Why is the market holding up so well?
From my perspective, albeit bearish-leaning, it appears that the momentum to the negative is building? Additionally, there are an abnormally high amount of potential black swan triggers (e.g., food shortages in Africa / Asia this winter, energy crisis in Europe from Russia cutting things off, crypto domino, snowballing of earnings coming down under new multiple regime, continued persistent inflation, world war, Taiwan etc.)
Q4 2021 article: “U.S. consumers grew their total debt to $15.6T in the fourth quarter of 2021. This represented the largest quarterly rate of increase since 2007”
Q1 2022 article
Debt then continued to rise through Q1… adding another $266B in Q2 2022… getting to $15.84T. Interestingly, credit card balances are up $71B vs. Q1 2021
https://www.newyorkfed.org/microeconomics/hhdc
April 2022 article:
“Investors are growing more skittish about bonds backed by consumer debt, worried that inflation and slowing growth will increase the number of low-income borrowers falling behind on car payments or credit-card bills.”
https://www.wsj.com/articles/investors-turn-cautious-on-consumer-debt-11649624240
May 2022 article:
“In March, 8.5% of subprime borrowers defaulted (60+ days) on their car loans, according to Equifax. That’s the second-highest total on record.”
https://www.kbb.com/car-news/subprime-car-loan-defaults-rising/
June 2022 article:
“Auto defaults up 10 of the past 11 months”
https://www.autoremarketing.com/subprime/auto-defaults-10-past-11-months
July 2022
“Home sale cancellations hit highest rate since start of pandemic in June (60,000 home purchases, equating to ~15% of monthly home sales)” This is up from 12.7% in May and 11.2% prior year
https://nypost.com/2022/07/13/home-sale-cancellations-hit-highest-rate-since-start-of-pandemic/
Recent tech announcements for slower hiring / hiring freezes
Microsoft
Apple
Nvidia
Lyft
Uber
Snapchat
https://fortune.com/2022/05/09/tech-hiring-slowing-down-job-market/
Corporate Debt
https://fred.stlouisfed.org/series/BCNSDODNS - has doubled since 2011… and is up 50% since 2018
Couple the above with debt as a % of market value of corporate equities… at an all time low (https://fred.stlouisfed.org/series/NCBCMDPMVCE) – would this imply that corporate equities are still broadly overvalued compared to the last 50 years?
“Yields are going up which will make it harder for smaller companies to refinance and thus, it will be harder for them to make debt payments” – thought this was particularly interesting to think about re private equity if there is a pause in sellside M&A or tightening of credit by companies leverages at >6x. What if they are forced to refinance at lower debt levels… say 4.5-5x and at higher rate? Think about the equity destruction…
Stocks
“Bubble expert Jeremy Grantham predicts weak earnings will hammer stocks - and warns the S&P 500 could plunge another 25%”
This seems like a dead cat bounce to me and might very well be people's last chance to sell for the next ~5 years.
Agree on dead cat bounce... hopefully not five years though! Wowza!
Most deep corrections/crashes happen in slow motion. A little bit at first, and then all at once. Look to 2007 - 2009 as an example, although it is a historical outlier as most bears don't haircut 50% off major indexes. Anyway, most of the damage was done in a relatively tight window of 4-5 months at the tail end of the bear. That's why calling bottoms during bear markets is a foolhardy endeavor.
I think this is shit advice that I would hear on CNBC, actually not even. Your right because you gave generic advice that is less likely to be wrong. You added no value to the conversation. Thanks.
Following
Q2 earnings is just the tip of the iceberg (a mixed bag of beats/misses). Expect us to trade sideways for a bit then trade down another 10-20% by EOY (starting at Q3 earnings). Hopefully, some of these tech and healthcare companies will get bought by strategics and sponsors.
Also expecting the broader market to be down ~20% more by the end of the year.
GDP gonna miss this week and then what? Is everyone still going to keep at it with the same “we’re not actually in a recession” bullshit?
Not to be the contrarian but the economy looks to be in pretty decent shape. I think this recession will be largely overblown and I think Jerome Powell is handing thing really well.
Was thinking this, you put pen to paper.
Also, arent companies going to lower guidance b/c of stronger dollar?
That's what I'm expecting. We haven't really see the re-rating of the market from an earnings perspective yet (just multiple).
I am cautiously pessimistic about the overall health of the market. There is just so much stupid rhetoric out there right now. I forget the exact title, but there was a very misleading WSJ article last week basically signaling that the latest consumer data was showing that spending was up. Initially this struck me as very weird, but what they tried to bury was the fact that people aren't actually buying more things, the items they buy just cost more due to inflation. In fact, they are actually buying less, it's just way more expensive to do so lmao. So inflation adjusted spending is actually flat to down. What scumbags, trying to get people to believe things are improving.
Another thing: today on WSJ front page "investors bet fed will need to cut rates next year". Hahahaha what a load of shit. Even if they are able to curb inflation with current rate increases (very unlikely IMO) everything still costs a fuckload more for consumers. It's not like prices are going back to pre-covid levels - slowing inflation just means that prices aren't rising as fast, which doesn't really even matter when goods already cost 2x what they used to a year ago.
Also, lots of debt maturities in '23, '24, '25 which will lead to refinancing/Rx activity. This will make or break the economy in my view. Its a question of whether the fed chooses to murder corporate earnings and slow inflation, or let inflation run rampant and let companies continue their addiction to cheap credit. Either way consumers and normal working class citizens are fucked. It's honestly such a shame.
Another thing to think about is that most people still have expendable income from the pandemic. Once this dries up (as it inevitably will) from inflated prices and stagnant wages, things will get considerably worse. People hoarding cash + inflated prices + expensive credit = a recipe for a meltdown.
The misdirection seems pretty obvious in my opinion and is also insulting to basic intelligence. The WH release on how to interpret GDP decline is also smoke and mirrors... so, let's just redefine "recession," because you say so? I'm sorry, but what?
Yeah that was ridiculous. How stupid do they think people actually are. You dont have to have a PhD in economics to go to the grocery store and realize that it costs you 2x more just to eat now. So much gaslighting and misinformation circulating right now and it’s very concerning. The fed and gvt are really gonna try everything they can to not take accountability for the mess they’ve made
Do you know the boomer song “bbbbaby you ain’t seen nothin yet”? That perfectly describes the situation here.
Wait for people to cry “uncle” - wait for the stock market to be down so long people stop auto contributing in their 401ks. Wait for venture capital and private equity limited partners to refuse to meet capital calls and cause losses at banks. Wait for companies who need moar investor money to survive like Tesla to go bk. Wait for the account frauds to be revealed such as Amazon web services. Wait for the circular tech economy where everyone buys each other’s saas products and advertising to dry up. Wait for bitcoin to go to zero and the claw back lawsuits to start flying, and ultimately for all of the stupid bitcoin articles to stop,
Then you will be singing The Who song - Won’t Get Fooled Again,
You are speaking my language! :D
Shizz gonna be fully locked by year end
Great write up. I also think that we won’t see the kind of rebound we did post 2008 since boomers will be largely risk off and my generation doesn’t have $$ to invest. Capital markets will probably shrink permanently moving forward which will increase the cost of capital well beyond what it seems that markets can tolerate.
The fun keeps coming - though none of this is surprising...
"Stock futures fall after Walmart cuts forecast, says inflation hit consumer spending": https://www.cnbc.com/2022/07/25/stock-market-futures-open-to-close-news…
"UBS misses second quarter earnings; CEO cites one of the most challenging quarters for investors in a decade": https://www.cnbc.com/2022/07/26/ubs-q2-earnings-2022.html
Expecting an utter shit show on Thursday
Coming back to this, it seems like the market is trying to find any shred of an excuse not to go down. Lmao, like today. Powell says "we MIGHT have to SLOW rate increases in the future", and the nasdaq absolutely creams itself and gains 4%. Bro there is just no way. Things are going to get so much worse. Spending is completely unsustainable at this level of inflation and companies are going to get dunked on when they have to refi at double the borrowing cost in the coming years. I try. I try not get emotional, but damn, if this shit doesn't piss me off lol.
I think you're slightly misinterpreting it re: Powell's statement. Powell and the Fed have consistently guided the market as to what their plans are. Remember when the inflation print for June came in and all of a sudden the market started to price in an 80% chance of 100bp? Then something got sent to WSJ and it heavily trended towards 75bp again. Same thing happened before the June meeting when May CPI came in hot and again, WSJ got a scoop. All you have to do is look at the yields on the 30-day Fed Fund futures and ceteris paribus, that's what we're going to get. It's been the same talk since June, at least to me - 3.0-3.5 EoY (~90% probability) and terminal of 3.50-3.75 by March 2023.
To me, everything the Fed can and will do is already in the 30-day futures. The only thing that never got priced in was earnings revisions - you never saw any adjustments to those, outside of a handful of examples e.g. Target, Walmart, Snapchat. Qualcomm and Facebook last night gave you the first look at what a forward guidance miss might look like.
Good points thanks for the insight
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