Are we in a bubble?

[Mephistopheles]

Sorry for the blasphemy to all you value bros, but I’m thinking this is a bubble. There’s a misconception that bubble’s only exist when you can’t spot them, but that’s just not true. People saw dot com in 99, real estate in 07, etc. But what you never know is when it collapses, and it can go much higher in the interim.

 

People say this isn’t like dot com because back then the earnings didn’t exist, whereas now the trillion dollar companies are selling for reasonable P/E ratios. However. as opposed to back then, there is hundreds of billions of capex and evaporating FCF. Are we really to believe that next 10 year ROIC or ROE for the the big tech firms will be nearly as amazing as last 10 years?

 

Just, there are too many parallels to the tech bubble, but everyone notices that and therefore we assume it’s ok since bubbles are invisible.

 

And yes we haven’t had a real stock market collapse since 09 and there have been many bubbles called since then, but that doesn’t mean this time it’s not the case.

 

I’m not trying to short it because I can totally get my face ripped off doing so, but I did go long the VIX at 18. The semiconductor run up, the geopolitical situation, AI, and Trump, all seem to be potential matches that can drive the VIX to 30. But what do I know! 

[Gamecock-YT]

Nearly 2 years since the last bubble post, SPY is up 45% on a total return basis:

 

 

[frommi]

Maybe theres a bubble in semis, but outside of them? Quality stocks outside the Mag7 are cheap. In fact i never in the past 10 years had a time when ~100 of my 300 quality stock list offered forward returns of 15%+ over the next 10 years. So if there is a bubble, it is like 2000, which was a fabolous time to be long value/quality for the next 7 years.

Edited May 14 by frommi

[Eldad]

Most definitely. 
 

Currently trying to balance that with @frommi point of great deals on the rest. Not a market I would usually want to be 100% in. 

[Cod Liver Oil]

I see a bubble in memory and possibly chips, a boom in the Goog stack and a bust in SaaS. Hard to generalize. Lots of cheap stuff, lots of macro risk.

[Longnose]

Yea, im not sold on the bubble idea either. 

 

Im more on the @Cod Liver Oil opinion that its a bit of a mixed bag by sector.

 

Lots of sectors that look quite attractive.

[Paarslaars]

There is bubble like behavior in the AI valuestream, lots of stocks ging vertical, especially photonics/CPO stocks.

 

Don't think memory is in a bubble. Remember not to mistake overvaluation with a bubble.

[Milu]

Many SAAS, Retail, and Restaurant stocks are trading at very low valuations compared to history. Many other items like Semis have gone up a lot. Whether we are in a bubble or not, who knows or cares. And let's say we are, what changes would you make to your approach? For me I will continue to hold good quality stocks and possibly add more if valuations warrant it.

[SharperDingaan]

Lot of bubbles in the US (Mag 7, etc) .... not so much in Canada 

 

Paying 2x the 'norm' via a high P/E today; just means that you expect E to 'double' tomorrow ... the 'when' being a mystery. Of course, if you also expect to be paid for the wait via DCF; .... then you actually need 3x E to compensate  The more one can convince the market not to do DCF, the more bubbly.

 

All bubbles fly on 'story', the more compelling and simpler the better; and the more skilled the promoter(s) the higher she goes! That Vancouver penny stock mining promoter, versus his/her Silicon Valley counterpart, uses very similar techniques, but wears a cheaper suit. It's still a hole in the ground, and a liar at the top   

 

Lot of folks in the US have strong incentive to keep the bubbles going until after the pending midterms. Thereafter, 'failure to win' strongly incentivising a Kennedy moment, to suddenly collapse the bubbles ... and harvest on the way down. 

 

Building a data centre every few states, when there's no power and no grid to deliver it, makes very little sense. A whole lot cheaper, and less capital intense, to simply archive/purge 'history' after X months, than keep it accessible for live retrieval .... but way less sexy. Of course, no new data centres, no additional chips, and no additional E 

 

Relocating old factory behind US tariff walls so that they can temporarily be competitive, is very similar. The world just moves on, technologies/processes become more efficient, and the old factory dies .... refreshing the US 'rust belt'. Of course if you're underground before that happens ... it's not a problem!

 

Opportunity.

 

SD  

Edited May 14 by SharperDingaan

[Spooky]

I agree with the sentiments expressed by others. Lots of pockets of the market are overlooked or left for dead. Just avoid the hottest stocks of the day and you'll be fine. 

[Blake Hampton]

The biggest bubble in history actually.

Simple explanation:

 

The Buffett indicator is currently at 242%. The Dot-Com Bubble peak was 190%.

 

Advanced explanation:

 

The S&P 500's 26-year average return on equity is 13.5%. This means that for every one dollar of equity capital invested over the last 26 years, you've made approximately 13.5 cents annually on it. To buy into the index today, you would have to pay $5.90 for each $1 of that same equity, resulting in an earnings yield of 2.3% if that level of ROE remains steady going forward (it has averaged close to 12% for a very long time). This is occurring at the same time when short-term, risk-free Treasury securities are yielding close to 4% on an annualized basis. The future also appears to me quite inflationary, that will likely result in you having to discount those same earnings yet further. Why would you invest to make 4% when you could go to the grocery store and buy things increasing annually at the rate of 8%? Inflation itself can become a discount rate.

Also, the recent past has seen low costs for carrying debt as well as low corporate tax rates. The first came about from the Fed's zero interest-rate policy and the second from Trump's 2017 Tax Cuts and Jobs Act (TCJA). Both of these items have directly increased the earnings available to the average business, which is exactly why returns on equity have generally been so high over the last decade. However, like with many things, the current situation regarding them will change.

 

JPM: Eye on the Market - Outlook 2025

 

S&P 500 earnings and estimate report

[Blake Hampton]

But the line go up.

And the government is printing debt like there's no tomorrow (there is).

[Spooky]

3 minutes ago, Blake Hampton said:

And the government is printing debt like there's no tomorrow (there is).

All this debt is someone else's asset.

[mengan]

Absolutely, yes.

 

[Blake Hampton]

Just now, Spooky said:

All this debt is someone else's asset.

True dat.

[Castanza]

1 hour ago, Blake Hampton said:

The biggest bubble in history actually.

Simple explanation:

 

The Buffett indicator is currently at 242%. The Dot-Com Bubble peak was 190%.

 

Who gives a shit lol Are you an economist or an investor?! 

[SharperDingaan]

1 hour ago, Castanza said:

Who gives a shit lol Are you an economist or an investor?! 

 

Sadly ... one has to be both . After you've made your fortune, you still need a pleasant place to live; if the place has become a shit-hole, and you now need to live behind a gated community (Maralago!), it's a wasted effort. 

 

SD

Edited May 14 by SharperDingaan

[aesophawk]

I buy rain or shine. There's always something to do. I do think the potential economic risks from the Iran conflict are underpriced and conference calls I've listened to have called out strained consumers on the lower end. But even with that in mind, there's a bunch of stuff out there that has already gotten waxed. Companies down 50+% and trading at levels from 10 years ago ain't hard to find. My worthless two cents is that it's a good environment for stock pickers. 

[frommi]

10 hours ago, Blake Hampton said:

To buy into the index today, you would have to pay $5.90 for each $1 of that same equity, resulting in an earnings yield of 2.3% if that level of ROE remains steady going forward (it has averaged close to 12% for a very long time).

When i look at your table ROE has gone up over time from 11% to 18% (not stable) and since the Mag7 have ROE's of 30-40% it will go higher as long as they grow earnings faster than the rest?
That fact alone makes all these Buffett or Shiller indicators useless as a valuation metric.

[brobro777]

I don't think there is a bubble in the general market - maybe NQ will pull back after rallying 30% in one month cuz that's fucking bonkers but no dot com bust 2000-2002 shit, no

 

But I do think there is a bubble in this semiconductor chips jibba jabba and that's why I shorted EWY, average cost $180.24. I am betting that KOSPI will repeat its pattern of ripping rallies and punishing deflations exhibited in the past (with higher plateau levels where the index goes sideways for years to reflect inflation after the bust) 

 

It has been fun watching EWY squeeze on me to $190+

 

haha

 

[Sweet]

21 hours ago, frommi said:

Maybe theres a bubble in semis, but outside of them? Quality stocks outside the Mag7 are cheap. In fact i never in the past 10 years had a time when ~100 of my 300 quality stock list offered forward returns of 15%+ over the next 10 years. So if there is a bubble, it is like 2000, which was a fabolous time to be long value/quality for the next 7 years.

 

15 hours ago, Cod Liver Oil said:

I see a bubble in memory and possibly chips, a boom in the Goog stack and a bust in SaaS. Hard to generalize. Lots of cheap stuff, lots of macro risk.

+1

[Lazarus]

If AI is a legit game-changer in the workforce, then it's just the like the industrial revolution: new technology allows society to get richer as a whole. And if that's the case, then society is about to get richer and the markets will charge ahead as a whole.

 

There are always doomsayers, since there are always scary problems and reasons to be negative. The doomsayers will eventually be right and a crash of 30% or 40% (or even 50% in super rare instances) will come, but they'll sit out all the gains while waiting for that moment. And even when the 30% drop comes, they'll think it's going to get worse and miss the bottom. How many of the doomsayers profited heavily by buying at market bottoms in 2009? In 2020?

[vinod1]

Quote Buffett Indicator and Ignore Every Single One of Buffett's Teachings!!!!

 

You know, things like, ignore macro, don't predict markets, focus on the business.... 

[Blake Hampton]

Can I get some valuation math?

 

Or am I suppose to buy the market because it simply goes up?

 

That's what Buffett teaches alright.

[Blake Hampton]