Global Macro Trading Journal

So the Gordon dividend model teaches that

Price of the stock = Dividend next year / RequiredReturnOrCost of Capital - Expected Growth Rate

If you apply that to the index using a expected SPY Div of $44 and a expected growth rate proxy of NGDP growth of 4% (2% real, 2% inflation for the long-term), you can infer that people use a required return of 6% right now for US equities. That number is what is consistent with a SPX at the level it is right now, roughly (The fair price to pay would 2200)

If Trumponomics brings expected NGDP goes to 5%, where is the new fair value for SPX? That would be 4400. But of course, that's nuts. The required return/cost of capital has to go up because risk free rates are also on the rise. So lets say that rises by 0.5%, the new fair value is 2933 (fair price = 44/0.065-0.05)
Even if the cost of capital rises by 0.75%, leading to only a 0.25% "net" improvement, the SPX fair value is still 2500
With only a 0.125% net improvement (6.85% requiredreturn/cost of capital, 5% NGDP growth). SPX fair value is 2378

Point is, if the tax/infrastructure/regulatory reforms do produce what they intend to produce (improve growth/productivity/make easier to do business), the long-term returns for investors can be huge. So even if they are likely to fail, it can still pay to be on the bull side

A new closing all-time high would be the confirmation that people are starting to expect this all to work
 
So, it might not be a big deal if interest rates continue to rise, as a long as expected growth rates are also on the rise by a bigger amount. Its the net 'improvement' that matters and if the reforms are well build, there should be an improvement in that net amount
 
If the reforms are badly done, then all the expected growth will come from inflation, which the Fed will offset by hiking risk free rates so there will be no net improvement. In that case, the fair value for equities doesn't rise. But it will be hard for that to happen, just by reducing regulatory burdens, that should improve businesses bottom lines. Combine that with less costs for tax compliance and things are looking good.
The infrastructure is more complicated given how much Congress likes to do pork barrel projects but still, its hard not to see scenarios where there is a fair amount of 'net improvement'
 
Last edited:
Made a quick look at my positions now and came up with this:

BR USD bonds 16.6%
EWZ and EWZS 16.5%
Cash 14.5%
BRKB 12.3%
PSH 11.4%
GLD 5.5%
UST 15y bonds 5.4%
Brazil REITs 4.6%
OAK 4.5%
VRX 1.8%
GDX/GDXJ 1%
GREK 1.6%
FMCC 0.8%
EWZ put shorts 0.3%
BRKB put shorts 0.01%

Total stock longs (not counting Reits and gold stocks) 49% (maybe more if you consider the leverage of BRKB and PSH)
Bonds and cash 36.5%

My next move is probably get my stock longs exposure up to 55-60% and then probably stop there
 
I was worried about US stocks because of valuations and a Fed that was hiking risk free rates when everybody was valuing stocks relative to those rates
But I really think this Trump thing might have changed the game. Now that rise in the risk free rate (or, you might call it cost of capital/required return) is being offset by likely higher growth rates. This decreases the downside and increases the upside for the market (as the gordon model shows)

Not that people use the gordon model to value stocks much but if that revaluing of stocks doesnt occur, you now own something cheaper where any significant decline will recover faster (due dividends/buybacks) and the upside will be more clear to people (as they see the higher profit growth)
So I'm looking to add to my US stock exposures
 
In a Shiller PE basis, US stocks are not cheap with a 25 multiple. But that if you expect mean reversion in profits. With regulatory and tax reform (the easy reforms that all Republicans agree should be done), profits are likely to do fine. Without profit margin mean reversion, then the forward PE makes more sense. There the market trades at 17x PE, and this was before Trump
 
My baseline scenario for US stocks is that they make a new all-time high in a closing basis in a few weeks/months and they dont look back
 
On a forward earnings yield basis the market is valued at 5.8%. So the total return of this market would be 5.8% plus growth
That looks pretty attractive.
Not saying, bear markets or recessions have been outlawed and they cant happen again but it appears to me that the upside looks pretty good compared to that downside

A simple 7% return in stocks will take the SPX 2300+. 2300 sounds like a crazy number but it really wouldnt be that much higher from here
 
Daal said:
So the Gordon dividend model teaches that

Price of the stock = Dividend next year / RequiredReturnOrCost of Capital - Expected Growth Rate
More...

The gordon model is nice because it tells you how much more to pay for an asset when the growth rate increases. Most people dont use it but they do use things like Discounted Cash Flows (DCF). Most analysts, fund managers and stock pickers will at least look at DCF when valuing a stock. If the higher expected growth starts to occur (or as people keep expecting it to occur), the fair value figures from their DCF calculations will get a bump up and they will be willing to pay more for most stocks out there
 
So this Trump rally looks big but all SPY did was to go from 210-211 to 216 (not counting that crazy overnight session because that was outside regular trading hours, where the volume come in). We are talking a 2-3% rally, its really not that much. As the trade/appointment uncertanties are cleared up I really believe there is at least a 10% upside for this market over the next year, and if the market comes down from here, its an opportunity to buy more and increase allocations
 
You must log in or register to reply here.
Back
Top