who flee the market to bonds or other assets.

 

 

 

An alternative viewpoint.

 

https://www.multpl.com/shiller-pe

 

When the market PE is over 25 the odds of another upswing start to get significantly lower, and the odds of a bad year get significantly higher..

[changegonnacome]

As I've said last year was multiple compression.........this year its earnings compression............both combined likely take you to a shiller PE that looks more like the mean of 17 above..........reflecting what is likely to be a secular normalization of underlying interest rates & lower overall broad indices pricing.......where future return will come from pure earnings growth + dividends.......and not the multiple expansion that defined much of the 2010's stock outperformance versus underlying economic performance

[Dinar]

58 minutes ago, ValueArb said:

 

An alternative viewpoint.

 

https://www.multpl.com/shiller-pe

 

When the market PE is over 25 the odds of another upswing start to get significantly lower, and the odds of a bad year get significantly higher..

These figures are NOT accurate.  Ben Graham/Shiller's P/E has earnings adjusted for inflation.  Take a look at S&P 500 EPS over the last decade, adjust for inflation and do the calculation.  You do not get 28.48.

[ValueArb]

13 hours ago, Dinar said:

These figures are NOT accurate.  Ben Graham/Shiller's P/E has earnings adjusted for inflation.  Take a look at S&P 500 EPS over the last decade, adjust for inflation and do the calculation.  You do not get 28.48.

not sure I understand. It says it’s inflation adjusted already. Are you saying its not, or done incorrectly?

[Gregmal]

13 hours ago, Dinar said:

These figures are NOT accurate.  Ben Graham/Shiller's P/E has earnings adjusted for inflation.  Take a look at S&P 500 EPS over the last decade, adjust for inflation and do the calculation.  You do not get 28.48.

The Schiller PE is indisputably the most useless so called metric of I’ve ever come across. It’s only productive use is if you press print, and then proceed to use it as a paper basketball to sink long range jumpers in the office. But even that is only useful if you aren’t the one paying for the ink. 
 

I mean seriously, if you followed it, the only time you woulda been in the market was for like a few months in 2009. Otherwise you’d have missed everything. 

[Dinar]

27 minutes ago, ValueArb said:

not sure I understand. It says it’s inflation adjusted already. Are you saying its not, or done incorrectly?

They are not doing it correctly.  Take EPS for the index, adjust for inflation, and take the average.  You will not get 28.45 p/e.  

[Jaygo]

22 minutes ago, Gregmal said:

The Schiller PE is indisputably the most useless so called metric of I’ve ever come across. It’s only productive use is if you press print, and then proceed to use it as a paper basketball to sink long range jumpers in the office. But even that is only useful if you aren’t the one paying for the ink. 
 

I mean seriously, if you followed it, the only time you woulda been in the market was for like a few months in 2009. Otherwise you’d have missed everything. 

Hilarious. 

[ValueArb]

1 hour ago, Gregmal said:

The Schiller PE is indisputably the most useless so called metric of I’ve ever come across. It’s only productive use is if you press print, and then proceed to use it as a paper basketball to sink long range jumpers in the office. But even that is only useful if you aren’t the one paying for the ink. 
 

I mean seriously, if you followed it, the only time you woulda been in the market was for like a few months in 2009. Otherwise you’d have missed everything. 

 

Depends on how you use it. Theoretically if you got out of equities entirely every time it broke a 30 PE and waited till it got back to 15 before getting back in, you would crush the market.

 

I'm always 100% invested whatever the Shiller PE because I'm mostly doing special situations. But anyone thinking that this year the S&P 500 has a greater than 50% likelihood of an up year isn't just ignoring Shiller, they are ignoring the Fed's stated intentions to keep raising rates.

[ValueArb]

1 hour ago, Dinar said:

They are not doing it correctly.  Take EPS for the index, adjust for inflation, and take the average.  You will not get 28.45 p/e.  

 

I'm actually getting a slightly higher PE when I do it by hand, so unless I'm doing it totally wrong they seem correct.

 

[Gregmal]

I’ll never understand why people go to such extreme lengths to complicate simply analyzing what a business is likely to be worth over the next 5-10 years. 

[StevieV]

34 minutes ago, ValueArb said:

 

Depends on how you use it. Theoretically if you got out of equities entirely every time it broke a 30 PE and waited till it got back to 15 before getting back in, you would crush the market.

 

I'm always 100% invested whatever the Shiller PE because I'm mostly doing special situations. But anyone thinking that this year the S&P 500 has a greater than 50% likelihood of an up year isn't just ignoring Shiller, they are ignoring the Fed's stated intentions to keep raising rates.

 

That would seem like an extremely unattractive way to use the metric.  Per the linked chart, I'd be out of the market now waiting for a drop to 15.  A drop to 15 that may not happen in my lifetime.  I don't think anybody would want to use the metric that way.

 

If anything, maybe someone can look at the graph, decide the market isn't cheap, and not get over-exuberant/over-extended.

 

[backtothebeach]

42 minutes ago, ValueArb said:

 

I'm actually getting a slightly higher PE when I do it by hand, so unless I'm doing it totally wrong they seem correct.

 

For 2013 for example, wouldn’t you have to divide $128 by 0.81, so it is $158.02 in today’s devalued dollars?

 

Also, in various years the adjustment is not applied: 2014/16/18/20.

[TwoCitiesCapital]

15 hours ago, Dinar said:

These figures are NOT accurate.  Ben Graham/Shiller's P/E has earnings adjusted for inflation.  Take a look at S&P 500 EPS over the last decade, adjust for inflation and do the calculation.  You do not get 28.48.

 

The problem with a simple inflation adjustment is that then we should also adjust for other things like the normalization of corporate margins instead of giving full credit to record margins as if they'll persist into perpetuity. 

 

Also, along those same lines, as inflation rises the margins tend to contract - exactly like what we've seen in 2022. So if we're adjusting 2013 earnings for a decade of inflation to show what the same company would have hypothetically earned in 2022, do we not adjust base earnings lower to reflect a lower corporate margins and some normalization of margins to history? 

 

And then if course people will bring up discount rates and etc (which is double counting IMO). 

 

Ultimately, I still prefer the raw Shiller P/E. It's not a timing tool. It doesn't tell you when to be in 100% in or 100% out of the market. But I think it's does a hell of a good job of telling you when you should be willing to take tons of equity risk versus having a fairly cautious stance in equities and seeking better diversification of return streams. 

 

Seeing as 2018, 2020, and now 2022 have had huge rough patches in the market, it seems that caution was well signalled. 

[SHDL]

The SPX EPS series on that website are already inflation adjusted (to Nov 2022 dollars) so you basically just need to take the 10 year average and divide the current index level with it to get the CAPE ratio. I believe the ratio is indeed around 28.

 

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

"S&P 500 Earnings Per Share. 12-month real earnings per share — inflation adjusted, constant November, 2022 dollars."

[ValueArb]

52 minutes ago, backtothebeach said:

 

For 2013 for example, wouldn’t you have to divide $128 by 0.81, so it is $158.02 in today’s devalued dollars?

 

Also, in various years the adjustment is not applied: 2014/16/18/20.

 

Yes those were just two of the errors in my calculations, but it doesn't matter since @shdl showed me all my work was fruitless.

 

 

Edited January 8, 2023 by ValueArb

[ValueArb]

45 minutes ago, TwoCitiesCapital said:

 

The problem with a simple inflation adjustment is that then we should also adjust for other things like the normalization of corporate margins instead of giving full credit to record margins as if they'll persist into perpetuity. 

 

Also, along those same lines, as inflation rises the margins tend to contract - exactly like what we've seen in 2022. So if we're adjusting 2013 earnings for a decade of inflation to show what the same company would have hypothetically earned in 2022, do we not adjust base earnings lower to reflect a lower corporate margins and some normalization of margins to history? 

 

And then if course people will bring up discount rates and etc (which is double counting IMO). 

 

Ultimately, I still prefer the raw Shiller P/E. It's not a timing tool. It doesn't tell you when to be in 100% in or 100% out of the market. But I think it's does a hell of a good job of telling you when you should be willing to take tons of equity risk versus having a fairly cautious stance in equities and seeking better diversification of return streams. 

 

Seeing as 2018, 2020, and now 2022 have had huge rough patches in the market, it seems that caution was well signalled. 

 

Another adjustment we should make is tax rates. The corporate income tax rate cut in 2017 increased after tax earnings roughly 10% for every year thereafter.

[maxthetrade]

FWIW, according to J.P.Morgans 'Guide to the Markets' CAPE was 27.96 at the end of the years and the 25 year average was 27.93.

 

[ValueArb]

1 hour ago, StevieV said:

 

That would seem like an extremely unattractive way to use the metric.  Per the linked chart, I'd be out of the market now waiting for a drop to 15.  A drop to 15 that may not happen in my lifetime.  I don't think anybody would want to use the metric that way.

 

If anything, maybe someone can look at the graph, decide the market isn't cheap, and not get over-exuberant/over-extended.

 

 

I think being out of the market for any extended period is bad for any skilled investor. I would never use a metric like this to tell me whether to buy or sell stocks. If i can't find good businesses trading at a significant discount to intrinsic value I'll naturally build up cash until I can find one.

 

But for passive investors sitting out equities from start of 1999 to start of 2009 to sit in safe fixed income investments would have doubled their portfolio size over staying in the S&P 500. It does make logical sense because the Shiller is telling you the equity risk premium is near all time lows.

Edited January 8, 2023 by ValueArb

[Gregmal]

Wall Street has plagued everyone with this virus that spread rapidly amongst market participants that you too can be a macro trading, market wizard while holding high levels of cash ALL THE TIME!

 

The reality is that it’s bullshit and there simply isn’t a substitute for being adequately invested, pretty much all the time. It’s really just asset allocation, and position sizing you need to focus on.
 

Across the board you can see how many of the macro trading market timers are just total….liars. Maybe not Madoffs but numbers really don’t lie. Like the old Yahoo message boards or Seeking Alpha topic comments, no you didn’t short the market here then cover at the bottom and go long and then sell the top and short more…nope. Nor did you sit on 50%+ cash and make 15-20%….unless you’re secretly generating triple digit returns on tiny positions which also begs for a cough, bullshit.

 

Reminds me of my friend who is genuinely a smart guy. Engineer. Great with math. Used to go to the Trop in our 20s and no joke he d win almost every time. When you asked his secret he said, if you keep playing you always end up winning. I really couldn’t believe he believed this because the math just tells the truth. What he believed was actually the exact opposite of the truth. Nevertheless one day his stories of his winning adventures just stopped. And that was the end of his gambling. 
 

It amazes me how many smart and capable people completely miss and get wrong the fundamental pillars of investing. Even a comment earlier I forget where, about being 4 days into the year….I laughed, because it’s true…is anyone really making any investment decisions based on what’s happened 4 days into the year? LOL if you are, you’re in trouble. Most of the big boys don’t even get back from vacation for another week or two and regardless, if 4 days are what you’re investing for, you ain’t investing.

 

 

Edited January 8, 2023 by Gregmal

[Luke]

33 minutes ago, Gregmal said:

Wall Street has plagued everyone with this virus that spread rapidly amongst market participants that you too can be a macro trading, market wizard while holding high levels of cash ALL THE TIME!

 

The reality is that it’s bullshit and there simply isn’t a substitute for being adequately invested, pretty much all the time. It’s really just asset allocation, and position sizing you need to focus on.
 

Across the board you can see how many of the macro trading market timers are just total….liars. Maybe not Madoffs but numbers really don’t lie. Like the old Yahoo message boards or Seeking Alpha topic comments, no you didn’t short the market here then cover at the bottom and go long and then sell the top and short more…nope. Nor did you sit on 50%+ cash and make 15-20%….unless you’re secretly generating triple digit returns on tiny positions which also begs for a cough, bullshit.

 

Reminds me of my friend who is genuinely a smart guy. Engineer. Great with math. Used to go to the Trop in our 20s and no joke he d win almost every time. When you asked his secret he said, if you keep playing you always end up winning. I really couldn’t believe he believed this because the math just tells the truth. What he believed was actually the exact opposite of the truth. Nevertheless one day his stories of his winning adventures just stopped. And that was the end of his gambling. 
 

It amazes me how many smart and capable people completely miss and get wrong the fundamental pillars of investing. Even a comment earlier I forget where, about being 4 days into the year….I laughed, because it’s true…is anyone really making any investment decisions based on what’s happened 4 days into the year? LOL if you are, you’re in trouble. Most of the big boys don’t even get back from vacation for another week or two and regardless, if 4 days are what you’re investing for, you ain’t investing.

 

 

Well said!

[StevieV]

42 minutes ago, ValueArb said:

But for passive investors sitting out equities from start of 1999 to start of 2009 to sit in safe fixed income investments would have doubled their portfolio size over staying in the S&P 500. It does make logical sense because the Shiller is telling you the equity risk premium is near all time lows.

 

That's a single backward-looking data point and the 15 threshold picked with the benefit of hindsight.  Even if you use the whole history, there are just very, very few data points.

 

2009 was very close to not hitting 15 and triggering the "buy".  There is no guarantee that the next low will hit the 15 threshold.  We could go another 20, 30, 40 years  without hitting 15 again.  That's just way, way, way too long of a timeframe to be of any use.  I can't imagine someone deciding they were going to wait to invest in stocks until a Shiller PE 15 signal hits when it could be literally decades.

 

Investing at that price is probably great.  Waiting for it to happen is tremendously risky IMHO.

[frommi]

1 hour ago, Gregmal said:

Wall Street has plagued everyone with this virus that spread rapidly amongst market participants that you too can be a macro trading, market wizard while holding high levels of cash ALL THE TIME!

 

The reality is that it’s bullshit and there simply isn’t a substitute for being adequately invested, pretty much all the time. It’s really just asset allocation, and position sizing you need to focus on.
 

Across the board you can see how many of the macro trading market timers are just total….liars. Maybe not Madoffs but numbers really don’t lie. Like the old Yahoo message boards or Seeking Alpha topic comments, no you didn’t short the market here then cover at the bottom and go long and then sell the top and short more…nope. Nor did you sit on 50%+ cash and make 15-20%….unless you’re secretly generating triple digit returns on tiny positions which also begs for a cough, bullshit.

 

Reminds me of my friend who is genuinely a smart guy. Engineer. Great with math. Used to go to the Trop in our 20s and no joke he d win almost every time. When you asked his secret he said, if you keep playing you always end up winning. I really couldn’t believe he believed this because the math just tells the truth. What he believed was actually the exact opposite of the truth. Nevertheless one day his stories of his winning adventures just stopped. And that was the end of his gambling. 
 

It amazes me how many smart and capable people completely miss and get wrong the fundamental pillars of investing. Even a comment earlier I forget where, about being 4 days into the year….I laughed, because it’s true…is anyone really making any investment decisions based on what’s happened 4 days into the year? LOL if you are, you’re in trouble. Most of the big boys don’t even get back from vacation for another week or two and regardless, if 4 days are what you’re investing for, you ain’t investing.

 

 

I am surely not a market wizard, but when you already created 10% alpha in 1 week, putting 3-4% into S&P500 puts for protection in a time where valuations are very high has nothing to do with  market timing, just with prudent portfolio management.

Edited January 8, 2023 by frommi