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Wilshire 5000 market cap / GDP exceeds dot-com peak


RuleNumberOne

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If generating prosperity were as easy as keeping rates low so that extremely high P/Es could be justified ("rates are 1%, a P/E of 50 is low"), Europe and Japan should have been booming

 

I'm trying hard to avoid pulling back the curtain on my weird devil's-den of macroeconomic theory,... but I'll just say this.

 

1) Perhaps we are very wrong about what a central bank does, and how limited its power truly is.

 

2) Perhaps we are also very wrong about deficits and how they work for a fiat currency issuer that is also a global reserve currency.

 

This is why its so tough to make predictions about macroeconomic theory. 

 

wabuffo

 

 

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If generating prosperity were as easy as keeping rates low so that extremely high P/Es could be justified ("rates are 1%, a P/E of 50 is low"), Europe and Japan should have been booming

 

I'm trying hard to avoid pulling back the curtain on my weird devil's-den of macroeconomic theory,... but I'll just say this.

 

1) Perhaps we are very wrong about what a central bank does, and how limited its power truly is.

 

2) Perhaps we are also very wrong about deficits and how they work for a fiat currency issuer that is also a global reserve currency.

 

This is why its so tough to make predictions about macroeconomic theory. 

 

wabuffo

Thanks for sharing some wise words. On my part, real concerns with this conundrum are relatively recent and I will try to come around.

-3 lingering concerns

 

1) In the last two to three cycles, easing has become more significant and unconventional and tightening (taking the punchbowl away in central bank ivory tower talk) has become more timid and incomplete.

https://fred.stlouisfed.org/series/BOGMBASE

which prompted the following central comment in 2009: "The epitaph to this curious case of monetary base expansion is yet to be written."

https://www.stlouisfed.org/publications/regional-economist/july-2009/the-curious-case-of-the-us-monetary-base

 

2) In this last part of the cycle, corporates have accumulated significant debt, not because they needed to but because they could. Isn't that weird?

 

3) Fiat money is now taken for granted as a concept but the whole thing has a troubled history. I'm told that two significant changes contributed to public acceptance of fiat money: accountable government and an independent central bank.

 

Even if you read the above, there is no need to respond. FWIW, I think I understand your devil's den comment and I just want to say that I visited the 'real' devil's den a few years ago, in Gettysburg. The den area is quite unremarkable even if it may have hidden a snake but the whole Gettysburg site is fascinating from a strategic point of view and something tells me that you would like it.

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I see little credit risk in the entirety of the S&P 500. I'm not talking just the top 10, not talking about my holdings, I'm talking all of it.

 

In the S&P 500 ex financials (439 companies), 263 have 5 yr CDS  spreads below 56 basis points, and a further 138 ar between 56-106 bps, so 400 / 439 have credit spreads below 106 bps.

 

There are like 3 companies above 200 bps: Apache, Occidental and L Brands.

 

Now we are on COBF so we don't believe in perfect market efficiency and that low credit spreads is necessarily evidence of low credit risk, so let's take a look at some fundamentals.

 

247 of those companies are less than 2x levered using trailing EBITDA. Only 80 are above 4x. the median is 1.7x levered. Even at higher borrowing rates, these companies will be fine.

 

Listed below are the scary companies that are over 5x levered and that's just using bloomberg dumb data, not adjusted or anything.

I see a bunch of well covered real estate companies and some onese that actually carry a fair bit of leverage (TDG for example).

 

I'm not trying to completely dismiss the macro risk. But the data is the data. I see a bunch of very healthy credits in publicly traded corporate america; i see a bunch of highly levered private equity portcos where the lenders are CLO's and private debt funds that themselves aren't levered and comprise a small portfion of various institutional investors portfolios. Perhaps the risk of LBO, CLO, etc. will bleed into the economy there'll be a recession and stocks go down. But don't look to big publcily traded corporate america to start experiencing credit events.

 

fear not the all time high corporate debt ratios if you hold broad indices. if you hold individual stocks you can avoid that too. I happen to have a large position in the 4th most levered company on this list. I think it has virtually no net corporate debt.

 

Equifax Inc

Newell Brands Inc

Edison International

Vornado Realty Trust

Alliance Data Systems Corp

CarMax Inc

Williams Cos Inc/The

Zimmer Biomet Holdings Inc

SL Green Realty Corp

Campbell Soup Co

General Electric Co

Digital Realty Trust Inc

Hologic Inc

Harley-Davidson Inc

Apartment Investment & Management Co

Dominion Energy Inc

TransDigm Group Inc

Western Digital Corp

Kimco Realty Corp

Healthpeak Properties Inc

Boston Properties Inc

Molson Coors Beverage Co

Welltower Inc

Noble Energy Inc

Dollar Tree Inc

SBA Communications Corp

NiSource Inc

Essex Property Trust Inc

Ventas Inc

American Airlines Group Inc

Entergy Corp

Alexandria Real Estate Equities Inc

Conagra Brands Inc

Extra Space Storage Inc

AES Corp/VA

CMS Energy Corp

Federal Realty Investment Trust

Duke Energy Corp

Simon Property Group Inc

PPL Corp

Realty Income Corp

Constellation Brands Inc

Kinder Morgan Inc/DE

Sempra Energy

Eversource Energy

Duke Realty Corp

MGM Resorts International

Microchip Technology Inc

Equity Residential

Prologis Inc

TechnipFMC PLC

 

What is the extent of "debt" in this measurement? For instance, is the $20-30 billion that GE's pension is underfunded included as "debt" when comparing to their EBITDA?

 

I'd also add that while tax reform is not easily reversed, it's the primary reason these numbers now look fo favorable as compared to say, 2016-2017, and CAN be reversed pending the direction of upcoming presidencies and Congress.

 

I doubt Democrats win, and even if they do it'd be a tough battle, but a reversion in the tax rates would make these figures look a hellofalot worse and including non-debt liabilities like pension requirements probably do too.

 

Ultimately, I think the the tax-reform and coordinated Central Bank actions of 2018-2019 has deferred the recession - but I do believe the economy is quite a bit more fragile than many think and I do believe it's like that we'll see it sooner rather than later.

 

Not sure if corporate debt will be the catalyst, but spreads will be quite a bit wider when it happens and we'll be working off the debt hangover for a time, on average, even if individual companies Excel in that environment.

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tax rates don't affect EBITDA, so I don't think tax reform really distorts net debt to EBITDA

 

https://www.investors.com/etfs-and-funds/sectors/sp500-ge-not-alone-25-companies-owe-trillion-pension-payments/

 

Largest 25 pension obligations collectively owe $1 trillion, and have a funding gap of $150 billion ($1 trillion of liabilities against $850 billion of assets)

 

Those 25 have a market cap of $3.5 trillion and $238 billion of EBIT, and $390 billion of EBITDA.

 

Most of these, their funding gap would add maybe half a turn or less to their leverage ratios. GE the data is wrong because they have negative EBITDA so it messes up the calculation.

 

For the companies that have the largest funding gaps as expressed in EBITDA, 4/4 of the top ones are defense contractors (Lockheed, Raytheon, Northrup, and Boeing). Many defense contractors utilize cost plus contracts that INCLUDE the cost of the pension benefits. The federal government is responsible for some portion of those folks pensions. Lockheed has the biggest funding gap, adding 1.3 turns to its leverage.

 

I recognize that the funding gap can really blow it if rates go down and stocks go down since that increases the liability and decreases the assets, but given the trend toward immunization, the very long term nature of funding a pension, and the low absolute numbers here as a percentage of these companies earnings power, I see very little risk in terms of corporate pensions.

 

Fear not the corporate pension "problem".

 

Let's say you think EBITDA is bullshit, so I'll use $240 billion of EBIT. I'll stress that down to $180 billion for fun. I'll increase the obligation by 20% and decrease the assets by 10%. then these collectively could get to 100% funded with just over 2 years of EBIT. And of course they don't have to do it like that.

 

Lockheed Martin                           -1.330194232

Raytheon                                   -1.161483702

Northrop Grumman                     -1.091703057

Boeing                                   -1.085029431

DuPont                               -1.015721604

Delta Air Lines                    -0.745312682

United Parcel Service             -0.660816813

General Motors                      -0.634868058

Ford Motor                               -0.538615238

Exelon                         -0.405309555

Exxon Mobil                  -0.328415521

Caterpillar                     -0.316484311

Pfizer                   -0.250183959

United Technologies   -0.227562352

3M                         -0.218516389

Johnson & Johnson   -0.181629476

Merck                       -0.117022936

AT&T                         -0.067857536

Verizon                   -0.04536176

Citigroup                 -0.03108909

Honeywell                 0.166219154

General Electric         1.852617649

International Business Machines -0.521864315

 

 

 

 

 

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https://www.pionline.com/article/20190204/PRINT/190209967/fixed-income-still-prized-in-asset-mix-of-corporate-funds

 

here's an article re the trend toward immunization and increase in fixed income; basically pensions have been taking equity profits, front loading contributions, and de-risking for the past few years.

 

some more info

https://us.milliman.com/insight/2019-Corporate-Pension-Funding-Study

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The end is nearing. Just look at what kind of junk is trending everyday. A few glamor stocks and FAANGs and then retail investor stocks. I would be almost certain a good amount of money will be made being short just about anything sometime in the near future, especially stuff like AAPL. Nothing goes up in a straight line and things that do almost always retrace much if not all of it.

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I’ve been trimming my family’s apple and google, but does the fact that these have re-rated to a low to mid 20’s PE really signal the end is near?

 

I’m not trying to be Pollyanna, but these just all seem like weak arguments to me.

 

I’ll probably end up looking like Bill Miller or PZena  pre GFC in all these posts and everyone calling for a big cyclical downturn will be right, but I think it’s actually hard to find real excess that is material portions of the indices.

 

The one thing that I really agree with is that leveraged loans and junk bonds and their borrowers (some small caps but mostly private equity  companies) look awful and downright bubbly. As part of my job I see the nitty gritty in these (detailed breakdowns of add backs and pro-formas, the contrived consultant due diligence reports, the lack of covvies etc). I think that the losers will be: institutions and retail investors who are investing in direct lending, mezz debt, CLO mezz tranches, business development companies, etc. Winners will be adept distressed debt investors and well positioned corporates. But as I mentioned earlier, the excesses in stucured credit are likely to hurt small portions of people’s institutional portfolio’s. If a pension throws 5 or 10% of their HY allocation into CLO BB’s for some spread pickup, I don’t think it’s going to be a huge issue when that unwinds. JApanese banks love them some CLO AAA but the 40 points of credit enhancement will insulate them just fine. Otherwise the banks don’t seem to be wearing all that risk; systemic risk from excesses in private / junk credit seems low to me

 

Long CLO tangent aside, I’d also point out that EM and Devloped International stocks trade for 12-14x earnings and their currencies have all underperformed.

 

I am not super bulled up; just Not buying these bearish arguments...unless the dems win, then its guns gold and canned food of course :)

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The top 5 trending stocks on Stocktwits are TSLA, SPCE, BYND, APHA, CGC.... one probably couldn't put together a better short basket. Just let the sheep and cattle lead you to the greener pastures. Daily gains for those, +11%, +9%, +21%, +11%, +12%... material news? None.

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Global debt to GDP at all-time high. European countries hitting all-time highs in household debt to GDP as central bankers blow a housing bubble in Europe.

 

https://www.bloomberg.com/news/articles/2020-01-13/global-debt-to-gdp-ratio-hit-an-all-time-high-last-year

 

"The global debt-to-GDP ratio hit an all-time high of 322% in the third quarter of last year, according to a report released Monday by the Institute of International Finance.

 

“While borrowing costs remain very low, many countries are finding a debt-driven growth model increasingly difficult to maintain,” said Sonja Gibbs, managing director of global policy initiatives at the institute. “High and rising debt-to-GDP ratios are making debt service and refinancing more challenging, and the 2020s are likely to see a greater incidence of debt distress and restructuring.”

 

Government debt-to-GDP hit a new high in the U.S. and Australia. Household debt-to-GDP reached a record high in Belgium, Finland, France, Lebanon, New Zealand, Nigeria, Norway, Sweden and Switzerland."

 

 

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tax rates don't affect EBITDA, so I don't think tax reform really distorts net debt to EBITDA

 

 

Yes, you're right. I should have been more specific. I wasn't just referencing the comparison of EBITDA/net debt specifically, but just valuation and liquidity metrics as a whole being more favorable after tax reform.

 

Having substantially more income after taxes allows for higher debt service and more turns of leverage and better liquidity. On a net basis, the reversal of tax reform would be a net negative to companies' flexibility to carry their debt loads even if EBITDA/Net Debt as a  metric is unimpacted.

 

Regarding the pensions, they've have been handed a gift from the heavens by being overweight equities during the rally of 2016-2019. The situation today does appear better - but it also appeared great in 2000 as well. We'll have to weather the next downturn to be sure the recent gains haven't been ephmeral.

 

Even beyond equity risk, pensions will also likely be hit with widening credit spreads and lower rate projections in a downturn so today's funded status after a decade bull market does not mean the funding status is safe or permanent.

 

TL;DR - Easy come/easy go regarding tax gains and that "net debt" doesn't tell the whole story with hundreds of billions in non-debt liabilities like leases and pensions (as well as the non-constant nature of the pension liability)

 

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This doesn't look like euphoria for stocks to me:

 

 

https://www.morningstar.com/articles/961935/2019-fund-flows-in-9-charts

 

"Taxable-bond funds had their best year ever with inflows of $413.9 billion in 2019, while U.S. equity funds lost $41.3 billion."

I don't want to enter a debate here but I find the 'message' of your post (and related link) to be incomplete.

Unaudited numbers and some approximations for 2019, US investors.

I estimate the rise in value of equity holdings by households, held through funds (pension adjusted) to be about 2.4T (2400B) in 2019. So, the total net outflows from funds (41.3B) represent about 2% of the increase in equity values in 2019. You can form an opinion about what this means in terms of investors' perception of the market. A recent well-done survey of investors in general reveals that a majority expects a recession in 2020 and a majority simultaneously expects to obtain good returns (both majorities being possibly constituted of the same people :) ).

 

Household surveys of allocation to equities tend to be pro-cyclical and may be reaching highs again. There are graphs circulating but it's not necessary to show them here; they have the same pattern compared to what RuleNumberOne  typically posts on this 'peak' topic. This is soft evidence and should probably not be used for timing purposes but one of the reasons that there are net outflows from equity funds is that people, in general, seem to have difficulty keeping up with rebalancing which explains the last section of your link (the author wonders if there is dry powder accumulating in money market funds). A possibly related topic is that 'funds' are reaching lows in terms of their own % to cash allocation.

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This doesn't look like euphoria for stocks to me:

 

 

https://www.morningstar.com/articles/961935/2019-fund-flows-in-9-charts

 

"Taxable-bond funds had their best year ever with inflows of $413.9 billion in 2019, while U.S. equity funds lost $41.3 billion."

I don't want to enter a debate here but I find the 'message' of your post (and related link) to be incomplete.

Unaudited numbers and some approximations for 2019, US investors.

I estimate the rise in value of equity holdings by households, held through funds (pension adjusted) to be about 2.4T (2400B) in 2019. So, the total net outflows from funds (41.3B) represent about 2% of the increase in equity values in 2019. You can form an opinion about what this means in terms of investors' perception of the market. A recent well-done survey of investors in general reveals that a majority expects a recession in 2020 and a majority simultaneously expects to obtain good returns (both majorities being possibly constituted of the same people :) ).

 

Household surveys of allocation to equities tend to be pro-cyclical and may be reaching highs again. There are graphs circulating but it's not necessary to show them here; they have the same pattern compared to what RuleNumberOne  typically posts on this 'peak' topic. This is soft evidence and should probably not be used for timing purposes but one of the reasons that there are net outflows from equity funds is that people, in general, seem to have difficulty keeping up with rebalancing which explains the last section of your link (the author wonders if there is dry powder accumulating in money market funds). A possibly related topic is that 'funds' are reaching lows in terms of their own % to cash allocation.

 

I think Rule is probably biased since he lives in CA (though, he could certainly see more of the excesses). Now it doesn't have to be euphoria for stocks to crash. There wasn't much euphoria in 2007 and we still had a meltdown. Personally, I wouldn't mind a huge meltdown.

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Per CNBC, both Tepper and Druckenmiller are still quite bullish on the market. Tepper is probably one of the few guys I drop everything to pay attention to, so there's that. But there's also the fact that I still cant find anyone but myself and maybe a couple folks here to pencil into the "bearish" column. Which continues to concern me nonetheless.

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Have you seen the latest issue of Barron's?

 

A few quotes from the cover:

 

"It is a year to be more defensive"

 

"There's not much margin for error"

 

"We have entered a new Cold War, and that is negative for global growth"

 

"The scale and pace of what's happening in China are beyond anything n America"

 

"I am not coming into this year expecting something dramatically negative the under economy (sorry this one is hard to read since the address label is there).

 

 

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I was looking at Japan's 1989 stock market bubble. That one topped out at a 139% ratio of stock market to GDP (would have been a lower ratio if GNP was used.) So the current stock market is in uncharted territory.

 

Jay Powell has turned out to be the weakest Fed Chair in history. We have been at 3.x unemployment for a long time but the Fed promised to not raise rates until after the November elections. Powell got bullied easily.

 

The market may go up another 5-50% this year even with no earnings growth. If central bankers excuse is they are waiting for inflation in Alabama or growth in Europe, they are waiting for rain in a desert - it is not going to happen. A lot of investors will feel the pain at some point in the next few years.

 

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Macro is so unpredictable and speculative. It's interesting to discuss for sure (everyone loves a good apocalypse thesis), but there is no sure way to effectively use any of this to your advantage. It's much more effective to hedge yourself on the personal finance side of things. Hedge your career with other skills outside of your current career path. Don't over leverage yourself with personal debt. Build a solid emergency fund. Take care of your body. One way or another, life will go on.

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I was looking at Japan's 1989 stock market bubble. That one topped out at a 139% ratio of stock market to GDP (would have been a lower ratio if GNP was used.) So the current stock market is in uncharted territory.

 

Jay Powell has turned out to be the weakest Fed Chair in history. We have been at 3.x unemployment for a long time but the Fed promised to not raise rates until after the November elections. Powell got bullied easily.

 

The market may go up another 5-50% this year even with no earnings growth. If central bankers excuse is they are waiting for inflation in Alabama or growth in Europe, they are waiting for rain in a desert - it is not going to happen. A lot of investors will feel the pain at some point in the next few years.

 

The guys has been doing it for less than 2 years and you're deeming him weakest in history?

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Is Jay Powell still alive? Nobody has heard from him for over a year. I am getting worried. Doesn't look like anyone is in charge at the Fed.

 

There are rumors circulating that Bullard stabbed Powell in the back and buried him.

 

 

I was looking at Japan's 1989 stock market bubble. That one topped out at a 139% ratio of stock market to GDP (would have been a lower ratio if GNP was used.) So the current stock market is in uncharted territory.

 

Jay Powell has turned out to be the weakest Fed Chair in history. We have been at 3.x unemployment for a long time but the Fed promised to not raise rates until after the November elections. Powell got bullied easily.

 

The market may go up another 5-50% this year even with no earnings growth. If central bankers excuse is they are waiting for inflation in Alabama or growth in Europe, they are waiting for rain in a desert - it is not going to happen. A lot of investors will feel the pain at some point in the next few years.

 

The guys has been doing it for less than 2 years and you're deeming him weakest in history?

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https://www.theglobaleconomy.com/Japan/stock_market_capitalization/

 

The ratio was 139% in 1989 and 106% in 2018. IMO, GDP is much less volatile than earnings and less subject to manipulation or arbitrary accounting ideas.

 

Large cap Japan was at 120x CAPE ratio and while market was at 70-80x PE; to compare the US stock market of today to 1989 Japan is to believe that company earnings will decline by some 60-75% via an extreme combo of margin compression/ sales decline to get to similar valuations as then.

 

 

http://siblisresearch.com/data/japan-shiller-pe-cape/

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Yes but if you are comparing Japan to US market cap to GDP that normalizes sales / margins between the countries. Given the differences in culture and company composition, this would be very mistaken, in my opinion. Why does the US have higher market cap to GDP than Japan bubble time but somewhere between 1/4 and 1/6 the PE ratio? Huge difference in earnings an margins. I think US corporates are over earning but to make the comparison between US and Japan is to say they are overearning to an extreme degree. I think the comparison has little relevance or analytical merit.

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^The Japanese cycle reference is interesting.

If used as a benchmark, then it's possible that US markets could double overnight and reach Nikkei 89's height.

 

On top of earnings decline and margin compression, Japan has had to deal with a triple whammy as they sort of went (are going?) through some kind of paradigm shift.

From Dec. 1989 to somewhere in 2019, total annual return in yen: -0.8%.

https://dqydj.com/nikkei-return-calculator-dividend-reinvestment/

 

Tell me where I'm going to die so I don't go there.

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