Is The Bottom Almost Here?

[John Hjorth]

Sanjeev [ @Parsad],

 

Perhaps, We may need a Macro Forum here on CoBF [, similar to Investing and Politics], too, for folks who think they may get rich [fast or slow] dealing with that matter a lot, to sort out the macro stuff and discussions related that.

 

I think it's fair to say, some discussions are getting tiresome here.

[TwoCitiesCapital]

3 hours ago, Spekulatius said:

I think the bond market can forget about H2 2023 rate cuts. This will become obvious over the next few month.

 

Ultimately though - the good thing about bonds is you can know exactly how much you will lose if rates go an extra 1% higher and/or stay there for 6-12 months longer. Don't want the duration risk? Short term bond funds now have YTMs 4-6% with barely any interest rates risk at all.

 

Equities are still very expensive. Fewer companies are beating estimates AND those estimates were dramatically curtailed in recent quarters. 

 

Newly revised expectations are for -5% YoY earnings growth in Q4, -5% YoY in Q1, and -3% YoY in Q2. They then expect it to get back to positive growth by year end w/ +2% for 2023. 

 

If inflation is running 6+% all year, how are equities having nominally negative earnings? If inflation in 2023 is going to average significantly higher than 2%, then why do we still view equities as an inflation hedge when earnings are only expected to grow ~2%. That will be the second year in a row that earnings growth have significantly lagged inflation for that calendar year....

 

Also, given that we've revised the last 2-3 quarters earnings expectations lower as we moved through the quarters, what's the likelihood that the +2% year-end target remains? Why are we paying 21x forward earnings when growth is only +2% nominal? 

Edited February 14, 2023 by TwoCitiesCapital

[changegonnacome]

Anyway getting fixated on report to report is not particularly useful.

 

What it does point towards is the higher for longer thesis - and if you dont think that matters relative to the prospective earnings of many public companies over the short-medium term well, OK.

 

Rates at these elevated levels for a sustained period of time has never not done damage to the US economy.

 

For every month that Fed Funds sits at 5%+ one should think of the cumulative scar tissue building up inside the US economy - projects being paused, financing deals failing leading to defaults, M&A deals not getting done, housing/investment commencements being postponed, consumer purchases being deferred. 

 

Not saying sell everything but pick your spots - anti-fragile resilient companies are my key overlay these days.

[Spekulatius]

31 minutes ago, changegonnacome said:

Anyway getting fixated on report to report is not particularly useful.

 

What it does point towards is the higher for longer thesis - and if you dont think that matters relative to the prospective earnings of many public companies over the short-medium term well, OK.

 

Rates at these elevated levels for a sustained period of time has never not done damage to the US economy.

 

For every month that Fed Funds sits at 5%+ one should think of the cumulative scar tissue building up inside the US economy - projects being paused, financing deals failing leading to defaults, M&A deals not getting done, housing/investment commencements being postponed, consumer purchases being deferred. 

 

Not saying sell everything but pick your spots - anti-fragile resilient companies are my key overlay these days.

Higher for longer is good for banks. Solid deposit franchises will generate sustainably higher NIM in an environment with bonds at 4-5% than they did with ZIRP. I don't think it's priced in bank stocks for the most part. A soft landing shouldn't be that much of a problem on the credit risk side.

 

That's directly actionable, not just macro chitchat.

Edited February 14, 2023 by Spekulatius

[dealraker]

10 minutes ago, Spekulatius said:

Higher for longer is good for banks. Solid deposit franchises will generate sustainably higher NIM in an environment with bonds at 4-5% than they did with ZIRP. I don't think it's priced in bank stocks for the most part. A soft landing shouldn't be that much of a problem on the credit risk side.

 

That's directly actionable, not just macro chitchat.

Spek, just for your perspective...I was screaming at my family to sell their bank stocks by 2005.  And I mean asshole like in their face about it.

 

As you know I was buying banks (that I already owned) a few weeks ago.

[changegonnacome]

1 minute ago, Spekulatius said:

Higher for longer is good for banks. Solid deposit franchises will generate sustainably higher NIM in an environment with bonds at 4-5% than they did with ZIRP. I don't think it's priced in bank stocks for the most part. A soft landing shouldn't be that much of a problem on the credit risk side.

 

That's directly actionable, not just macro chitchat.

 

100% agree......the most leveraged version of this in a way is European banks....in oligopoly markets.

 

https://www.bloomberg.com/news/articles/2023-02-06/steve-eisman-of-big-short-fame-sees-a-new-paradigm-unfolding-in-markets?sref=7zqHEcxJ

 

Steve Eisman had a good appearance on Odd Lots Podcast last week worth listening too........and he touches on the banking sector post-Dodd Frank and GFC reform........these are institutions stuffed to the gills with regulatory capital with assets categorized by risk weights (RWA's).....forced at the first sign of trouble to forecast and take FULL!! provisioning on expected losses on loan books.........these aint grandmas GFC banks, where the story just keeps getting worse till common shareholders get diluted in an equity raise... ....his take which chimes with mine......is that they are priced as if a modest US recession would send them into negative earnings territory or worse.......in reality I think the banks with large deposit franchies like you say will actually make a profit through the cycle in anything but the worst of the worst economic depressions.

 

What happen to their valuations once that reality gets proved out......that are now kinda of anti-fragile......well they need to trade closer to a market multiple.......and when some are earning 16% RoE and are trading below tangible book thats a long way up to get you that market multiple. Then add in secularly higher rates due everything we've discuced.

[changegonnacome]

2 minutes ago, dealraker said:

As you know I was buying banks (that I already owned) a few weeks ago.

 

My man! I nibbled on some Wells....curious what banks are on your radar?

[dealraker]

14 minutes ago, changegonnacome said:

 

My man! I nibbled on some Wells....curious what banks are on your radar?

change I added to BAC at $32-and-something --- and Wells when it was lower than now- but can't remember the price.  

 

I also added to two banks I've owned since their IPO's: Cathay (CATY since about 1990 or so) and East West (EWBC since 1999).  EWBC has gone up a lot since a few weeks ago, Cathay a tad.

 

I had intended to buy HOPE, but just literally forgot about it.  My family business wanted to buy something Asian, not much of this "something", and had bought HOPE.  But almost immediately they decided to change to an index - chosing EEM.

 

The feeling was the anti-Asian thing was maxing out giving things related to Asia low prices.  It was a small endeavor, almost a speculation.  

Edited February 14, 2023 by dealraker

[changegonnacome]

13 minutes ago, dealraker said:

change I added to BAC at $32-and-something --- and Wells when it was lower than now- but can't remember the price.  

 

I also added to two banks I've owned since their IPO's: Cathay (CATY since about 1990 or so) and East West (EWBC since 1999).  EWBC has gone up a lot since a few weeks ago, Cathay a tad.

 

I had intended to buy HOPE, but just literally forgot about it.  My family business wanted to buy something Asian, not much of this "something", and had bought HOPE.  But almost immediately they decided to change to an index - chosing EEM.

 

The feeling was the anti-Asian thing was maxing out giving things related to Asia low prices.  It was a small endeavor, almost a speculation.  

 

Nice - yep looked at HOPE before (you've reminded me to look again, thanks).......those customers pay back their loans more than most!........and all things being equal HOPE participates in the success of that demographic.......and at the risk of sounding anti-Caucasian (which I feel I can be as I am one!)......those Asian folks play hard & work harder......and wherever they plant their flag they do well over time.

 

On the banks - in general.........I'd really like to buy them in size if/when the next recession comes.......everybody will have GFC 2.0 disease......when you and I know these things are now built like the Rock of Gibraltar!!!

Edited February 14, 2023 by changegonnacome

[Spekulatius]

38 minutes ago, dealraker said:

change I added to BAC at $32-and-something --- and Wells when it was lower than now- but can't remember the price.  

 

I also added to two banks I've owned since their IPO's: Cathay (CATY since about 1990 or so) and East West (EWBC since 1999).  EWBC has gone up a lot since a few weeks ago, Cathay a tad.

 

I had intended to buy HOPE, but just literally forgot about it.  My family business wanted to buy something Asian, not much of this "something", and had bought HOPE.  But almost immediately they decided to change to an index - chosing EEM.

 

The feeling was the anti-Asian thing was maxing out giving things related to Asia low prices.  It was a small endeavor, almost a speculation.  

$EEM is for rookies because the fees are too high. $VWO from Vanguard is roughly equivalent and much cheaper (0.08% vs 0.68% fees). This 0.6% fee differential does add up:

Edited February 14, 2023 by Spekulatius

[dealraker]

20 minutes ago, changegonnacome said:

 

Nice - yep looked at HOPE before (you've reminded me to look again, thanks).......those customers pay back their loans more than most!........and all things being equal HOPE participates in the success of that demographic.......and at the risk of sounding anti-Caucasian (which I feel I can be as I am one!)......those Asian folks play hard & work harder......and wherever they plant their flag they do well over time.

 

On the banks - in general.........I'd really like to buy them in size if/when the next recession comes.......everybody will have GFC 2.0 disease......when you and I know these things are now built like the Rock of Gibraltar!!!

As to predictions of trouble while I was certain most banks were going to collapse by 2005 I was as wrong as the next guy in the end.  Completely missed the overall senerio.  I was astonished at what happened to Cathay and East West.

[dealraker]

6 minutes ago, Spekulatius said:

$EEM is for rookies because the fees are too high. $VWO from Vanguard is roughly equivalent and much cheaper (0.08% vs 0.68% fees)

Agreed, but not my decision.  The older guys run the show.  However, they have done an incredible job over the last 50 years so...

 

I wasn't even aware of either until this was brought up 3 months ago.  While it is a small position I'll relay the VWO .08 to them.  They'll likely swap.  

Edited February 14, 2023 by dealraker

[changegonnacome]

To go from macro musing to actionable insights $VWO is exactly the type of vehicle I have my eye on if/when the Fed gets the economy roll over........the US gets to fix its inflation first....that is its right as the worlds reserve currency.....via dollar strength etc.......exporting some of its inflation to rest of the world in the process......hurting EM worst........if we are close to 'being done' with inflation and cuts are just around the corner.......VWO will rip with the dual tailwind of currency appreciation against the dollar and underlying company earnings power growth against what likely to be trough earnings..........EM if you can get the timing right (not easy!) is like a coiled spring!

[Gregmal]

Well, with respect to kind of what I perceived John’s gist to be….the bottom is clearly past us. We don’t need to keep a thread about the bottom going because people want to regurgitate the same “stocks are expensive” stuff we’ve heard for a decade or argue over 3.5 or 4% inflation. Maybe it’s time for another thread that more aptly fits those topics. For one, I thought the Kuppy on Inflation thread was good, but apparently he doesn’t like the vaccines and doing double or triple digits green every year is poor risk management.

[Castanza]

12 minutes ago, Gregmal said:

Well, with respect to kind of what I perceived John’s gist to be….the bottom is clearly past us. We don’t need to keep a thread about the bottom going because people want to regurgitate the same “stocks are expensive” stuff we’ve heard for a decade or argue over 3.5 or 4% inflation. Maybe it’s time for another thread that more aptly fits those topics. For one, I thought the Kuppy on Inflation thread was good, but apparently he doesn’t like the vaccines and doing double or triple digits green every year is poor risk management.

Thats fair, and I deleted my comment so as to not ruffle feathers. When the markets are down people discuss it. Likewise when it’s up. It’s the nature of the beast. Nothing is certain and the market can change. I think most on here know that it’s a fools errand to invest solely based on macro predictions. But I still enjoy the commentary and time people put into their posts. The comment came across as “I’m entitled to specific types of posts.” Having a wide range of topics to discuss is beneficial overall to the forum. And I welcome anyone who takes a good amount of time to share their thoughts on mostly any particular topic. I’ve learned a lot from you, thePupil and BG regarding real estate. Dealbreaker has been interesting as of late discussing his investment career. Bill has been great with his Fed/treasury insights. 
 

How’d that fishing trip go? 

[SHDL]

13 minutes ago, Castanza said:

Dealbreaker has been interesting as of late discussing his investment career.

 

Typo I'm sure but I had to laugh.

 

Came for investment ideas, staying for @dealraker's stories...

[Gregmal]

25 minutes ago, Castanza said:

How’d that fishing trip go? 

African pompano which is a gorgeous fish, mackerel, and some yellowtail. Shark fishing tonight in honor of CPI.

[TwoCitiesCapital]

53 minutes ago, Gregmal said:

Well, with respect to kind of what I perceived John’s gist to be….the bottom is clearly past us. We don’t need to keep a thread about the bottom going because people want to regurgitate the same “stocks are expensive” stuff we’ve heard for a decade or argue over 3.5 or 4% inflation. Maybe it’s time for another thread that more aptly fits those topics. For one, I thought the Kuppy on Inflation thread was good, but apparently he doesn’t like the vaccines and doing double or triple digits green every year is poor risk management.

 

Respectfully, I disagree. Traditionally markets don't bottom BEFORE the recession. And traditionally they don't bottom without a capitulation event. We've seen neither and we find ourselves in an economic environment that has many leading and coincident indicators suggesting it's gonna get rough. 

 

Maybe this time it IS different - but I think we're still in the 3-4th inning. This will be a 2-year event like 2007/2008 and 2000/2001.

 

IMO, all we've seen is the most egregious speculative excess come out of the market, not an actual correction for interest rates/inflation/declining earnings/etc. 

[Gregmal]

15 minutes ago, TwoCitiesCapital said:

 

Respectfully, I disagree. Traditionally markets don't bottom BEFORE the recession. And traditionally they don't bottom without a capitulation event. We've seen neither and we find ourselves in an economic environment that has many leading and coincident indicators suggesting it's gonna get rough. 

 

Maybe this time it IS different - but I think we're still in the 3-4th inning. This will be a 2-year event like 2007/2008 and 2000/2001.

 

IMO, all we've seen is the most egregious speculative excess come out of the market, not an actual correction for interest rates/inflation/declining earnings/etc. 

I would think this sort of thesis or whatever would fall into a different category. Finance is wayyyy too full of these open ended, never ending, types of predictions. It’s how folks spent the past decade shorting FANG or Tesla because “it’s a bubble”…after a certain period of time, even just purely from a risk management perspective, you need to settle up.
 

Index or not(which is another subject we ve discussed) the bottom for now is very clearly in. It seems we are right back into good old fashioned valuation short territory, which is basically what the case is when a thesis hinges on “everyone’s gonna miss earnings” or “analysts are all gonna get together and revise estimates down” or something. Possible, but not realistic. If we never draw the line then what’s the point of any of this? Can I just openly keep arguing that the top isn’t in because sometime down the line we will make an all time high again? Can I still argue that 2008s bottom isn’t in? 

[TwoCitiesCapital]

13 minutes ago, Gregmal said:

I would think this sort of thesis or whatever would fall into a different category. Finance is wayyyy too full of these open ended, never ending, types of predictions. It’s how folks spent the past decade shorting FANG or Tesla because “it’s a bubble”…after a certain period of time, even just purely from a risk management perspective, you need to settle up.
 

Index or not(which is another subject we ve discussed) the bottom for now is very clearly in. It seems we are right back into good old fashioned valuation short territory, which is basically what the case is when a thesis hinges on “everyone’s gonna miss earnings” or “analysts are all gonna get together and revise estimates down” or something. Possible, but not realistic. If we never draw the line then what’s the point of any of this? Can I just openly keep arguing that the top isn’t in because sometime down the line we will make an all time high again? Can I still argue that 2008s bottom isn’t in? 

 

It's literally been ~2 months of an upswing and 4 months since the absolute lows. During that time we've barely made a new local high before pulling back with no real definitive buy in to the recent "breakout". More of a sideways grind then anything definitive in either direction. 

 

And over that 4 month period?  Fundamentals have continued to deteriorate while alternatives to equity have only gotten more attractive. The earnings/margin contraction that members like me have been warning about for nearly a year is here. Global liquidity is still be drained and expectations for future earnings are coming down with each subsequent miss. 

 

It's not uncommon to get multi-month bear market rallies. I've seen nothing to suggest this one is different. If we climb from here for another 2-3 months, I'd consider that I'm wrong. But as of right now, there is nothing atypical about this rally compared to prior bear market rallies. 

[Castanza]

1 hour ago, SHDL said:

 

Typo I'm sure but I had to laugh.

 

Came for investment ideas, staying for @dealraker's stories...

Well some of investing it temperament and emotion. Dealraker has shown how remaining agnostic towards your positions can be beneficial in the long run. 

[Castanza]

1 hour ago, Gregmal said:

African pompano which is a gorgeous fish, mackerel, and some yellowtail. Shark fishing tonight in honor of CPI.

Very nice always wanted to do some big game fishing 

[Sweet]

1 hour ago, TwoCitiesCapital said:

 

Respectfully, I disagree. Traditionally markets don't bottom BEFORE the recession. And traditionally they don't bottom without a capitulation event. We've seen neither and we find ourselves in an economic environment that has many leading and coincident indicators suggesting it's gonna get rough. 

 

Maybe this time it IS different - but I think we're still in the 3-4th inning. This will be a 2-year event like 2007/2008 and 2000/2001.

 

IMO, all we've seen is the most egregious speculative excess come out of the market, not an actual correction for interest rates/inflation/declining earnings/etc. 

 

Didn't we have a recession?

 

Or do believe that two negative quarters is no longer a recession anymore?

[TwoCitiesCapital]

9 minutes ago, Sweet said:

 

Didn't we have a recession?

 

Or do believe that two negative quarters is no longer a recession anymore?

 

They never counted the two quarters in 2015 as one even though it was accompanied by one of the longest earnings recessions in US equities too. They're not counting the 2 quarters in 2022 as one either. Both would have been extraordinary mild recessions if counted (if we're suggesting 2022 is already over). 

 

The two quarters rule has always been a rule of thumb. There are a number of indicators the NBER looks at with employment being dominant among them. I generally agree with their approach in determining what constitutes a recession. 

 

The rising unemployment from it's current levels to 4+% will likely mark the start of any NBER declared recession - but like always they'll announce it with a 6 month lag. 

Edited February 15, 2023 by TwoCitiesCapital

[Sweet]

20 minutes ago, TwoCitiesCapital said:

 

They never counted the two quarters in 2015 as one even though it was accompanied by one of the longest earnings recessions in US equities too. They're not counting the 2 quarters in 2022 as one either. Both would have been extraordinary mild recessions if counted (if we're suggesting 2022 is already over). 

 

The two quarters rule has always been a rule of thumb. There are a number of indicators the NBER looks at with employment being dominant among them. I generally agree with their approach in determining what constitutes a recession. 

 

The rising unemployment from it's current levels to 4+% will likely mark the start of any NBER declared recession - but like always they'll announce it with a 6 month lag. 

2015 did not have two consecutive quarters of negative growth:

 

Q4 '15:  +0.6%

Q3 '15:  +1.3%

Q2 '15:  +2.3%

Q1 '15:  +3.3%

 

The working definition of what is considered a recession was always two negative quarter until last year.  

The economy did contract for two quarters - it wasn’t a quarterly anomaly.  There is a chance that we have had the recession and the bottom is in.

 

And remember, the covid induced recession was enormous, and it wiped out a lot of businesses and a lot of wealth.

 

I’m not claiming to know if the bottom is in, because I can’t know, but I do feel there is an elephant in the room.

 

 

Edited February 15, 2023 by Sweet