A Contrarian View - Raging Bull

thebrofessor's picture
Rank: The Pro | 28,813

TLDR - seen a lot of pessimism out of the major firms, it's starting to make me think it's too pessimistic, making me consider that we're on the cusp of a multi-year secular bull market, let's discuss

OK, I've been struggling with a couple of thoughts over the past few months and wanted to see what others thought (either your personal view or your firm's view). let's try to keep this based on the market, not turn it into politics, even though a bit of that will be inevitable. full disclosure, my personal money outside of emergency funds is ~100% invested, about 60/40 US/non US, with a bias towards quality/GARP/dividend growth in the US while I outsource the nonUS (for all of you Taleb fans you believe "don't tell me what you think, just tell me what's in your portfolio")

Over the past couple of years I've noticed a tremendously bearish tenor from many of the major firms. I'm just not seeing the optimism. everyone from people I hate (Hussman) to people I admire (Howard marks) seem to have a conservative tilt in their commentary. I wanted to explore this a bit more, because outside of permabulls like Jeremy Siegel, I'm not seeing the optimism and it makes me think we're on the cusp of a secular bull market. allow me to present some points and counterpoints, and then I'm curious to hear your take.

9.5 year economic recover

1. US is 9.5 years into this economic and market recovery, near the longest on record, trees don't grow to the sky, eventually, this will roll over and likely sooner rather than later

Counterpoint:

this recovery, while long in date, has been short in growth, one of the shallowest post-crisis recoveries of all time, GDP growth is below average, bucking the previous trends of sharp down followed by sharp up, markets don't wear a watch and the economy does not look particularly overheated**

Debt:

2. Debt is an issue that will hamper growth, between student loans, inability to get a mortgage, and the federal gov't, how can the US feasibly continue to grow at any sort of rate? the crash is coming

Counterpoint:

Actually, the household debt service ratio is near the lowest it's been in over 35 years (was lower earlier this decade, but still it's low AF), consumer balance sheets are incredibly healthy, student loans have little effect on the economy unless there's a massive cascading default wave of gov't subsidized loans, and the gov't debt issue (while near & dear to my heart) only becomes anti-growth if you have the crowding out problem Japan had. so yes, it's a problem, but not for my portfolio at the moment**

CAPE:

3. Looking at CAPE and other longer-term valuation measures, stocks are projected to get dismal returns, equity risk premia are declining as stocks rise and rates rise, why would you invest in stocks when the potential returns are so low?

Counterpoint:

Actually, with earnings growth, valuations have been coming down, and while ERPs are skinnier, they're a notoriously terrible forecasting tool. while negative into the tech bubble, they were also negative in the 80s & early 90s (great returns) and positive leading into WW2 (negative returns). furthermore, show me an asset class with meaningfully higher potential returns than stocks for the next several years. in other words, yeah, stocks are probably due for a below average time period of returns, but that does NOT mean you shouldn't invest, it means you should alter your expectations. you think me, a 30-something guy is going to go into fixed income? unless munis start paying 8%, NOPE**

Earnings Growth:

4. Ok bro, you mention earnings growth, but that's been accounting sleight of hand, with stock buybacks, laying off people, etc., and since we're operating at near peak profit margins, this earnings growth can't go on forever.

Counterpoint:

This one's actually kinda tough, because I don't know what peak profit margins are, we won't know until it's been years from now and we can look back. there's an argument to be made that since we're a more tech and outsource heavy economy, profit margins along with multiples may just be perennially higher. comparing an economy that's heavy in manufacturing compared with one that's more service and tech-oriented is just nonsense. I'm not saying "this time is different." what I am saying is the heuristics you use to draw market conclusions need to keep up with the times. finally, sales growth has been STRONG. the economy (credit trump or credit the cycle) is firing on most cylinders right now. earnings growth without sales growth? yeah I'd be worried, but we're not seeing that**

A few more random thoughts:

Rising rates

Yes they're an issue, but this only meaningfully affects indebted companies, if you keep quality high, I really wonder how much of an impact this has. there's actually some data out there that up until the US10 reaches 5%, stock prices rise along with rising rates. now, if Jay takes rates tremendously high, you likely have an overheating economy or he's been drinking jungle juice. neither of which seems plausible at the moment

Trump & trade:

Look, I worry about trade as well, tariffs if persistent can lead to runaway inflation, which is bad for everyone, and nobody wants a 1970s stock market again. I wonder if we're using the availability bias (can you tell I've been reading psychology?) where we all grew up in a period of globalization out of fear of another global war (the Euro, NATO, NAFTA, UN all came post WW2), maybe bilateral deals aren't a bad thing, maybe Trump acting like a jackass is just rubbing people the wrong way and the effect of all of this is completely moot. on other stuff he's doing, he's decidedly pro growth

Tech sector:

This one I struggle a bit with, the % of the S&P tech makes up is near the highest of all time right before the worst 3 years in market history outside of the great depression. however, what's different is earnings. back then, before SOX, companies were actually making shit up in a big way and prices were far & away outpacing earnings growth. today, when I see MSFT crush it in cloud (70+% growth!) and the stock gets whipsawed, that doesn't scream euphoric to me.

Fund flows:

Flows have been in a steady decline (across all products) for stocks whereas bond flows have been quite strong. the average investor tends to be dead wrong if you look at fund flow data & subsequent performance, this bodes well for stocks

Passive ETFs:

I don't use them personally, but I hear the argument that people going passive will cause the next recession, I don't see it. an ETF is just a wrapper, that's all it is. furthermore, they still barely make up 20% of the overall equity universe and even less of the bond world, so to say they could cause a crash is just short-sighted and wrong.

Inverted yield curve:

It has a flawless track record, predicting every recession we've ever had, the thought process is if long credit pays less than short credit, that's indicative of an overheated economy and that we're on the cusp of a slow down. well, it's not yet inverted, and I'd like to throw one other thing out there. full disclosure: if the yield curve inverts, I'll probably take some risk off, this part is more of an intellectual exercise. has anyone ever actually thought that our sample size for recessions might be too small to draw conclusions? I mean think about it, we've had 18 technical NBER recessions in 118 years, out of which, the only really really bad ones were the tech bubble, GFC, Vietnam, WW2, great depression, and WW1 (early 90s was barely one, you actually had positive full-year market performance, similar for the 50's & 60's). maybe something that infrequent and over such a short time period (118yrs is nothing in the context of human history, much less natural history), maybe it's truly just coincidental, or like Soros believes, a reflexivity type reaction, where because everyone believes the economy will contract because of the inverted YC, they conduct their affairs as such, thus sending the economy into a recession.

Recency bias:

Part of me wonders if because we had two of the worst market declines in modern history in the past 20 years has made people, in general, more skeptical and conservative. This is not normal, you don't normally see your assets get cut in half twice in two decades. Is this the new normal as PIMCO famously said (and subsequently backed off of)? Or, was that truly a blip and it's now off to the races?

Bottom line, I'm still undecided on this, but since I seem to be seeing no optimism, I want to know from WSO, am I totally off the reservation? what do you all think?

Tagging a bunch of CU's so we get some good discussion going

@CuriousCharacter @TNA @InfoDominatrix @Eddie Braverman @GoodBread @Going Concern @Disjoint @Burke @macro bruin @DeepLearning @GreenspanAndHam @IlliniProgrammer @LeveragedTiger @APAE @C.R.E. Shervin @Esuric @Layne Staley @zanderman @Isaiah_53_5 @jankynoname @SSits @West Coast Analyst @the_gekko @ke18sb @Kassad @Secyh62 @Keyser Soze 123 @DickFuld @Frieds @Bondarb

Comments (149)

Oct 25, 2018

Fed is raising rates as they should. This will cool the market. That being said, a lot of issues going on right now causing the sell off.

We should stand by Saudi Arabia, Europe is going to buy more of our gas, we are going to break a China's back and the new TRUMPTA agreement will incrementally help the US.

You'll see more stock buy backs once earning season is done. I just bought more myself.

Rates are still very low, we've finally cut Corp taxes and incentivezed capex and have trade agreements moving in our favor. Once China comes to their senses we will be back on track.

Bunch of Debbie downers praying for a recession because they are blind with their hatred of Dear Leader.

Oct 27, 2018

"Europe is going to buy more of our gas"
It's economically unviable for Europe to do this vs. buying Gas from Russia, Norway, Algeria, etc... It costs more than twice the price to supply LNG to Europe. WTF are you even talking about? Europeans are not retarded, unless you subsidise it heavily which you won't you will only skim the surface of that market. Russia is 40% of European gas, Norway 30% and Algeria 10%, that leaves the rest to a bunch of smaller countries including the rest of the world and the US (imported gas which is 70% of European consumption).
The US' puppet in Germany is losing her power. European countries are finally taking back control - it will take longer for US hegemony to break in Europe but you can fucking dream about them meaningfully buying more gas from the US.

Saudi Arabia is a shit ally - a fucking pocket dictator that has pissed off all of its neighbors coupled with a US backed genocide in Yemen. The only thing standing up for the Saudis does is hurt your standing in the middle East. There is a reason why Russia is doing so well in Syria - by not allying themselves with a bunch of nut case Wahabist they have gained large support in the region. That and they actually understand the various nuances of Islam by virtue of having dealt with Muslims for centuries.

Only thing I can agree with your foreign policy response above is about tearing apart the bull shit trade agreement that the world has with China. This is good for everyone long term and for US at home. I have faith in Trump to reverse a lot of the Obama/Bush/Clinton foreign policies, but that's going to take some time. Would be good to tell the house of Saud to fuck themselves for a start.

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Oct 27, 2018

Europe is our puppet. Besides getting fucked from allowing unfettered immigration, they will ultimately do whatever the US wants. Personally, Id want the US to completely withdraw from NATO. Saving those clowns twice was two times enough.

As for the Saudis, please tell me what is a good ME ally. They control OPEC and buy our weapons. They can cut up anyone they want as long as oil is priced in USD.

Yemen aka Defense stocks spiking. Zero fucks as long as we keep supplying the fight.

And thank god for Russia. Obama's loser policy of supporting regime change caused the mess we are in. That and the war criminal Bush.

Nov 3, 2018

And we also have countries like Italy that still import from Libya lol

Oct 30, 2018

Trump gives me a RAGING BONER.

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Funniest
Oct 25, 2018
thebrofessor:

don't tell me what you think, just tell me what's in your portfolio"

100% equity for me. Balls deep.

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Oct 25, 2018

any additional comments dick? would be curious to hear your take

Oct 25, 2018
thebrofessor:

any additional comments dick? would be curious to hear your take

I have nothing of value to add over what you wrote. The general direction of the market is up and I want to be buying all the time. Buy early and often.

With the strength of both top and bottom line results, this is still a good time to be in the market. It will take something real to significantly derail the market. The length of the bull market has no meaning to me. Many people have predicted 82 of the last two downturns. Meanwhile, I just keep buying and getting better results because of it.

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Oct 25, 2018

Thank you for the tag, @thebrofessor . I'm not going to try to predict when the next recession will be or what will cause it. Instead, I'm going to throw out food for thought in bite-sized samples, and maybe people will want to dig in on a full meal for one or more of them. Some of these bullets may seem more tangential than others, but I think they're all connected.

  • The [Potential] Dark Tech Bubble: VC is not my area of expertise (I'm in middle market traditional LBO PE), but I've recently been thinking about "blind spots" in our economic commentariat, and one of them is what I'm tentatively describing as the "Dark Tech Bubble." Basically I mean exploding economic activity in non-public tech companies (think Uber). The worry here, and I'm happy to be rebutted on this point, would be that these are much risker-than-the-market companies that are being massively overvalued in the midst of an already systemically bullish market but we don't get the day-to-day pricing, unlike public companies. Links for further exploration: https://pitchbook.com/news/articles/us-venture-cap..., https://pitchbook.com/news/articles/how-venture-ca...
  • Secular Stagnation: This is a question that may never be answered, or maybe we'll just have to wait for history itself to answer it. Have we ridden the technological improvement in the "world of atoms" to a point of diminishing returns (the whole "where are our flying cars?" point) to growth? Are we reaching the same point in the "world of bits?" Yes, employment is high, but I'm not convinced that the quality of employment, the idea of "jobs" themselves, and the distribution of prosperity work the same way they used to. Eric Weinstein is heterodox in his economic thinking in many ways, but I think he's very interesting to listen to, even if I don't and may never understand the mathematics he utilizes: https://www.edge.org/response-detail/26756
  • Economy-Wide Consolidation: I feel like every IBISWorld report I read talks about greater industry consolidation, and as someone in the middle market, this keeps me up at night (well, figuratively). I am definitely a capitalist, but is what we want out of capitalism the almost-impossibly-moated dominance of a small number of huge firms over their own economic kingdoms (or in Amazon's case, multiple kingdoms)? May this not make disruption and competition less likely? Is this turning into a kind of economic soft despotism, where our lives are so convenient and utility-maximized that we continue to relinquish more choice and privacy to our government AND corporate overlords?
  • Education and Student Loan Debt: We need a massive overhaul of our education system, but I want to focus on higher ed. We need much weaker administrations, stronger faculties, and much less moral hazard when it comes to governments funding education. College does NOT need to be a highly-funded, carefully-curated and programmed experience for upper-middle-class young adults. You want to lower higher ed costs? Phase out federal student loans and let half the weak 4-year universities that shouldn't even exist, the fancy dining halls, the diversity offices, and the 5-star dorms die; and let alternative options flourish. We need a social reorientation away from the 4-year university degree as the end-all, be-all. We need more 21st century vocational partnerships and training woven into our educational system if we have a hope for the prosperity distribution to flatten out more.
  • AI: This is the wild card that will impact everything if it pans out in a form even close to what we typically imagine. We simply don't know what will come out of Pandora's Box here, and I'm pessimistic about the world's governments to be able to handle this intelligently.

I don't mean to sound like an alarmist or pure bear here, but if want to continue a stable system of growth, competitiveness, and prosperity, we have to confront and talk about these ideas before they become torpedoes that hit us head-on.

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Oct 25, 2018

appreciate the thoughts. I share your concerns on all of the above, I just wonder if those are even 5 year issues (meaning you should still be balls deep like dick), they're probably 20-30 year issues.

I've wrestled with those same ideas, but I keep coming back to the thought "yeah, but does it impact my portfolio?"

secular stagnation - sure it'd impact the portfolio, but that's just where we'll have to agree to disagree, humans have a unique way of plowing forward and constantly bettering themselves, I don't see that stopping, so I don't buy the idea of secular stagnation. I also think people are underestimating another technological revolution (AI, 5G, NLP, etc.)

dark tech - I don't put my clients in these deals so I would have to imagine that this would be limited in terms of its damage (kinda like when bitcoin tanked). in other words, the contagion risk isn't with WeWork, Uber, or Airbnb, it's with other stuff like a massive currency move, interest rates tripling, the EU breaking up completely, etc.

consolidation - as a capitalist, this does bother me, and I don't think you can expect every CEO to be like Bezos (being huge and innovative simultaneously), but I'd also suggest that the top companies get recycled every few years or so (we may be witnessing the end of GE) without tremendous negative contagion, so I think this will always continue. we go through periods of consolidation, then breakup, then consolidation, then breakup.

student loan - no argument at all on what the educational system needs, I'm actually quite refreshed to hear someone whose thoughts are so similar to my own, I believe education has so many other positives from lower crime rate to better child rearing to improved medicines, but I just don't see those issues impacting the markets for even the next 10 years. again, I see it as an issue for markets only under 2 circumstances - millenials who would otherwise be entering their peak earnings years have so much in debt that other spending is crowded out by loan payments/defaults, or there are so many defaults it crowds out gov't spending from bailouts from other programs or causes taxes to spike (both of which I've not seen the data to convince me)

AI - way over my head technologically, so this may sound dumb. I'm essentially going on faith that the human race has never obliterated itself and has survived every major disruptive job force, so I find it hard to imagine that this time is any different.

TLDR - I agree, but still, does that mean you shouldn't be long and all in?

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Oct 26, 2018

Those are essentially my counterpoints to myself as well. I hope it's not naive optimism, but I'm generally long, and if I'm proven wrong about these things, we probably have even more to worry about than our portfolios

Oct 26, 2018

On the Dark Tech bubble. Do you think that it seems so promising because there are never down rounds. Uber cant go lower if they simply refuse the funding, but at the end of the day Uber operates at a loss. I mean you can come up with these adjusted EBITDAs all day to make something profitable, but I just can't believe some of these Pre IPO prices that I see and then watch them go public 6 months later. It looks like the easiest money in the world just to jump in on Spotify, Uber, Pintrist Ect.

Oct 26, 2018
zanderman:

- Economy-Wide Consolidation: I feel like every IBISWorld report I read talks about greater industry consolidation, and as someone in the middle market, this keeps me up at night (well, figuratively).

If you're going to lose sleep, please don't lose it over IBISWorld's sage wisdom [insert snarky tone here].

I'm kinda/sorta floored that they're still around, despite the quality of the content and the high cost to subscribe/purchase. Regarding their content, IBISWorld rarely if ever specifically cites where they're getting their information from... always an iffy situation. I see that you're a Certified User and don't wish to try n' learn you, as I'm assuming that you use far more than IBIS, but I would feel remiss if I didn't give you a head's up about them and suggest reading them with a grain of salt. :)

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Oct 26, 2018

full disclosure, I'm not a subscriber, but I've yet to see a forecaster publish his/her track record. until someone publishes a track record alongside their guesses, I'll stick to people who have their money where their mouth is.

the lone exception was blackrocks chief equity guy bob doll, he would do 10 predictions per year, do a mid year scorecard, and a full year scorecard. since I've tracked him, he's between 50-80% correct, and it's not like he's making weak predictions. that's the kinda forecasting I can get behind (that + the Atlanta Fed)

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Oct 25, 2018

+1 I troll around on WSO but really only keep coming back for posts like these. Interesting perspectives as always.

Dick never disappoints.

? thebrofessor:don't tell me what you think, just tell me what's in your portfolio"

100% equity for me. Balls deep.

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Oct 25, 2018

haha thanks braddah, I can't take credit for that quote, it's from Taleb's newest book "skin in the game" (highly recommend btw).

it furthers my point that most talking heads don't know their ass from a hole in the ground and aside from good ones like bob doll, howard marks, jeff smith (starboard), and so on, their opinions are worthless (no AUM, no track record, no thank you

also, the "dick being balls deep" comment nearly made me lose it on a client call

Oct 26, 2018

Really neat to see the Taleb quote, I love SITG. I was wondering if you have read the Dao of Capital by Mark Spitznagel. He runs Universa Investments, a fund that Taleb is a "Scientific Advisor" for. They have a neat investment strategy that I'd love your take on.

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Oct 25, 2018

ive noticed a strong tendency for people lately to think of the future market trajectory in extremes - either that its going to skyrocket or plummet.

Not an absurdly insightful comment i know, but why not consider that it could slightly rise or fall?

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Nov 4, 2018

You are correct. Especially now with the 2 year at 3%. Stocks now have competition with the risks free rate.

For a very long time I thought equity markets had failed to price in 0% rates. I thought stocks should price themselves for 5% yearly returns at a 0% risks free rate.

My gut says equities are priced to return around 8% a year now. Which seems fair with a 3% 2 year.

Now a crash could occur if the fed hikes too much. That can cause a recession but it's not expected.

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Most Helpful
Oct 25, 2018

I had previously been quite cautious on the cycle earlier this year, and more so in late 2017, but we still haven't had any of the key pieces that would turn me into a full-on bear materialize.

First, I've been looking for an unexpected pop in inflation that has just not come. As an Industrials analyst, I've been hearing all year that costs have risen (as in already risen) and that they would be passing those costs through in 2H. Well here we are in Q3 and CPI is at 2.3. One of the pillars to my bear thesis was that an unexpected pop in inflation would cause the fed to move at a pace that is not priced in, they would overreact on rates, and that would put the brakes on the economy. We still have one quarter to go but we just haven't gotten anything unexpected on the inflation side yet. I'm continuing to hear more of this costs-up prices-up story on calls this quarter but we will see if it makes its way into the numbers. Until we see it, that bear point is null. Real rates are still negative, there is nothing restrictive about the current fed policy.

I too have been watching the yield curve for inversion. It is often not discussed why an inverted yield curve is problematic, just that it is a predictor of recession. The reason that the yield curve matters is that it reduces the incentive to lend. When credit tightens up growth slows, and if it tightens enough you can get a recession. The 2Y/10Y is the one that gets the press but the 3M/5Y is arguably more relevant to lenders (what business out there borrows at the 2-year to lend at the 10??). That spread has not gotten any flatter since 2012. For argument's sake, say the 2Y/10Y is the one that matters given that it is the flattest. Historically, a recession follows an inversion anywhere between 6-24 months. If you extrapolate the 2Y/10Y's recent rate of flattening you could assume it could invert in 6-12 months. That gives you a range from here of 12-36 months before another recession. Meaning, we could go as long as the end of 2021 before we have another legitimate slowdown.

Which leads into this next point, sentiment. First of all, the broad consensus has become that a 2019/2020 recession is on the horizon. This would be the first time in history that the consensus has accurately called the end. There is absolutely no value in being contrarian just to be contrarian, but when does the consensus, especially a consensus of economists, ever get that call right? So if you think the consensus is likely to be wrong, that implies that a recession could be here now or that it isn't likely to come for some time. The market is obviously pricing it to be here now. We may look back and say that 2940 was the top, but there is literally no sign of trouble anywhere in the broader economy. I don't count slower growth as trouble, nor do I think that it will grind down to a contraction. In addition, the sentiment around stocks themselves just doesn't feel like it has ever gotten to peak levels. Historically, once the last bear comes off the sidelines is when you get a top. It just feels too negative out there for me to think that a top could be near. The run up in January was as close as we have come to that kind of irrational exuberance that I've been looking for, but we've since made new ATH's. It makes me feel like we still have one more rip left in the tank, a fomo type rally if you will, before we can say that the stock market was truly crowded. Just haven't seen that yet.

Those are the three big things I've been looking for to mark a top: a material and somewhat forced increase in real rates (forced by inflation), an inversion in the yield curve, and overwhelmingly positive sentiment. Sentiment could not be more negative right now and you'd be hard pressed to find a buy the dip call out there (might find a "buy the dip once the bottom is clearly in" type call, which is equivalent to "I have no confidence in what to do next").

That being said, there are some macro indicators I follow that are quite "toppy", but I'm not seeing any definitive signs that it's time to get overly defensive.

Employment: On the employment front, most of those metrics are near or at all-time lows or highs (depends on the metric, voluntary job leavers at highs, unemployment itself at lows, both signal the same thing). Typically bottom/top out at the end of the cycle.

Sentiment: Consumer confidence is near its all-time high along with small business optimism, but these tend to start to come off in advance warning of a recession. Sentiment specifically around stocks is more mixed (and those actual gauges are much more volatile anyways).

Rates: The real fed funds rate is still negative, hardly restrictive, and the actual shape of the yield curve is quite healthy despite being flatter. Interestingly, the Taylor rule suggests that rates should be closer to 5% and the FRBNY's underlying inflation gauge is over 3%, so it might not be too late to get that inflation pop. On credit quality, In general, credit spreads are nowhere near the point of flashing a warning sign. Delinquencies are near lows, default rates are suppressed, I'm not seeing any impending problems on the credit side.

Debt Levels: Forget about debt levels mattering, I'm convinced that we will be able to issue more debt and print more money forever. I think of Japan as the model for this. People have been calling for Japan to implode under their debt burden for years, yet the sky has not fallen. Maybe it will eventually, but it gives me some solace knowing that our runway is much longer than people think after looking at Japan's model. I will say that we are in somewhat uncharted territory. The fed's massive balance sheet, US corporate tax receipts taking an absolute plunge, running a huge deficit. I'm not saying it isn't concerning, but debt levels don't keep me up at night.

Housing: Seen some calls recently that housing is rolling over. Give me a break, those calls are amplified by the increase in negative sentiment recently. The bears are reaching for anything they can grab at that isn't on an absolute rip. Most housing metrics are still well within the uptrend off post-recession lows.

Industry: New orders came in a little light recently, but everything is coming off of really tough comps. PMI remains strong and capacity utilization is still quite a bit off pre-recession highs. I also put some weight on the Conference Board LEI, I think the assumptions and components of that are pretty sound, and it has had pretty reliable lead-in on recessions. There is absolutely 0 sign of trouble in the LEI.

Commodities: Commodity prices have risen this year without doubt, but most have not risen to highs or to crazy levels. Most were much higher in 2012, and we didn't collapse then. The trade war complicates the outlook for commodities, but I think that it gets resolved sooner rather than later. Random note: have a look at lumber prices, looks like the bitcoin chart.

FX: Strong dollar has been a talking point for the multinationals I cover, and I think that is having the biggest impact on these businesses. But again, the dollar isn't at crisis levels or anything, and you can make a good fundamental case for why the dollar should be strong.

Valuations: valuations are now back down to pretty reasonable levels, and as a value tilted investor, I'm seeing some things in my coverage that have gone on absolute sale for really no fundamental reason other than the extrapolation of some imminent recession. I am a quality guy first and foremost, but I actually have closed up some of our underweights to the most cyclical companies because they're trading as if their EPS is going to be halved from here.

All in all this sell off is overdone and lacks solid reasoning, and I've become more bullish as a result (though I would not say that I'm a raging bull or betting on a multi-year continuation of the expansion form here). The market climbs that wall of worry and you don't get a crash with so much negativity still persisting. In the PA I'm all in on the IWM for a rebound.

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Oct 25, 2018

bra-fucking-vo. I'm glad you commented, I've enjoyed your stuff around the forum, and it sounds like you've gone through the same mental roller coaster I have this year.

any reason you're all in on IWM? I'm assuming that's not your only holding, but the small cap concentration is a bit surprising, is that just because it's already corrected 20% from the highs, or is that more of a US biased, strong dollar type play? Or, are you still diversified and that's more of just an overweight

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Oct 25, 2018
thebrofessor:

bra-fucking-vo. I'm glad you commented, I've enjoyed your stuff around the forum, and it sounds like you've gone through the same mental roller coaster I have this year.

any reason you're all in on IWM? I'm assuming that's not your only holding, but the small cap concentration is a bit surprising, is that just because it's already corrected 20% from the highs, or is that more of a US biased, strong dollar type play? Or, are you still diversified and that's more of just an overweight

Purely because the selling in the small caps has been so severe and persistent that I think they stand to go on the best run from here if the market does rip. I'd like to see the small caps lead the recovery to have more confidence in equities overall. I'll look to the R2K to signal whether the next run to the upside is a legitimate continuation of the bull market or something more temporary, and because I think we have a legitimate rip left, I picked up some calls on it. Put a good chunk into this trade, and it's definitely a trade and not an investment. I'm still cautious overall, like I said, some things out there are pretty toppy and wouldn't need a damatic shift to push me back to the bearish camp, but I will continue to own a core set of high-quality companies, mostly QARP/GARP type names.

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Oct 29, 2018

Respectfully, disagree.

I have been bullish up to this point, but went double long vix, double short tech at the beginning of the month, and here's why:

Earnings are strong and I'm not here to predict a recession, that's not what I do because I would be wrong. I looked at consensus EPS growth of the S&P and sectors for y/y 3Q2018. Tech was at 42% expected EPS growth and S&P overall was at 39% expected EPS growth. That's not realistic, hence my double short tech (position is up over 16% MTD) and double long VIX (TVIX), sold when up ~40%, will buy back when VIX is around 17. Earnings growth has been positive for the most part, but at a slower growth rate on both a q/q and y/y basis has unfolded, predictably from the crazy high expectations we were at. When capex and earnings went bananas at the beginning of the year, who thought those growth rates could last forever?

The 10-year is supposed to represent growth + inflation. A key component to inflation in Q3 was the rocket up in oil prices. If you look at the drop in oil prices compared to the 10-year you will notice significant correlation. For this reason, I believe we have seen the top of inflation growth and we will begin seeing slowing inflation (still growing, just at a lower rate), and treasuries continue to rip (stop looking at headlines, 10 year yields are down 20bps from their 3.27% high a month ago, there is NO runaway inflation threat).

I think we have seen the top of growth and inflation, which puts us in Quad 4 (slowing growth, slowing inflation). My thesis has worked well this month while the market is getting hammered and people are looking around with their dick in their hands.. My favorite part is there's no bullshit about tariffs (a non-issue, as China was failing as soon as it came off the world's largest stimulus ever and Europe never had any economic success, just one brief year of market success), no political sideshow, no talking about things that don't effect markets. Growth and inflation, nice and easy, KISS style. Comments welcome.

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Nov 2, 2018

...and for stuff like this is that I keep coming to this site! I don't have much more to add, other than (pre correction) prices/valuations seemed very daring, but again, it could be a consequence of keeping the spigot wide open for such a long time (multiple reasons, already explained by many here). In VC, sometimes I'm speechless about expectations (many times met!).
I tend to think that within the next 18-24 months we will experience further down markets. Having lost money in dot com, fin crises etc. I would consider myself rather a cautious investor.
Thank you @thebrofessor for getting the ball rolling. To your question: long cash, long gold, long a few equity plays (still waiting for some to materialise, but i guess I'll need another 20 years) and very concentrated selected EM quasi sovereign HY debt (with a finger on the "sell" key).

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Nov 4, 2018

I think real rates are positive now.

Definitely are if you use pce. But they are about close to 0 now.

Taylor rule is outdated.

Correct on the yield curve. That is the main risks to the economy. And it's about a lot more than lending....you can extrapolate that to investing. Why take investment risks if you can just own cash with attractive returns.

On consensus of a recession in 2019/2020 it's all about the fed. If the fed is stupid and inverts the yield curve we will have a recession. But the fed is filled with smart people who should know inverting the yield curve causes recessions. So do you want to bet on the fed committing an unforced error and doing something like inverting the curve?

Traditionally the fed did things like inverting the curve to fight inflation since we were coming from 15% inflation in the 70/80's. But inflation has been harnessed to 2% max for a while. Even if it pops we are talking about a little higher. To invert the yield curve before losing control of inflation would be stupid.

Also on Taylor rule I think the natural unemployment rate is a lot lower now. The friction of finding a new job has shrunk. We now have the platforms like Uber to provide a job fast. And LinkedIn/Glassdoor etc for researching positions.

Array
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Oct 25, 2018

I generally think the markets are fairly valued, but things that I think some people are worried about include China's economy, high profit margins (anecdotally, I see so many companies miss on revenue but beat on EPS quarter after quarter), and rising interest rates. I think there are a lot of companies, primarily in Tech, that trade at very large revenue multiples but have no earnings, and may never have earnings. If one sector has a mini meltdown, it'll affect the whole market. Finally, and anecdotally again, I see sizable deals done by PE at double digit EBITDA multiples for no or very low growth, mediocre assets with high leverage. While this doesn't directly impact the public markets, it speaks to investors having to reach to earn decent returns.

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Oct 25, 2018

the PE multiple thing reminds me of howard marks' latest memo talking about too much money chasing too few deals, I get that.

tell me more about the tech side. in terms of mega cap tech, I was under the impression that earnings have actually been solid. the newly minted IPOs like SNAP, obviously crazy valuation, but I'd be curious to hear more of your take on this

Oct 25, 2018

I think it's far less of an issue with big tech (AAPL, GOOGL, FB). I actually think you can make an argument those are fairly valued or even cheap.

Running a quick CapIQ screen, there are ~240 companies that trade above 5x revenue with negative net income with market caps above $1B, mostly Tech. Some are big - Square, Workday, Shopify, Dropbox, Snap, Zillow, etc. And then there are plenty with positive earnings but that trade at huge NTM EBITDA multiples, like Adobe and Salesforce.

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Oct 26, 2018

I wouldn't say I discounted Howard Marks latest memo. But perhaps "dog eared" recent content (memo, articles, interviews, podcasts etc) to pay attention perhaps return & read again in 6mo, 1yr, 5 yrs. Because he is releasing the book "Mastering the Market Cycle". Not a negative or positive thing, just made me say hmmm, interesting.

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Oct 25, 2018

I'll add that it does seem like risk has been mis-priced for an extended period of time (really back to mid-late 2016), I definitely agree with Marks on that. I don't think you saw that change in Feb or March, but it does seem different from that standpoint in this sell off, which is probably a good thing.

Oct 25, 2018

Re: politics - I actually think we're in a great position politically. The Middle East is as stable as its ever been, with Saudi Arabia caught between a rock and a hard place and Israel neutralizing Iran. It's going to be years before the EU crumbles, and Indo-China is focused on economics for the foreseeable future.

(Trump has done a great job at deflecting all economic responsibility onto Powell, so that bodes well for his administration should interest rates start rising rapidly)

With the 10 year at ~3%, Microsoft doesn't look rich at <50 P/E (especially when it takes zero equity capital to operate) and the growers are still managing to deploy capital effectively.

I think you're right.

Oct 25, 2018

Rates going up seems like a big factor but as some have mentioned above inflation doesn't suggest a particularly aggressive trajectory on that front.

The main things that have me worried are how important the FANGS have been, and the sheer length of this bull market at this point. I'm also seeing some anecdotal weakness from industrials, and the big inventory buildup pre-Chinese tariffs is ending soon.

Oct 26, 2018

This is an amazing write up. There are still a lot of nay sayers out there who seem to be chomping at the bit for the economy crash due to tariffs or deficit or rates or anything really so they can use it as political ammunition. My general view is that they shall be dissapointed. I don't mind the Fed raising the rates as I see it as a counterbalance to the market appreciation. As the rate goes up the market self corrects one little bit at a time rather than go crazy and then see a giant self correction at the end. Having said that, my general investing disposition is that when I see a buying frenzy in a bull market, i tend to pull back to the margins and watch the battle as it were and then when it's over simply walk over, take out the weaker survivors and claim my prize so I'm pretty much out of the market as a buyer at this point unless i see something or someone being stomped on even though have have healthy fundamentals in which case I pounce. The biggest thing that worries me is the China trade situation. They are a huge market for imports and exports for us so if the flow of goods constricts it will impact the buying power of our consumers and impacting the CPI, Confidence, and cascade into the rest of the economy like a raging greek fire. I do believe there are signs that this will be resolved soon, mainly that their own economic performance at home has been sub par so they are't too eager to piss off their largest cash cow unless they get poked with a really large stick so we shall see. But to be a successful investor one needs to hedge their bets so lets all make sure to buy lots of hookers, blow and trips to St Barts just in case Armageddon is around the corner. We're all probably going to hell anyway and might as well make some happy memories to get through an eternity of torture and damnation. Happy weekend all. :)

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Oct 26, 2018

The market's behavior in the past few days should spook you all. Literally nothing of consequence happening but daily 2-5% swings in major indices. If we really have a major world event (regime change in the US, China trade war, Middle East madness) then there is easily 25%+ downside in the market as companies are still priced as if they will fire on all cylinders. Nothing to do with my personal feelings on Trump but hasn't he done everything growth-wise that he could do already, and won't he face more opposition going forward?

Also this is my narrow view looking at PE deals every day, but I haven't seen it more frothy in my entire career. Deals getting done this year that wouldn't even come close last year. Again the market's pricing in 100% execution.

I'm 50/50 equities/cash and have been for a few years so what do I know.

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Oct 26, 2018

the PE side of it intrigues me, because I've seen this even in the deals that they ask us to pitch to clients. at the same time, I wonder if that has much to do with public US equities. like what do I care if there's a mini blowup in middle market tech or retail? I'm long MSFT.

on the other hand, maybe there's a contagion risk I'm overlooking...

Oct 26, 2018

In general I don't think there is a huge PE contagion risk because it's such a small part of the overall market and overall, even if every LBO blows up, most companies are pretty flush with cash. Kind of TBD whether the economy overall is due for a deleveraging cycle or just a pause.

The other related problem right now is that there is so much cash / dry powder in the PE and direct lending world that many "bad" or I should say risky decisions are being made, and the market is assigning too high of a probability of success for those decisions.

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Oct 26, 2018
Synergy_or_Syzygy:

I haven't seen it more frothy in my entire career.

Have interest rates ever been this low in your entire career?

Oct 26, 2018

they haven't been this low in anyone's career aside from the old fogeys. the other thing that people forget is if you look at the last time we started this low (1941), the ensuing 40 years got compounded returns of 11.5% (source: aswath damodaran's tables). now, that's not to say we won't see better entry points, but low rates with the prospect of rising rates is no reason to stop investing into stocks. you had a few rough years in the early 70s but you got back to even pretty immediately

I'm still curious to see if the PE thing has contagion risk, because I've heard the same thing from both my friends in PE and when I talk to managers

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Oct 26, 2018

Well the problem is the sky high leverage comes at the same time as valuation is sky high.

If last year I buy a company for 15x EBITDA multiple and put 7x debt on it (8x required equity), ok. If this year multiples are up to 20x EBITDA, I still can't put more than 7x debt on it (ability to pay down interest is the same regardless of how the company is valued) but now IRR goes down for the Sponsor, and they push the banks hard to get that # to e.g. a 7.5x Debt/EBITDA level. Therefore it's a race to the bottom and deals are getting very risky from a cash flow perspective. This is why Toys-R-Us happens.

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Oct 26, 2018

What do you mean by pricing in '100% execution?'

Oct 26, 2018

When you model out an IS or free cash flows, you make operating assumptions about e.g. how fast the revenue will grow and the costs associated with realizing that growth. Then there is a measure of how much debt that FCF can service under different operating scenarios (especially thinking about the downside). Market right now is accepting a leverage quantum and pricing of debt as if those downside scenarios don't exist.

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Oct 26, 2018

Awesome discussion... bookmarked to read more thoroughly at my leisure...

The economy remains solid, not overheating and inflation's moving higher, but not drastically, and the Fed's just as concerned with overheating as it is with downside risk.

Jobs gains have been strong, on average in recent months along with unemployment staying low. Household spending and business fixed investment continue to grow strongly.

The markets have evidently been aggravated by the brusqueness presented in the Fed-speak minutes from Aug/Sept - their messaging around the neutral rate was badly communicated. Powell and the FOMC's are addressing a more hawkish policy path - financial conditions will tighten and those tightening conditions'll compress market multiples. They're not trying to kill the expansion, nor are they overly hawkish, it's just more that the Fed's saying there's a strong economy, and that that should support higher rates, which doesn't have to be a kill-shot to the bull market.

Things that might reverse the markets:
* if valuations get appealing enough that earnings take the upper hand
* the Fed might hint at fewer hikes
* further drops in oil prices may quiet inflation and take edge off bond yields
* trade tensions could ease

WSJ today has a piece discussing some Morgan Stanley analysis of the last 65 years of the S&P 500 and the past 27 years of the MSCI All Country World, finding sharp initial drops are the "hallmarks of run-of-the-mill corrections, defined by declines of between 10% and 20% in equity prices. On average, recovery follows within six months, and a rally within a year. By contrast, bear markets typically start with deceptively gentle drops."

Here's the article on it... https://www.wsj.com/articles/has-the-bear-market-a...
Someone mentioned FANG [Facebook, Amazon, Netflix and Google] and what stymies me is the mindset of some investors and analysts. Alphabet/Google boosted its earnings by 37% during 3Q, but that still wasn't sufficient to soothe investors concerned about stricter regulations that could make it tougher to collect the personal data that feeds that company's advertising bloodline.

Meanwhile, Amazon's 3Q results showed strong growth with revenue surging 29% year over year to $56.6B and yet that still fell about 1% shy of Wall Street's estimates.

Today it would seem that even really decent growth just ain't good enough for a company when investors have come to anticipate massive growth from them. Do their high valuations and relatively low volatility speak to the risk of another tech bubble? I'm no Cassandra and have no crystal ball.

But call me Pollyanna if you must, I'm an optimist, whether it's bull season or bear season. Even after seeing and living through the crashes in '87 and '08, their subsequent recessions, the dot com bubble burst, the housing bubble burst, the subprime madness, TARP, etc.... even with 9/11 bringing the end to a decade of growth, that particular recession was short-lived [less than a year]. I never stopped investing, although I did keep more in cash and still do.

As for "don't tell me what you think, just tell me what's in your portfolio"... I'm apparently only "palms deep" as I wasn't born with balls, LOL... 80% equity, 20% fixed/cash.

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Oct 26, 2018

we've gotta find the female equivalent for balls deep, thanks for your comments, I missed that WSJ article this AM

Oct 26, 2018

I'm mostly in cash after closing out my NVDA put options and putting on a smaller dollar amount in more aggressive strikes.

I'm mostly sitting on the sidelines, and I don't have a strong opinion on the broader markets. It does seem like there are some similarities between now and the early 1980s: ever increasing fiscal deficit with a hawkish Fed. That combination quickly led to a recession, but was short-lived when the Fed lowered interest rates again. A raging bull market shortly ensued.

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Oct 26, 2018

I don't know how much more I can add here, since everyone has provided some good commentary. I will say though I think we experienced a "mini-recession" in 2015-2016. 6 quarters of earnings decline, bear markets in foreign markets, collapse in manufacturing (due to oil collapse), slowdown in business investment, run-up in the dollar, etc. The whole concept of an ageing bull market and all those silly metaphors to baseball innings are misplaced. One could say 2009-2013 was pure recovery from a low base, 2013-2014 was a short bull market, 2015-2016 was a recession, and now we are moving into a new bull market cycle (rates normalizing, etc.) I might be optimistic, but last I remember baseball games can go 20 innings, so saying we're in the 8th inning doesn't tell you anything.

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Oct 27, 2018

Growth: somehow I'm less convinced the current wobble is going to turn into a crash than the turmoil earlier this year. You mention the recovery was poor in quality, I agree, but it has been getting better in the last 2 years, there's a bit of upward movement of wages outside the top 20%, jobs are better redistributed towards manufacturing and less bartending.

Debt: Not sure how old you are, but I think we'll see the end of the student debt issue when millennials retire, I also don't think it'll be pretty, mostly due to the generation abysimal consumer habits and lack of savings. Govt debt wise, someone mentioned the Japanese model of printing your way out of it, ok, but keep in mind the Japanese public debt is mostly owned by Japanese themselves, while the US one is not. It's hard to replicate the circumstances that keep Japan afloat.

Tech: not my strength as I do mostly macro stuff. I'm bullish on tech in general, but the giants are going to have issues from now on. Google has been simply perfecting its products for the past decade, but hasn't come up with anything new. They are also beeing squeezed from political polarization (left on fake news, gender gap, sexual harassment-right on censorship), they'll get hurt. Same goes for Facebook and Twitter. Microsoft and Amazon seem to be doing fine for the moment. No kind of protectionism will salvage Apple from Huawei. The digital economy is still booming and looking for new applications so it's still the place to be.

Raising rates: I think markets are swallowing them rather well, for now. A few companies will get squeezed out but that's normal market practice. We'll see. I have limited experience in this kind of environment, I trust what I see. If things change, my opinion changes.

Trade: too early to say. A reorganization of trade flows was long overdue. I'm calling an EU implosion in the late 20s and that's going to be worse than whatever Trump is doing in China. Watch oil. Someone mentioned the Middle East is stable, ok I call it calm before the storm. I didn't trust the PR campaign of MBS a few months ago, I'm not surprised about what's going on, Saudi Arabia is the weak link. Humoungous youth population with no skills nor prospects, heavy Salafist involvement in society, abysimal political leadership. The only thing that can keep the country stable are high oil prices and free money for the lower classes. Otherwise it's going to implode.

Inverted yield curve: nothing to add.

Overall: contrarian view, if everyone is pessimist, time to look for opportunities.

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Oct 29, 2018

@thebrofessor Sorry for taking so long to put my thoughts out there, but having read much of what's been said, I think there are a lot of good points that have already been made. That said, there are a few reasons I'm contrarian.

Regarding rates - people seem to forget that we've lived in a world where rates have been kept artificially low for years. The Effective Fed Rate didn't breech 50 basis points until the end of 2016. After 8 years of low rates, and now with 7 hikes since then, I am a bit worried about what happens as the Fed continues to tighten up. It poses some structural issues (ie how will it affect new issuance, if there is a recession, the Fed doesn't have much room to play with rates because they have been depressed for so long, the saver vs spender debate and how the search for yield affects investment decisions for people who should be invested in fixed income instruments as opposed to equities, the impact it will have on companies who have funded share buybacks with debt issuance, etc.), as well as makes me wonder how the US will manage to pay off its debt balance. It also ties directly into unemployment and inflation. This move to raise rates is, in some way, a byproduct of the extremely hot labor market we are seeing, but it causes me to look at the BLS numbers differently since wage growth is not really there and inflation is higher than expected. If inflation is wiping out wage growth, raising rates will make it more expensive to live and push things towards a recession.

This leads me to my next issue - the low unemployment situation. Forgetting wage growth being hampered by inflation for a moment, but the U6 is still 7.5%. The U3 is a rosy 3.7%. Every time I hear these amazing figures, I wonder how much the available and countable labor force is actually growing by. There reaches a point where people are no longer considered as part of the labor force, and that can be used to produce artificially low unemployment numbers. Just look at the trends in the labor participation rate. It was at a high of ~67.5% in the mid-200's and now sits just under 63%. If the economy was doing so well, we should be seeing slow upticks in the labor force participation rate. That, to me, indicates that the economy is not doing as well as it should be.

Tech/VC/PE is in a strange place as well. With Tech, I think the question is how much of the earnings growth attributed in the last few years been attributed to the FAANG versus non-Tech growth. It may finally start to slow down, but it's taken long enough to get to this point. I think that we may also see some political backlash against Tech (and their Silicon Valley Savior Complex). I've thought for a while that Amazon might be the target of an Anti-Trust suit and am starting to believe that FB/TWTR/Alphabet could all be hit with a Section 230 Complaint. Now, mind you, a Section 230 Complaint is more politically motivated than tech driven, but it would potentially disrupt these companies ability to generate revenue and pose significant restrictions on their ability to operate.

I've been bearish on tech for a while because I don't think it's quality growth. I also think it speaks to the underlying issue with VC funding. Every startup wants to be the next <> and money is just being poured into these things willy nilly. It feels like the late 90s all over again. When that bubble bursts, it will be painful to watch. Similarly, and I think my point of bringing up both VC and PE is that they are sitting on tons of dry powder. They are looking to use it, but if we continue to see rates raise and things turn into a recession/depression, either valuations will drop significantly or funding will dry up.

When it comes to politics, there is just too much to unpack. It's just a cluster fuck. From the elections to the divisive culture we live in, I think that there underlying tensions that will continue to grow until it boils over. I know it's not economic or recessionary, but that have some impact. However, when it comes to trade, I'm concerned about China and their economic policies. They have ~$34 Trillion in outstanding debt, with a great deal issued with lax credit standards. My concern is that if the debt starts to default despite Chinese efforts at capital control, it could trigger a global depression given how important the Chinese are as a global trading partner.

Honestly, I'm sure where things go though. I think we're heading towards a recession. I think it's the inevitable dead cat bounce. 8 Years of low interest rates, corporate buybacks, no real growth and significant underlying political discontent have produced a situation rife for problems.

Oct 30, 2018

love the thoughts frieds, if you're open to sharing I'd be curious to hear what part of the buyside you reside in. obviously your thoughts have merit, just curious what lens you're looking through...

Oct 30, 2018

I'll provide more detail in private, but the general scope is I'm looking at this from a very macro lens. I think in the past (and hopefully it shows) that I take the approach of looking at the underlying links between things. If I can understand what drives the linkage points between multiple issues, I can come up with an investment thesis that I like. Everything I wrote is all tied together in the same way. What links things together - From Rates, it's about funding and the ability to create a growth environment. This leads to unemployment, which should be indicative of good things but is really anemic and on the precipice of a downturn. Tech/VC/PE are all directly tied to funding issues, along with corporate buybacks, but their funding is about trying to get the next billion dollar valuation to flip despite the fact that most ideas honestly fucking suck. As I said, I've been bearish on tech and most startups because it's all about how do you deploy the powderkeg of capital, which means there is a ton of money sitting on the sidelines. That's not good for economic growth.

At the same time, the SVGC has been a byproduct of wealth and unnecessary idealism that shows the top level folks have lost touch with reality and we're seeing it in the way FB/TWTR/Alphabet are handling things. Paypal's recent cutting off of Gab.AI says it's not okay to have any association with the Right while allowing TWTR to continue on just fine with folks like Louis Farrakhan saying "[He's] not antisemite. [He's] anti-termite." without any issues, FB's censoring of pages and accounts they dislike, or Google trying to act as a benevolent censor are all driving this SVGC to negative results. Even without that, given the rights afforded to them under Section 230, they are violating that without hesitation and that's a political issue. That, in turn, ties to the political side of things.

Politics are politics and with all the shit going on, mind you this was written before Pittsburgh which just changed the game entirely, it's how do you position yourself to account for the potential upending that the mid-terms and 2020 will bring. And that will have a further impact on trade and rates Once you see the circular logic, it becomes easy to see longer term trade ideas that capitalize on the vicious cycle. I also think 2008 had a huge impact on my ability to see how things move from point A to point B. Not that I recommend it, but working on the street through a major economic crisis offers unique insights into the investment process when shit hits the fan.

Also, I just realized that those brackets don't say what I want them to - it should have said "Insert Wannabe Billion Dollar Valuation Unicorn That Think's Its a Disrupter But Really Isn't Here". Just had to add that for a bit of humor.

Oct 29, 2018

In general, I'm sanguine on equities and the economy, but bearish on credit. Although if one's truly bearish on credit, that thinking should translate to one's views on the economy too. Equities are what gets talked about in newspapers, but there are a bunch of things going in various markets that gives me pause.

  • Currently, way out-of-the-money put options have higher implied volatility than at-the-money options. In other words, when you solve the Black-Scholes formula for volatility given current option prices, the OOTM option price is WAY more sensitive to spot price moves than ATM which is just bonkers. People have bought the shit out of downside protection so much so that the options market is trading contrary to normal logic.
  • Everyone loves leveraged loans right now. Everyone loves these products right now because they performed like champs in the 08/09 crisis. At current prices, leveraged loans are trading at implied recovery rates that are consistent with experience in the Credit Crisis. However, everyone knows that underwriting standards have deteriorated in leveraged loans so it's pretty much a guarantee that recovery rates will be lower the next time around. Some people are going to lose their shirts here.
  • Direct lending is scarier than I thought. I was under the impression that direct lending was done on a 1:1 leverage ratio from funds. Turns out that I was wrong, and some funds use outside leverage to get high single-digit returns up to low double-digits. From a borrower's perspective, they don't know the difference, but some LPs may be out of pocket, and some banks may find themselves with NPLs that they weren't expecting. The amount of direct lending that is leveraged at the fund level is hard to determine though, so this is more of an academic exercise than I thought.
  • Because of elevated valuations prior to 2018, value investors had to go bargain hunting in some weird places, like dry-bulk shipping. This concept is similar to hedge-fund hotel stocks. When everything is expensive, hot-money flows into cheap shit simply because it's the only cheap thing around. However, these stocks get whipsawed when other more compelling value propositions start to appear like we're seeing now. As major names keep selling off, prepare to see some interesting re-allocations in areas that are considered value plays right now.

At the end of the day, the above facts give me the impression that everything is tightly coiled right now and ready to blow at a moment's notice, except that no one knows what that one spark is going to be, or the timing of it. On a macro-markets level, I think markets will keep playing this roller coaster ride, with risk to the downside as trend reversals cause position unwinding and re-allocations.

However, trying to trade on that concept is a mug's game, so I'm using all of these newfound equity deals as an opportunity to put cash to work. In particular, I like Facebook (market freaked out over derating revenue growth from 40% to 30% - seriously?), and am also getting increasingly excited about Alibaba (yes, China could blow up, but if it does, everything is worthless anyways). I have also been buying into Ferrari because Warren Buffet's thinking on the ability to raise prices got me all hot bothered about the price elasticity of a Ferrari car.

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Oct 30, 2018

Great insight.
I follow the options market and had been seeing that the implied vol was soooo low in September that I couldn't help but buy VIX (TVIX), because vol always will spike at some point and it's fast. Even though I follow the options market (for volatility) pretty closely, I have been surprised by the crazy movements in hedging on the downside. Then again, the Street always has a herd mentality.

On the debt side, I don't know how else to put it, it scares the shit out of me. I have gone all AA or better. I recently read this article:

https://www.theinstitutionalriskanalyst.com/single...
and it only reiterates that we are not out of the woods by any stretch from the risks that Yellen and Bernanke put us into with all of their shenanigans. I believe that ultimately all of the pain and suffering we see IF markets unwind is the fault of the Fed (and other central banks worldwide) recklessly leaving money easy for so long and buying up every shitty debt they could find. The more they intervene the more fragile markets ultimately become, and they intervened more than anyone ever...

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Oct 30, 2018

Speaking from an IB perspective. Investment activity and business valuations have been at ATHs in the majority of industries we cover. We view it as a great time for business owners to sell equity in their companies with asset prices as high as they are. Business owners can get the most capital per share of equity in their company than at any other time in the economy (more money at less dilution). From the investor standpoint, many are seeing certain opportunities as being overpriced and are refraining from putting additional capital into the marketplace.

The firm view is that the economy has just entered the "peak phase." As in we may not be at the peak, but we are close to it. There are a lot of warning signs out there which have already been stated in the forum. One that I did not see addressed (I apologize if it was as I was skimming) is the increased level of corporate debt since 2008. The last statistic I read on this stated that Corporate debt currently makes up around 45% of the GDP, which is the highest its been of any bubble (and is significantly higher than it was in 2008). I'm not the most analytical person when it comes to credit facilities, but it may only take a small uptick in interest rates to tip the vessel and have many of these over levered businesses begin to default. If businesses go under, unemployment will rise, drying up credit, and slowing economic productivity.

My personal view is pretty high level, as I tend not to dive too deep into the numbers. I recently read Ray Dalio's book "Principles for Navigating the Big Debt Crisis," and one of the overarching takeaways from his book is that debt cycles and recessions have tell-tale warning signs. Although no one can predict when exactly a downturn will occur, there are a variety of signs that could be perceived as being tell-tale of a peak economy. All of this coupled with investor sentiment erring on the cautionary side, and world politics being in a fairly tumultuous state. I think we are close to a tipping point... maybe 1 - 2 years out, but who really knows for certain.

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Oct 30, 2018

Missed this somehow. Looks like there has been some solid discussion here and haven't had the time to read through it all so I may end up repeating what others have said.

This might be an obvious point but if we are looking at only the US, the majority of the SP500 is in a bear market.

https://www.cnbc.com/2018/10/25/nearly-half-of-the...
Tech has driven returns of the US market completely. Look at the performance of SP500 equal weighted ETFs. Market cap weighted indexes distort broad market performance because tech composes such a large percentage of the benchmarks. This is also why you see active managers underperforming their benchmarks as they tend to have a value tilt and value has had pretty poor/negative risk premia the past decade besides the initial phase of the recovery from GFC. Nobody is going to pay active managers 100 basis points to hold FAANG when SPY is so heavily exposed to FAANG and you can get that for 1 or 2 basis points.

We can opine about macro conditions all we want and go through all kinds of mental gymnastics to justify whether there will continue to be a bull or bear market. In terms of academic quantitative finance, timing the macroeconomic cycle is actually a pretty controversial idea. AQR has put out pretty compelling research as to why macro timing is nearly impossible to do. There are logical arguments to make from a macro perspective but empirically it's pretty clear that macro timing is mostly an exercise in futility.

We have plenty of data in front of us to suggest that we already are in a bear market. The debate comes down to whether or not sector dispersion in returns is justifiable. This is a profoundly difficult question to answer because the value factor does not have positive risk premia for the technology sector. In other words, valuation practically doesn't matter for the technology sector and in fact, focusing on traditional value factors will actually lose you money. Empirically, all that has seemed to matter is growth.

The dispersion in returns between technology and other sectors, in my view, is not justifiable, Although it is not unusual for sectors to perform differently during different periods, it is unusual for one sector to have sustained positive returns while every other sector is in a sustained bear market. Reversion to the mean is a very prevalent phenomenon in asset pricing so unless there has truly been a fundamental shift in the way we should look at asset pricing overall, the signs point to it being unlikely that technology will continue to be able to drive a bull market when practically every other sector is already in a bear market.

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Oct 30, 2018

thank you for replying, love the insight

Oct 30, 2018

Here are some thoughts:

The Shiller trailing P/E at its peak this year was about mid 30s, which is twice as high as the historical P/E ratio for the S&P 500. The stock market has not performed well when this ratio has been high.

Interest rates are rising. Plug higher rates into any model, and you will get lower valuations. The number of years the stock market has been going up does not really matter all that much. What matters is valuations

Inflation while not high, is higher than is has been. Higher inflation should lead to higher interest rates.

Tariffs can be inflationary, and if they are, rising rates will follow

The unemployment rate is at its lowest rate ever. There is minimal upside here and there is the potential for a higher rate if the stock market deteriorates further.

Earnings are strong, partly supported by a strong stock market for several years and tax cuts. There is little room here for improvement.

Deregulation, while a good thing in the short run for corporate earnings, lax regulations could eventually impact investor confidence. If the equity markets continue to fall, investors might panic. I am just trying to point out that the losses in the equity markets could be amplified.

Tax cuts when we are experiencing strong economic growth does not make a lot of sense and could lead to higher inflation and higher interest rates

Who and what will save the equity markets out this time? We have already reduced taxes substantially. There is not much we could do with taxes or interest rates. I do not have a lot of confidence in the head of the Federal Reserve or the Treasury. Powell, while a smart guy, has the least economic experience for a chief that we have seen in a long time. Mnuchin's background is not as good as the past few heads of the Treasury. I am concerned about substantial downside for the equity markets. The S&P 500 fell about 57% during the last bear market. My guess would be that the declines would be worse this time.

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Oct 30, 2018

@LeveragedTiger @Keyser Soze 123 thanks for the PE & IB perspectives, it's interesting to hear from both buy and sell side the views. I've been curious about lending and easy money in private markets. we've done business with oaktree in the past and they've sounded the alarm (albeit early) and for that reason they don't employ leverage (in the stuff they've shown us).

I still wonder though...is a private credit blowup (which I think is absolutely plausible) a contagion risk? will something like that reverberate through the economy and public markets and cause another recession?

part of me sees the argument, the other part wonders if we're anchoring to the 2008 crisis where valuations weren't all that outrageous and it was credit that sank the ship.

either way, I still think quality wins out and while I'll see declines in my PA, I'll be better positioned than those who went too far out on the risk curve and threw caution to the wind.

we'll see...

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Nov 3, 2018

Dude, thanks for starting this thread. Easily one of the highest value threads on this site in the last two years.

The private market question is a really interesting one to me. While I think we just have to see a correction in private markets (especially VC but also PE) given valuations and general frothiness, I'm sanguine about the potential risk of contagion since: 1) private valuations are lagged and not publicly distributed (especially when low)*, 2) the avg. private deal has waaaaay less leverage than last cycle, and 3) lenders are just generally better capitalized this time around.

The single factor that made me real squeamish as I typed that (and wasn't mentioned much above) is the pretty significant increase in PE/private debt/infra allocations from endowments/pensions over the last 3-4 years (and projected to continue growing by at least 50% through 2023 according to Prequin). Normally, I'd be less worried about this (since a lot of that capital has yet to be deployed and would dampen a trade off), but so many state pensions are actuarially insovlent today. In that context, I could see a 10-15% overall decrease in private debt/equity asset values being existential for pensions that have double digit PE allocations and are already on shaky ground from a solvency standpoint..

*To elaborate for the sake of younger monkeys, this is particularly true in a world where all the big shops have raised mountains of cash and, at the margin, have more flexibility to inject cash into a strugglng portco instead of exiting at a loss (which wouldn't get picked up in a precedent transaction analysis).

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Oct 31, 2018

@thebrofessor I'm not sure if it is an anchoring to the 2008 crisis for me, or more so an understanding of human nature that makes a credit crisis seem like a very real "repeat" scenario. I think a private market credit crisis is a plausible cause because people & businesses have such a high affinity for credit and historically low self-control when it comes to overextending themselves.

I'm not entirely certain as to whether a credit crisis in the private market has the potential of reverberating through to the public market, but I think it will because I do not believe the two marketplaces (public and private) are mutually exclusive of one another when considering the connectivity of the economy and the potential scale of a contraction.

Both public and private businesses make-up almost an equal share of GDP and are very reliant on one another for business, strategic partnerships, and employment. In addition, private businesses employ a much larger share of the U.S. workforce than large public companies.

Fortune 500 companies only employ about 17.5% of the U.S. workforce.

Even if we broaden our filter from Fortune 500 companies, to say "Large U.S. enterprises." A large enterprise being defined as an organization which has 1000+ employees, and annual revenue over $1 billion. The U.S. census reports that large enterprises employ about 51% of the U.S. workforce. This means that over 49% of the U.S. workforce is employed by businesses who have less than 999 employees. These are the companies that (in my opinion) are most likely "at risk" in a private market credit crisis.

It seems that if private business defaults and bankruptcies increase, unemployment will rise. If unemployment and private company bankruptcies increase to a sizeable enough amount it will lower public company revenues (B2B and B2C) causing a public market decline & sell-off. Large lending institutions are also going to feel the strain as they are no longer getting payments on outstanding balances drying up access to credit across all marketplaces. Therefore I think if the private market credit crisis is large enough, the cascading series of dominos may eventually reach the public market.

---Comment----

Brofessor, I also want to commend you on starting such a fantastic thread, I've really enjoyed the discussion you've started, and I'm looking forward to thoroughly going through the thread when I find more time.

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Nov 2, 2018

If I have to read one more Business Insider article about John Hussman's predictions I am going to quit the internet.

Anyways, I was on an equity trading desk, now I work as a controller for the family construction equipment business. We are maxed out, are customers are stacking projects years out because they can't find enough tradesman to get the work done. I don't see a recession coming unless they keep raising rates. We have gone from 3.75% to 5.25% approx in the last year, which is fine to talk about academically but it has a big cost to the business IRL.

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Nov 6, 2018

I have nothing to add to this thread about market cycles, but I would point out that long term growth projections are really low in the US. AQR and JPM are saying 4% over next 10 years, my analysis is saying low 3's.

Did you know we are losing 11,000 from the work force every day. That comes out to over 4million a year. With tighter immigration laws, and loss of labour jobs the GDP projections from the retirement of babyboomers is, in my opinion, the largest economic force this country has to deal with. remember GDP = Productivity x Labour hours, and if our labour hours are dropping a .5% - 1% a year, productivity won't be able to out grow that kind of deficit. I don't love the idea of using CAPE as a way to time markets (especially as recently there seems to be a dichotomy of FAANG vs everyone else when it comes to PE ratios), as I think that the value people are willing to pay for equities has just generally risen over the past 25 years. So even if we assume this is the new normal, and there won't be a crash, there really isn't much growth left for the markets to eke out of the economy.

The dynamic I think is going to be really interesting to watch is what happens when rates are actually higher than equity projections.

Dec 4, 2018

The yield curve just inverted, what say you @thebrofessor ?

Dec 4, 2018

still parsing this one out. so far just the 2s5s and 3s5s, whereas the traditional measure is the 2s10s.

did some bargain hunting late october & right before thanksgiving, maybe this is a test of those lows (still a bit to go).

I'm still long

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Dec 7, 2018

Was wondering if anyone was going to revive this off that event. Yield curve is one of my big pillars, it's super flat and it def has my attention now that we've had an official inversion, but the 3-5 spread is not meaningful and overall the curve is still upward sloping. Jefferies put out a chart this morning that shows the history of the 3/5 spread. The 3/5 spread has called 73 of the last 9 recessions...

You need much more meaningful inversion across the entirety of the curve for the signal to be valid. The 2/10, 3M/5Y are the two that I put the most weight on. I'm not saying it's all roses, curve is flat AF, but I do think there's other dynamics at play here. I think this entire sell off from October, while somewhat somewhat sentiment driven, has been a massive unwind of the short treasury trade, which was the consensus most crowded trade all of last year, even ahead of long FANG, and was the most short it has ever been in history. Have a look at the short interest on the 10 year, huge short covering since the beginning of October. I think it's more likely CTA's have been blowing out of equity positions to cover those shorts. Just one theory on it, but what I think is most probable. I'm proceeding with cautious optimism.

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Dec 7, 2018

was wondering if you were going to comment since you did mention the 3s5s spread in your post. can you provide a link to your 73 of the last 9 recessions comment? I'd be curious to see it

we're not even through the Q1 lows in the US, yet this feels like people are so much more pessimistic this time.

Dec 8, 2018

I changed my mind a quite a bit. I read October as the end of Trumpamania for the markets, so a reasonable correction was meant to happen. November can be interpreted as some sort of consolidation phase, but this week of December has been pretty nasty and I'm no longer optimistic about markets digesting rates and the end of QE as relatively smoothly as it can be. There's plenty of potential game-changing events right now in the world that would make me rather uneasy about being all in. Technical analysis is less reliable in long term analysis, nonetheless, a number of resistances have been crossed. I'm not going to make predictions about Black Swan-style crashes, because those are unpredictable by nature, but as it is right now, I'd keep a plan B and plan C. Either way, I'm no longer bullish on the markets in general.

Still very bearish about Facebook, Apple and Google, positive on Amazon.

Also agree with brofessor about the inverted yield curve again: wait the 2s10s. Nonetheless, there's plenty of meat to burn right now.

Dec 8, 2018

At the moment, we have an environment that includes contractionary monetary policy, high valuations (compared to historical numbers), a partially inverted yield curve and an administration that is the target of an ongoing investigation. What could possibly go wrong?...

Dec 8, 2018

Add the beginning of a trade war, overall world economic slowdown, quite a number of political turmoils in Europe, which remains a key US trade partner, overloaded consumer debt, there's plenty of things that can go wrong. However, none of that in particular worries me. It's the ability of markets to digest them, mass psychology and self-fullfilling prophecies.

Or maybe it's because I haven't traded for long and I have never traded something like this.

Dec 10, 2018

thanks for your thoughts. I would just argue that the "stories" haven't changed it's just that markets have turned red.

the president has been under investigation for over a year, trade tensions have been going on a while (not just recently), Fed has been raising rates for a while (yet people suddenly care?), and my thoughts on valuation still remain (name me an asset class with higher prospective returns).

in the short term, you're probably right, we'll see more red. but when sentiment gets this negative, absent a recession, it usually doesn't persist. finally, I'll stick with my quality bias, because companies that can self fund, don't care about rising rates, and don't have lofty valuations should be better insulated when shit inevitably hits the fan (my plan B), and on top of that you gotta have some cash to pick up bargains (plan C).

still long and in, plans A, B & C all engaged

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Dec 10, 2018

I actually have a question for you. Is this thread a sort of ''tell me why you think I'm wrong''? I know Ray Dalio actively looks for opinions contrary to his, so it doesn't surprise me if you were doing it as well.

Dec 10, 2018

One thing I don't understand, how are you still long when markets are in red? Are you long new portfolio shifts? Are you waiting to sell when we hit the bottom?

Dec 10, 2018

first, why would I sell at the bottom? that's counterintuitive

how am I still long? a few quick reasons:

I like what I own

I'm in this for the long term (I'm not spooked at all)

this is a benign correction with normal volatility (the "bottom" was february and down not even 15% from the highs after a year with no volatility)

I suppose some of you are wondering what would cause me to get more cautious. something like what happened in 1998, when the US10 had a higher yield than the earnings yield on the S&P, or like the 1960s nifty fifty, where companies are believed that they can do no wrong.

sometimes bad news is bad news, like stagflation, like war, like a recession, like people defaulting on their mortgages en masse. but sometimes bad news is just noise, like the fiscal cliff, like impeachments, like the mueller investigation, like brexit, and so on. always always always ask yourself "what does this event have to do with the earning power of the companies I own?" that will lead you to make better decisions. say you own AAPL, does brexit matter? nope. trade war with china? absolutely, but I bet it doesn't affect your position in JNJ. war in the middle east? sure that impacts your CVX holdings, but what about MSFT? probably not, nope. I believe that while markets can be efficient (can be, not that they ARE), they are rarely rational, so it's up to you to cut through the BS and find what's really important. this will require you to be contrarian by nature, be patient, and have a quality bias. I know I'll be wrong a lot, so when I am wrong, I better like what I own (cause imma be stuck with it), and quality names tend to hold up better during the inevitable tough times.

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Dec 10, 2018
thebrofessor:

first, why would I sell at the bottom? that's counterintuitive

how am I still long? a few quick reasons:

I like what I own

I'm in this for the long term (I'm not spooked at all)

this is a benign correction with normal volatility (the "bottom" was february and down not even 15% from the highs after a year with no volatility)

Thanks, that does answer my question. I was being a bit snarky about selling at the bottom

;)

Dec 19, 2018

I think it's important to dinstinguish between "quality names" and "quality" as an investment idea because the two are not the same. Enron was a "quality name" before it wasn't--but it doesn't need to be that bad. Companies go through cycles (growth, moderation, peak, decline) but are also generally correlated to the market. It doesn't make sense to take on their beta unless you think they are in a secular trend.

Quality as an investment idea generally refers to the quality of earnings (e.g. accruals, major discrepancy between EBIT and net income, etc.) but could also refer to the quality of the company (as a proxy just use the F-score).

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Dec 20, 2018
thebrofessor:

first, why would I sell at the bottom? that's counterintuitive

You don't know it's the bottom and you should cut your losses.

Dec 17, 2018

I few more supports breached, I had smelled those ones, though I expected the breaching last week. Shit happens.

Dec 18, 2018

The market is up, for now. Not that I use any technical analysis to make decisions, but we might test additional downside levels. I am not sure where this one is headed...Will the downside be 15%, 25%, 50% or 75%? My crystal ball is a little foggy

Dec 19, 2018

You'll have to pay me for this--I'll take a bottle of Imperial...

Let's start with the basics. What's your framework? Let's do top-down and bottom-up.

1- Leading economic indicators across the globe are down (Eurozone, China, etc.). US PMI (flash) came in at 53.6 and there's further softening in new orders (which leads GDP %). Economic growth IS slowing.
2- US rates are higher than Eurozone and Japanese rates-- China is barely higher; this means money will flow into the US and cause the dollar to rise (international fishers effect). However, the dollar already rallied with the expectation of 4 rate hikes next year. If US GDP is slowing then there will be a reduction in the number of hikes, which means the dollar is priced too high and should come down. If the dollar falls, exports will rise and shrink the trade deficit, improving net exports, and having a smaller drag on US GDP.
3- From a political standpoint, Brexit and Macrons challenge will continue being a headwind in Europe, China's slowdown will likely be countered by further stimulus, Japan will continue to grind on, and in the US we may see talk of infrastructure and a cooldown in trade rhetoric (improving trade). Hard to predict the political stuff, though. Just know the time table of major events/decisions.
4- Commodity prices are moving lower--partially because of greater supply, but primarily driven by cooling demand (tariffs, steel, oil, lumber, etc.).

So make your predictions:
- US GDP growth will be lower next year, which means revenue will be less, which means lower EPS, which means there will be more analyst revisions lower, which lowers investor sentiment, which impacts stock prices.
- With GDP weaker, fewer hikes will go forward, making the dollar too strong, which means it should weaken, which is good for exports, which will moderate GDP cooling (false signals for first few months/quarters), which will cause uncertainty around fed hikes, which will increase equity volatility. Moderation on the dollar will also impact the EPS of some companies, make oil cheaper in foreign currencies, and impact emerging markets (fewer rate hikes means interest differential weakens, which means expected returns on EM assets should decline, which means people will be buying and price will rise).
- With GDP growth weaker, sectors and industries with higher sensitivity to GDP growth will underperform, and those with low sensitivity will out perform (as we have seen for the past 6 months). Within sectors, pick industries with low betas and tilted to growth, for now.

Top-down:
go find companies that are best aligned to your prediction.

Bottom-up:
- When picking stocks, you prioritize growth at value, growth at fair, and value at value
- When picking stocks, use multiple metrics (outperforms single metrics) for growth
- Do your due diligence and generate a price target (multiples, DCF, etc.)
- Set a required rate of return and then solve to see if the current price is a value, fair, or rich
- Make your trades if a trend has settled (3 months excluding most recent month at minimum)

Other thoughts:
- don't use generic asset allocation-- use a risk parity approach. Develop multiple themes with low correlation and invest in them where the total portfolio correlation to US equity markets is low.
- When volatility rises, it means that to hit your returns you need less capital-- so reduce position sizes when volatility jumps up, and increase them when volatility jumps down
- When volatility is very high and you trim your positions, take the money and "flip stocks" at close to open (buy at close sell at open). Intraday prices tend to drift lower, while overnight prices tend to drift up. Note: it's easier to do this using S&P futures.
- if you need to reduce portfolio correlation and beta, you can also short the S&P or sector ETFs

I hope this helps. I'll be expecting that bottle...

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Dec 19, 2018

Great framework, just a thought if I may: I understand growth is inseparable from intrinsic value and you should never pay more than a fair price. But why do you continue to recommend a bias toward growth when selecting sectors and industries? We have seen quite a significant underperformance of "growthy" names in recent months, and don't really see that letting up should your macro scenario continue playing out. Wouldn't it make more sense to hide out in the beaten up areas that have been underperforming growth the last few years?

Dec 20, 2018

The best way to understand this is from a weak-form EMH framework. The markets are relatively efficient, though not perfectly so. Under the EMH framework, risk and reward go hand in hand-- alpha is created by luck (is random) and not by selection. Within this framework, there have been some anomalies which do generate alpha (more return than risk over time). These market anomalies are called "factors" (also: smart beta) and include momentum, value, quality of earnings, and low volatility. None of these factors consistently outperform on an annual basis or quarterly basis. This means that sometimes value pays more than momentum, while other times low volatility pays the most, etc. A simple way to track these factors (proxy) is following iShares ETFs based on them. It should be noted that most "smart beta" ETFs are really closet large cap index funds and aren't a true measure of the factors performance. Therefore, compare the ETF return with a large cap index (S&P)-- the differentials serve as an approximate guide on how each factor is performing.

Whichever factor is outperforming, has a trend, will help you figure out how which style to tilt. Why pick value stocks when value is not paying? You can also try to combine factors, but unless you have a very robust quantitative skill set, I do not recommend this. It's very easy to be specifically wrong.

If you want to make predictions around future factor performances, you'll need to understand the theories that explain them. For example, momentum performs because it is hard to arbitrage, and has periodic crashes. This means that to capture the alpha from momentum, you need to be willing to hold through these periodic crashes. It also means that momentum is not necessarily tied down to an economic component. Momentum may just be the result of feedback loops and heuristics-- though a feedback loop might start from an economic event. I'm assuming most readers here have a decent enough background in math, economics, and reading comprehension to read through econ. and financial journals.

From a managers standpoint, finding these factors is relatively simple. The hard part is figuring out the appropriate level of risk to take. E.g. if the momentum factor has drawdowns of over 25% and your risk limit if 8%, then how do you manage your positions?

Once you've set a framework, you can make your security selections. This will stack the odds in your favor. Hope this helped.

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Dec 21, 2018
Rahma:

- When volatility rises, it means that to hit your returns you need less capital-- so reduce position sizes when volatility jumps up, and increase them when volatility jumps down

Buy high, sell low strategy?

Dec 21, 2018

You don't use volatility to manage exposure?

Dec 20, 2018

it's not sentiment, it's the cycle...

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Dec 21, 2018

thank you for your opinion, now check your ego. I'm glad your trades worked out well for you, but what's next? are you staying bearish? are you doubling down? are you cashing out and waiting?

this thread wasn't meant for measuring dicks, I didn't talk about my track record or the names that have crushed it, because I know that eventually I'll have a soft period. humility is key to becoming a great long term investor.

with sentiment so negative, I'm not thinking it'll take much for that to switch, unless I'm dead wrong and we're entering a recession in which case there's more blood to run before we snap back. I'm still long, holding up better than broader market because of quality bias (I think, could just be dumb luck), and getting my buy list ready for Q1

@DickFuld how you holding up?

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Dec 21, 2018
thebrofessor:

thank you for your opinion, now check your ego. I'm glad your trades worked out well for you, but what's next? are you staying bearish? are you doubling down? are you cashing out and waiting?

this thread wasn't meant for measuring dicks, I didn't talk about my track record or the names that have crushed it, because I know that eventually I'll have a soft period. humility is key to becoming a great long term investor.

with sentiment so negative, I'm not thinking it'll take much for that to switch, unless I'm dead wrong and we're entering a recession in which case there's more blood to run before we snap back. I'm still long, holding up better than broader market because of quality bias (I think, could just be dumb luck), and getting my buy list ready for Q1

@DickFuld how you holding up?

Actually balls in at this point.

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Dec 21, 2018

The S&P 500 was down 57% from its peak to its low point in 2009. The valuation for the S&P 500 was higher at its peak this year compared to its peak prior to great recession. The government implemented extraordinary measures in 2009 in fix the financial system. I do not have confidence that this government would be as successful in trying to engineer a similar bailout.

Dec 22, 2018

A number of traders I know are pulling out and trading lightly until March, mostly conservative bets like VIX at 11-12 when available, avoid particularly leveraged products.

Honestly wondering is secyh62 has changed his mind by now. Great analysis, he clearly did his homework, more than I did. But he's wrong.

Dec 24, 2018
neink:

A number of traders I know are pulling out and trading lightly until March, mostly conservative bets like VIX at 11-12 when available, avoid particularly leveraged products.

Honestly wondering is secyh62 has changed his mind by now. Great analysis, he clearly did his homework, more than I did. But he's wrong.

I was super wrong on taking the small caps on a short-term basis so far (short-term speculation is not my specialty), but I'm still not ready to pull the chute on the economy or the cycle. I'm willing to admit that I don't have any clarity given this market movement, and it has been deeper/more persistent than I would have expected, but it's times like these where keeping emotions in check is vital to the long-term longevity of your portfolio. It is completely possible that the market is way out in front of fundamentals here and foreshadowing what is to come, it has before, but that is still not my base case at this juncture.

I want to make a clear distinction between my current opinion/outlook and my overall investment philosophy. I do the best I can to remove emotions from investment decisions, and as a result, I am never married to any one side. If the gauges of economic health I'm watching start to look more ominous, I will simply position appropriately so. This means that although my bias is bullish today, if something sounds the alarm tomorrow, I will be biased bearish tomorrow. Here's a quote I always liked that I think definitely applies to investing: "You must be willing to, at any moment, give up what you are for what you may become." Investing is dynamic and fluid, meaning that your role is to take in information as it comes along and alter your positioning accordingly. You can't get locked into a thesis or position, humility is paramount. There is a fine line between strategic discipline and emotional bias. Once you've taken a stance, it's extremely easy to only look for information that supports your position and dismiss new divergent data points as they come along. Always know who is on the other side of your trade and how they are thinking (always know who is in your trade with you as well and if they are in it for the right reasons). In this case, I think investors on the other side of my trades are dealing more on emotion than long-term fundamental outlooks.

So with that said, I can understand why people are selling here. It is difficult to keep a cool head when the market sells off 2% every other day and every headline is overwhelmingly negative. If this business was easy, it wouldn't be worth doing any additional work. If investors want to sell me a good business at what I perceive to be a discount to intrinsic value, I am happy to take it from them. My boxes for putting risk on are all still checked here, so I remain cautiously optimistic.

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Dec 24, 2018
Secyh62:

This means that although my bias is bullish today, if something sounds the alarm tomorrow, I will be biased bearish tomorrow.

What would sound the alarm for you? We currently have issues that are quite alarming including but not limited to high valuations (subjective), contractionary monetary policy, increased protectionism via trade tariffs, slowing global growth, etc.

Dec 24, 2018

Investing is dynamic and fluid, meaning that your role is to take in information as it comes along and alter your positioning accordingly. You can't get locked into a thesis or position, humility is paramount. There is a fine line between strategic discipline and emotional bias.

You don't think that your suspect to the endowment effect?

In my view, your trade wasn't bad (as an extension of your thesis)-- your thesis is just wrong. The economy is slowing and EPS forecasts are still too high. IMO, you'd want to wait to get long until after most revisions have come in...

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Dec 22, 2018

@thebrofessor

Update?

Any thoughts on Trump vs. Jay Powell? Is it even possible for the President to fire the Fed chief?

Perhaps a new post?

Dec 27, 2018

Throwing in the proverbial towel. I have no idea what's going on anymore.

Dec 27, 2018
neink:

Throwing in the proverbial towel. I have no idea what's going on anymore.

Trying to make short term calls on the market is pointless. Nobody saw the big drop on Christmas Eve, the 1,000+ point rally yesterday, or the 900 point intraday swing today. For most of the young people here, the correct answer is to buy all the time whenever you have excess cash. Check back in 5, 10, 20, 30, 40+ years from now and you will be glad you kept buying.

There's an old joke about Einstein going to heaven. ....when he goes to heaven, he's able to see the IQ of every person he speaks with. The first person he meets has an IQ of 150. Einstein says, "this is great, we can talk about mathematics and physics." The second person he meets has an IQ of 125. Einstein says, "this is fantastic, we can talk about literature and the arts." The third person has an IQ of 100. Einstein says, "we can talk about sports and reality tv."

The fourth person has an IQ of 70. Einstein asks, "where do you think the market is headed?"

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Dec 27, 2018
DickFuld:
neink:

Throwing in the proverbial towel. I have no idea what's going on anymore.

Trying to make short term calls on the market is pointless. Nobody saw the big drop on Christmas Eve, the 1,000+ point rally yesterday, or the 900 point intraday swing today. For most of the young people here, the correct answer is to buy all the time whenever you have excess cash. Check back in 5, 10, 20, 30, 40+ years from now and you will be glad you kept buying.

There's an old joke about Einstein going to heaven. ....when he goes to heaven, he's able to see the IQ of every person he speaks with. The first person he meets has an IQ of 150. Einstein says, "this is great, we can talk about mathematics and physics." The second person he meets has an IQ of 125. Einstein says, "this is fantastic, we can talk about literature and the arts." The third person has an IQ of 100. Einstein says, "we can talk about sports and reality tv."

The fourth person has an IQ of 70. Einstein asks, "where do you think the market is headed?"

My approach is rather systematic, thus I don't have particular issues shorting. It went fine, I'm a bit butthurt about what was left on the table but I'll forget about it by next week.

I agree predicting is pointless, I merely enjoy the market commentary. I'm going to play lightly for a while.

Jan 24, 2019
DickFuld:

For most of the young people here, the correct answer is to buy all the time whenever you have excess cash. Check back in 5, 10, 20, 30, 40+ years from now and you will be glad you kept buying.

Would you just buy MSCI AWCI or something else?

Jan 3, 2019

Told you Apple will get eaten alive by Huawei.

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Jan 3, 2019

Apple probably will not be the last one to lower guidance for sales and/or earnings.

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Mar 20, 2019
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