What's especially depressing is these Companies have increasingly used debt to repurchase those buybacks, thanks to the zero-interest rate.
Mr. Bull, We've Had Enough with Your BS. You're Fired!
- Thread starter schizo
- Start date
What's especially depressing is these Companies have increasingly used debt to repurchase those buybacks, thanks to the zero-interest rate.
Exactly right!
I learned much of this from those videos that dozu is linking to sarcastically, from George Gammon. The reason why its a big problem is because pension funds are only allowed to own shares of companies rated BBB+ or higher I believe. If these companies get downgraded, the pension plans will be forced to sell them, and that may very well cause a huge disruption in the market. Now lets of course not forget these rating agencies aren't exactly doing due diligence, but at some point, you would think they will have to do what's right.
Okay, I suppose I owe at least an explanation as to why I believe we're due for a correction (I wouldn't wanna be part of that other top-calling crowd who base their reason on hunches). As you can see from the chart, it's a sight to behold. Completely breathtaking!
Its hard to say what too high is though. And as I've been stating in other responses, we no longer have a functioning market. I in some ways see this in the panic buying and the shrugging off of bad news. Just the other day it came out that maybe tariffs might not be rolled back even after the signing, and yet, the market recovered from there. If it recovers after every bad piece of news, I have to wonder if the forced that used to move the market no longer apply.As you can see from the chart, it's a sight to behold. Completely breathtaking!
In reality, it is a functioning market with a valuation that isn't out of the ordinary. What hasn't shifted is the perception of many people in understanding the strong earnings expansion especially in two very recent years. Any time the best corporations sell off because of people's fear or profit taking, big buyers eventually come back in and buy the companies on sale.
For example, when GOOG was low $1200s, many analysts thought they were a good fundamental buy based on their earnings growth. They had a couple of bad quarters and sold off down well under $1100 twice. On the second earnings report, one astute analyst said there were a lot of big buyers waiting for it to hit $1100 again to begin buying shares. It then went under $1100 again and is now over $1400. Naturally, when year 2019 laggards like GOOG finally perk up, US indexes are likely to go up to new highs and they did.
That's a highly functional market.
It is because of the tax law. If you rent out your house and rent an identical one to live in, you can deduct all of the cost of ownership plus depreciation.
Then when come time to sell, you can move back in and after two years sell it for a $500K tax free gain!
I could do it but it is just too much trouble to be worth my while.
I don't pay much attention to fundamentals, but reading what you wrote made me remember what Wolf said in his article about why he shorted the market. Its about Apple.
"Mega-weight in the indices, Apple, is a good example: shares soared 84% in the year, though its revenues ticked up only 2%. This is not a growth story. This is an exuberance story where nothing that happens in reality – such as lacking revenue growth – matters, as we’re now told by enthusiastic crowds everywhere."
https://wolfstreet.com/2019/12/30/i...-stocks-again-just-shorted-the-entire-market/
So I'm not really sure about this earnings expansion you talk about. People are trying to justify new equity highs in all sorts of different ways, and who am I to say that they are wrong. Maybe P/E ratios don't have to be at a historical 12 or whatever it is. Maybe 50 is just fine. Maybe companies don't ever have to make a profit and have sky high valuations since one day they will save the planet.
The only functioning part of the market that I see, since you bring this up, is that there is a buyer for every seller, and both agree on that price at the moment. But all the reasons are a guess at best in my opinion.
Its also because of cost to rent ratios. If you live in an area where you can rent a $750k house for $3000 dollars lets say, but own 3 houses $200k houses that each supply $1,500 rent per month, then technically, your equity is making you money. If you own the 750k house and hence save 3k per month on rent, this isn't nearly as profitable as getting that same equity to make over 4.5k per month. (yes, I'm choosing random numbers to illustrate the point)
I once again learned this in those George Garamon videos and it makes perfect sense.
Here is a sample chart on SPX P/E levels :
https://www.multpl.com/s-p-500-pe-ratio
Nothing about this chart suggests we are at some incredible valuation out of the norm. Yet many of you post like we are. I guess if you think 12 is normal and that we are at 50, you'd expect a crash, sure. In reality, two recent years ( I believe it was 2016 and 2017 ) were two of the most impressive earnings growth in recent history, which pulled the P/E to higher part of the normal range early in 2018. While markets have gone up since January 2018, it's not by a huge amount at all. The perception however is out there that they have. One could argue that the trade wars killed earnings growth, but the market is now pricing in an end to those wars and if the earnings growth returns it's entirely justified on a fundamentals basis.
I always go back to the real numbers because traders online and the press are notoriously wrong about these things ( too much bias really ).