Is The Bottom Almost Here?

[TwoCitiesCapital]

2 hours ago, Gregmal said:

Student in the back row raises hand and asks question…..

 

Teacher, if earnings keep coming in better than expected and stocks respond favorably because of this, what is the proper refrain? Revert back to “it’s a bubble and people are euphoric so the market still needs to crash”? Or what? 

 

1) the estimates have been dramatically lowered over the last 3-6 months. The "beats" that are occuring are relatively to these newly lowered expectations. Compared to where markers thought they'd be 6 months ago, earnings have been hugely disappointing. According to Yardeni, estimates were for -1% as recently as February 1st. -5% is shaping up to be a disappointment just from estimates 2 weeks ago...

 

2) despite lowering those estimates so as to claim companies "beat" them, my company estimates that only ~70% of companies are beating these lowered estimates as opposed to the historical average of ~77%. So despite lowering the benchmark significantly, it's still proven tougher to beat those "expectations" then average.  

 

3) I'd argue outside of day trading, what matters is the trend and not what they're doing relative to variable expectations. What matters is that earnings are down -5% YoY and not that the expectations had recently been revised down to -6% or whatever they were so as to "beat" that benchmark. 

 

Current expectations are -5% for Q1. Similar estimates have Q2 at minus 2-3%. Not major drops, of course, but also not what you pay 28x forward earnings for. Also, I'd argue that these, too, will prove optimistic just like Q4's were wve just a few weeks back. 

 

Edited February 16, 2023 by TwoCitiesCapital

[TwoCitiesCapital]

2 minutes ago, thepupil said:

 

 

What are you referring to?

 

Here are the 2023 earnings estimate trajectories of the S&P 500 and 4/5 top components (I skipped AMZN because EPS not relevant)

 

 

 

 

 

 

 

 

+1

 

Glad you had the charts. Couldn't find any of the resources to share on my phone other than looking up Yardeni's research reports

[thepupil]

to be clear, this is why you own stocks for the long run. EPS fo brrrr. America!!! 

 

But let's not pretend that earnings estimates for the biggest co's and whole market have not done anything but come down for like 3 q's. 

 

[Gregmal]

16 minutes ago, thepupil said:

What are you referring to?

I’m kidding cuz I pulled up a trending stock/news feed while at dinner and there’s all these tech stocks blasting off after earnings beats the last couple days. As you probably know, my tech stock exposure is minimal…so I have no real horse in the game outside of a few positions. But it’s weird to see. 

Edited February 16, 2023 by Gregmal

[Gregmal]

5 minutes ago, thepupil said:

to be clear, this is why you own stocks for the long run. EPS fo brrrr. America!!! 

 

But let's not pretend that earnings estimates for the biggest co's and whole market have not done anything but come down for like 3 q's. 

 

Yea, I guess this is part of the “market” discussion…I almost want to start a new thread disclaiming that we are no longer allowed to include FANG is any discussions about the markets cuz it just obfuscates things. No interest in those. And I’m not talking about CVNA type rallies either. But ABNB, RBLX, ROKU, UBER, TTD, etc. Even Z…what to make of this? Something, nothing? Idk. But if you’re following this whole time the market things…those were some of the first to crash, first to bottom, now breaking out. 

[thepupil]

Not allowed to include the largest companies by rev/mkt cap/ etc but instead should focus on a sideshow basket of unprofitable tech when talking about market fundamentals? 
 

greg, cmon man, like I kind of agree with your overall view here, but it’s this type of stuff that pulls me back into uselessly debating you

[Gregmal]

3 minutes ago, thepupil said:

Not allowed to include the largest companies by rev/mkt cap/ etc but instead should focus on a sideshow basket of unprofitable tech when talking about market fundamentals? 
 

greg, cmon man, like I kind of agree with your overall view here, but it’s this type of stuff that pulls me back into uselessly debating you

I guess this is where I circle back into my thing about hating FANG stocks in todays environment and only being interested in potential 5-10x stocks if I’m venturing into the tech space. I guess I’m just literally incapable of seeing “the market” because I’m 1000% a specific stock guy. So everyone says market and I think of a gazillion interesting sub sectors of the market and say “wtf are people wasting their time with”. 

[thepupil]

1 hour ago, Gregmal said:

I guess this is where I circle back into my thing about hating FANG stocks in todays environment and only being interested in potential 5-10x stocks if I’m venturing into the tech space. I guess I’m just literally incapable of seeing “the market” because I’m 1000% a specific stock guy. So everyone says market and I think of a gazillion interesting sub sectors of the market and say “wtf are people wasting their time with”. 

I’ll do some non tech heavyweights when I have time.

 

 

 

 

[changegonnacome]

1 hour ago, TwoCitiesCapital said:

Current expectations are -5% for Q1. Similar estimates have Q2 at minus 2-3%. Not major drops, of course

 

Everybody is also conveniently forgetting to inflation adjust falling nominal earnings........I'm not claiming inflation is 9%.........but it isn't 2% either.......I'd be comfortable saying one should take whatever your nominal fall in earnings is and adding 4-5% on to that to come up with the REAL fall.........or put another way if your equity stub isnt growing earnings ~5% YoY in the current climate it isn't growing its earnings power at all.

 

Simply another reason why one, in a inflationary & higher interest environment, should be seeking companies with higher than normal FCF yields and ideally companies that have positive FCF per share growth YoY in REAL terms. Put another way value beats growth in this environment because its a better vehicle for preserving purchasing power......with less risk of being killed by multiple contraction which haunts many equities I see still. Value provides way less ways to get hurt right now IMO.

Edited February 16, 2023 by changegonnacome

[changegonnacome]

9 hours ago, Spekulatius said:

For a real hard landing, the annual stress test results give you an idea what a 2008 GFC like scenario looks like. It's not pretty but the major banks would survive. That said, you don't want to own banks in this scenario.

 

I consider such a hard landing very unlikely however.

 

Me too - hard hard landing that would endanger current banks equity capital such that common shareholders gets diluted ala GFC or whatever is very very very unlikely.

 

The GFC was fundamentally a balance sheet recession.......everybody got levered up and paid dumb prices for stuff......and a tiny move in the value of the underlying destroyed what little equity there was in the banks AND households. This is a scenario where defaults for just about everything (not just housing) go through the roof as people throw in the towel on all debt and declare bankruptcy. 

 

What we are likely to experience, in an adverse scenario, is kind a little of what we are seeing already which is a household income statement recession.....wages failing in real terms.....household budgets getting stressed......more folks in trouble at the margins........unsecured sub-prime lenders I would be concerned about here.....but prime secured stuff IMO should be OK.

[Gamecock-YT]

10 hours ago, Viking said:

Here in Canada, a reasonably large subset of the population carries lots of debt (mortgages and LOC) thanks to our housing bubble. Lots of people own multiple properties with big mortgages (that were already cash flow negative at historically low interest rates). Most of this debt is variable, especially if interest rates stay high for years (even 20% of those 5 year fixed mortgages come due every year).
 

The real estate bubble has also created a mental rental market: here in Vancouver it is not uncommon to pay C$1,500-$1,700/month for a one bedroom and $2,800-$3,000 for a two bedroom - if you can find one (crazy low vacancy rate). Landlords with mortgages are going to need big increases in rental rates given their mortgage costs are going through the roof.

 

The learning is you do not want to blow a housing bubble because it usually causes big problems for years when it corrects. The US learned its lesson in 2008-2010. China is in even worse shape than Canada.

 

The Bank of Canada is really boxed in. Their answer is to stop rate hikes. Even in the face of high inflation (Canada has lots of very large public sector unions) and a very tight labour market. Government spending looks like it is accelerating.
 

No idea how it plays out here. Super happy i have no debt. 

 

Australia is in a similar boat. 23% of households will be getting mortgage rates resetting by roughly a 2% increase in Q2 and Q3. They're already have one of the highest household debt in the world.

[nafregnum]

8 hours ago, Gamecock-YT said:

 

Australia is in a similar boat. 23% of households will be getting mortgage rates resetting by roughly a 2% increase in Q2 and Q3. They're already have one of the highest household debt in the world.

 

As opposed to "What's the Fed gonna do next?", I think this kind of "macro" has to be at least as actionable as weather reports following the path of a hurricane.  Sure, a hurricane can change direction and make landfall somewhere else, but that doesn't mean weather reports are useless noise.

 

So, as mortgage rates in Australia and Canada begin to climb, what will happen?

 

  - Mortgages become more expensive.  Real estate prices see downward pressure.  Some areas suffer more than others, depending on demand as people move to where they can afford to live.

  - If rents go higher, do people move further from big cities out into the suburbs?

  - In general, people have less money to spend?

  - Maybe foreclosures go up?

 

In the aggregate, what behaviors change when people are feeling the pinch?

 

  - Less eating out at restaurants?

  - Cut back on travel plans?

  - Start shopping at DollarTree and Walmart type stores?

  - More people do their own car maintenance?

 

Some of you could add some good insights to add to these bullet points based on your wide reading and long experience.  I remember reading that Allan Mecham (who used to run a fund called Arlington Value) wrote that AutoZone would benefit during downturns because as people have less money to spend, those who know how will start doing their own oil changes.  I always thought that was an interesting detail to notice, and I often find myself trying to think of new insight like that.  

 

If a mortgage debt hurricane is threatening Vancouver and Australia, how would you prepare for the financial storm? 

Edited February 16, 2023 by nafregnum
grammar

[changegonnacome]

Troubling signs emerge as credit card debt hits record high

https://finance.yahoo.com/news/troubling-signs-emerge-as-credit-card-debt-hits-record-high-160607906.html

 

I'm sure someone else will post...........on the surface its concerning...........but being internally consistent the nominal level of credit debt reaching a record high is mis-leading.........we've had a couple of years now of inflationary pressure.........knowing this one would expect aggregate nominal credit card debt to be posting records!!!!!!!!............the same way I would expect nominal spending levels to be hitting records too.....the numbers attached to everything have gone up (incl. wages) and so too should numbers like this.

 

Missed payments as % of outstanding payment is a more important metric and this report show they are a little higher than the last two years.......yeah of course they are!.....the last two years were historically unprecedented low in delinquencies cause everybody and their mother were getting cheques every two weeks so they paid their credit cards.

 

I put articles like this firmly in the bear porn that folks talk about......headline scary....underneath the surface its kind of a nothing burger.

[Gregmal]

Yea between ABNB and the MSG earnings calls, I’m not sure there’s any signs of a struggling consumer…at least if you are picking your spots wisely. 

[TwoCitiesCapital]

Philly Fed area Manufacturing outlook report came in at -24 versus the prior months -9. 

 

Primary detractors were new orders and declines in average work week hours. Shipments and employment remained positive, but were somewhat weaker MoM. 

 

The -24 level is the lowest reading since May 2020. Prior to 2020, the last time it was at these levels was 2008/2009. 

[changegonnacome]

26 minutes ago, Gregmal said:

ea between ABNB and the MSG earnings calls, I’m not sure there’s any signs of a struggling consumer…at least if you are picking your spots wisely. 

 

Yep Its exactly like I would expect - and we talked about before........middle to high income earners are able to be navigate the cost inflation (1) cause their household budgets have room for a little upward movement in prices (2) the've the ability to negotiate & secure CPI vicinity salary increases.

 

Businesses that provide services (and credit) to more sub-prime/lower income customers are feeling it from what I can see..........MSGE does not sell $40 vodka sodas to these folks!!!

 

Picking your spots right now is 100% the right way to navigate things!

 

Edited February 16, 2023 by changegonnacome

[Viking]

1 hour ago, nafregnum said:

 

As opposed to "What's the Fed gonna do next?", I think this kind of "macro" has to be at least as actionable as weather reports following the path of a hurricane.  Sure, a hurricane can change direction and make landfall somewhere else, but that doesn't mean weather reports are useless noise.

 

So, as mortgage rates in Australia and Canada begin to climb, what will happen?

 

  - Mortgages become more expensive.  Real estate prices see downward pressure.  Some areas suffer more than others, depending on demand as people move to where they can afford to live.

  - If rents go higher, do people move further from big cities out into the suburbs?

  - In general, people have less money to spend?

  - Maybe foreclosures go up?

 

In the aggregate, what behaviors change when people are feeling the pinch?

 

  - Less eating out at restaurants?

  - Cut back on travel plans?

  - Start shopping at DollarTree and Walmart type stores?

  - More people do their own car maintenance?

 

Some of you could add some good insights to add to these bullet points based on your wide reading and long experience.  I remember reading that Allan Mecham (who used to run a fund called Arlington Value) wrote that AutoZone would benefit during downturns because as people have less money to spend, those who know how will start doing their own oil changes.  I always thought that was an interesting detail to notice, and I often find myself trying to think of new insight like that.  

 

If a mortgage debt hurricane is threatening Vancouver and Australia, how would you prepare for the financial storm? 

In Canada anyone with a mortgage or line of credit is now (or will be shortly) paying much, much more in interest expense. $100/month more doesn’t matter. $1,000/month more does matter. $2,000/month matters even more. This is an after-tax increase in expenses. At the same time food costs are way up. Insurance costs are way up. Flight costs are way up. Vehicle costs are way up (if you can even find one). Etc, etc. Wages? Up a little.
 

What does it all mean for an investor? Not sure. It will likely take years to fully play out. But given the magnitude of the impact, there will be big winners and losers. And that is the fun part about investing… skate to where the puck is going… 

—————

Having said all that, Canada has minted tens of thousands of millionaires over the past decade (real estate). House prices have come down over the past year; but real estate prices are still much higher that what they were 2 short years ago. That wealth is real and those people are spending. 
 

So i am not doom and gloom. I am remain very optimistic. 2023 is shaping up to be another super interesting year. 

 

Edited February 16, 2023 by Viking

[thepupil]

if you want to find the companies that are struggling in this environment. middle market buyout levered to the gills with floating rate debt is where its at. 

 

~40% of companies seeing EBITDA* decline. 100% of companies seeing interest expense rocket up. 

 

*and that's PE owned company reported EBITDA. how many you think are super aggressive in trying to show EBITDA growth?. 

 

 

 

Quote

 

Shrinking Profits at Private Borrowers Sound Early Credit Alarm

• Middle-market firms see revenue and earnings growth diverge
• Lincoln says loan values drop to lowest since the pandemic

By David Brooke

(Bloomberg) -- 

The Teflon gleam of the private credit market is showing cracks as rising interest rates and inflation cut into profits at middle-market borrowers.

While experiencing strong revenue growth last year, closely-held companies that typically rely on financing from private credit funds have been hit by a contraction in profit margins due to higher debt service and labor costs, which may lead to earnings declines in 2023, according to Chicago-based investment bank Lincoln International.

Around 80% of private middle-market companies tracked by Lincoln increased their revenue in 2022, yet only 60% of those also reported growth in earnings before interest, taxes, depreciation, and amortization. Median revenue growth was 15% for the year, while earnings expanded only by 9%, according to Lincoln.

“It is remarkable that four in every five private companies experienced revenue growth, but only about half experienced Ebitda growth,” said Ron Kahn, co-head of Lincoln’s valuations and opinions group. “If portfolio companies are unable to pass along costs through price increases and sustain demand tailwinds, we will likely start to see Ebitda declines across the market.”

The Federal Reserve’s rate-hike campaign is adding to private borrowers woes. Loans provided by private-credit lenders are tied to floating rate benchmarks and borrowers are typically able to lock in the reference rate for 90 days.

That means many have only started to feel the full impact of recent interest rate increases on their earnings. Tuesday’s US consumer price index report for January made clear that inflation persists, and Fed officials have pledged to raise rates as needed to combat rising prices.

Values Decline

Public asset markets, of course, have been battered for about a year by rising rates and sticky inflation. But the erosion in profit margins is a wake-up call for the opaque, $1.4 trillion private credit arena after a decade of steady growth amid benign credit conditions. 

There are other worrying signs. The fair value of private credit loans tracked by Lincoln decreased to 96.3 cents on the dollar in the fourth quarter of 2022 — its lowest since the pandemic. Default rates almost doubled last year to 4.2% from 2.2% in 2021, according to Lincoln. 

Lincoln tracks around 900 companies with median Ebitda of approximately $30 million to $35 million. Because these companies are typically owned by private equity and rely on private lenders for financing, their performance is a closely watched measure of the market’s overall health.

Lenders such as Ares Management Corp. and Golub Capital say they’re well aware of the challenges faced by the companies they lend to and that they are preparing for tougher days ahead.

“I bundle a lot of these operating concerns for companies into the same bucket, whether it’s the need to pass through price increases, labor shortages, production challenges or supply chain issues,” Kipp deVeer, chief executive officer of Ares Capital Corp., a business development company, said on an earnings call last week. “It’s just harder running companies these days.”

 

 

 

Quote

Closely held midsize companies in the US are being challenged to pass on the costs of rising inflation and higher interest rates to protect their own bottom line new data show. 

Earnings growth trailed revenue expansion for the fourth consecutive quarter as last-twelve month revenue for middle-market companies grew 4.7% on average in the second quarter, while earnings before interest, depreciation and amortization -- or Ebitda, a critical measure for debt-laden firms -- was recorded at 2.3%, according to a report Monday from investment bank Lincoln International. 

Year-to-date, firms saw a 13% increase in revenue growth compared with the same period in 2021, yet Ebitda growth in that period was just 0.6% with margins contracting 2.3% on average. 

“Though it is remarkable how well demand has held up through the first half of 2022, this year may be a tale of two halves if demand slows in the second half of the year for discretionary businesses,” said Ron Kahn, a managing director at Chicago-based Lincoln, in a statement.

In the second half of the year, “private company growth hinges on consumers’ willingness and ability to spend and private companies’ efforts to, mitigate inflationary pressures impacting margins,” he added.

Meanwhile, the Lincoln Private Market Index, a measurement of private company enterprises values (EV), declined 0.5% in the quarter - it’s first drop since the beginning of the pandemic. In the previous quarter, the gauge rose 1.7% as private companies were able to shrug off the volatility hitting public markets, but the headwinds have appeared to have caught up to private companies.

Previously stable earnings were able to stave off declines in EV multiples, but Lincoln’s latest report shows a drop to 10.8 times in the recent quarter, down from 11.1 times in the quarter prior. 

“As we have historically observed, portfolio companies in the private markets are not insulated from trends in the public markets and recessionary fears.” said Steve Kaplan, a professor of entrepreneurship and finance at the University of Chicago and an adviser to Lincoln’s index.  

Lincoln’s Senior Debt Index, a measurement of the fair-market values of loans for private companies, declined for a second consecutive quarter to 97% from 98% reported in the first, while default rates crept up to 3% in the second quarter, from 2.5%. Kahn expects the default rate to rise for the rest of the year. 

“Although private credit default rates remain low and interest coverage ratios remain in line with levels observed over the past year, that could quickly reverse course as private companies face a storm of rising rates and recessionary fears,” said Kahn.

 

Edited February 16, 2023 by thepupil

[rkbabang]

On 2/15/2023 at 10:42 AM, thepupil said:

 

I think many people care about indices because it's their only option. My wife and I save  $67K/year through tax advantaged vehicles. we save more on top of that, but it's a material amount of money for us and our 401k providers only allow various indices/mutual funds. Unless we quit our jobs we have to buy something with that, so having some opinion on the relative merits of the performance of various asset classes is of some use to me. 

 

for me right now I wonder whther I should keep buying bond index, switch to long term bonds, or use it to add international / non USD exposure. my portfolio's always gonna be US stock/RE heavy. for now I think bonds are a better diversifier than non US stocks. 

 

That sucks, try to convince your company to use Fidelity for your 401K.  My company uses Fidelity and it has the normal selection of funds or you can transfer the money into what they call 401K Brokerage Link and invest it into anything that you could in an IRA, even options (buy calls/puts, write covered calls and cash backed puts).

 

[Castanza]

1 hour ago, rkbabang said:

 

That sucks, try to convince your company to use Fidelity for your 401K.  My company uses Fidelity and it has the normal selection of funds or you can transfer the money into what they call 401K Brokerage Link and invest it into anything that you could in an IRA, even options (buy calls/puts, write covered calls and cash backed puts).

 

 

Hmm had no clue this was a thing. My company uses Fidelity. Will have to check this out. Did Christmas just come early?!

 

Edit: Not offered for me....damn 

Edited February 16, 2023 by Castanza

[maplevalue]

1 hour ago, Viking said:

In Canada anyone with a mortgage or line of credit is now (or will be shortly) paying much, much more in interest expense. $100/month more doesn’t matter. $1,000/month more does matter. $2,000/month matters even more. This is an after-tax increase in expenses. At the same time food costs are way up. Insurance costs are way up. Flight costs are way up. Vehicle costs are way up (if you can even find one). Etc, etc. Wages? Up a little.
 

What does it all mean for an investor? Not sure. It will likely take years to fully play out. But given the magnitude of the impact, there will be big winners and losers. And that is the fun part about investing… skate to where the puck is going… 

 

On the point of it "likely take years to fully play out", you are very right on that from a Canadian perspective since 75% of variable rate homeowners payments are fixed (i.e. payment same, interest/principal split changes, or amortization extended; https://www.bankofcanada.ca/2022/11/staff-analytical-notes-2022-19/). It just delays the pain, but one day these borrowers will have to pay!

[rkbabang]

55 minutes ago, Castanza said:

 

Hmm had no clue this was a thing. My company uses Fidelity. Will have to check this out. Did Christmas just come early?!

 

Edit: Not offered for me....damn 

Probably disabled by your company for your protection.  

 

[Spekulatius]

1 hour ago, rkbabang said:

Probably disabled by your company for your protection.  

 

Most plans don't have a brokerage window due to compliance concerns (the concern is that participants may blow up their account and then sue the sponsor).

[Santayana]

If you're in the industry, it's not uncommon to have trading restrictions on all of your accounts.

[Minseok]

18 hours ago, maplevalue said:

 

On the point of it "likely take years to fully play out", you are very right on that from a Canadian perspective since 75% of variable rate homeowners payments are fixed (i.e. payment same, interest/principal split changes, or amortization extended; https://www.bankofcanada.ca/2022/11/staff-analytical-notes-2022-19/). It just delays the pain, but one day these borrowers will have to pay!

 

That day is already here. Banks are increasing payment on variable rate mortgages without the consent of home owners when the trigger rate is hit. I voluntarily increased my payment at every rate hike for a total of $1250/month but one of my colleagues has had his bank forcebly increase payment by a total of $800/month through the hiking period. This is from a tier 1 bank. 

Edited February 17, 2023 by Minseok