Did we just here a bell?

[TwoCitiesCapital]

 

Yes, but I've hammered on and on again about how low interest rates do NOT support high multiples b/c they also imply low growth.

 

 

Don't inflation expectations drive interest rates down?  Don't inflation expectations also drive P/E for the markets?

 

P/E of 15x == 6.67% earnings yield

P/E of 20x == 5% earnings yield

 

So if future inflation expectations are (hypothetically) 167 basis points lower, then isn't a 15x multiple the same as a 20x multiple in real terms?

 

Agreed. Inflation is far more important than nominal rates. But it's not linear.

 

Top multiples tend to be found when inflation is 1-3% (regardless of what nominal rates are T that time). If inflation falls sustainably below, or above, that range is when P/Es start collapsing dramatically.

 

Also, found some of the data I was looking at on Japanese companies. They were actually using earnings relative to Enterprise value since Japanese companies tend to hold so much cash while U.S. companies were far more levered. The difference was stark!

[mcliu]

I think you might have to factor in both growth and inflation/interest rate.

They're linked since low growth implies low inflation/interest rate, but not always. With globalization, there's possibility of importing deflation from other countries.

In Japan/Europe, you have negative growth, negative inflation/interest rattes, hence low multiples.

In US, you have low-medium growth but also low inflation/interest rates, hence high multiples.

I dunno, not an economist, so just a guess.

[Spekulatius]

I think you might have to factor in both growth and inflation/interest rate.

They're linked since low growth implies low inflation/interest rate, but not always. With globalization, there's possibility of importing deflation from other countries.

In Japan/Europe, you have negative growth, negative inflation/interest rattes, hence low multiples.

In US, you have low-medium growth but also low inflation/interest rates, hence high multiples.

I dunno, not an economist, so just a guess.

 

Low or negative interest rates mean that the economy tends to be very slow growing and fragile. This also means that profits don’t grow a d may be fragile, which doesn’t support high equity multiples. If Europe and Japan is any guide, the multiples for equity won’t go up if interest rates in the US go negative, because this won’t occur in isolation, there will be other factors that negate higher discount rates (crappy profit growth, fragile profits etc).

 

At least that’s how I think about this, but I am not an economist. I do think that multiples for real estate, especially residential RE will go up if interest rates go negative, because borrowing costs  is the largest cost factor except in very high tax states.

[TwoCitiesCapital]

 

We're still @ like 16x trailing earnings. When has a bear market and a recession EVER ended @ 16x earnings? And those earnings haven't even really been revised down yet.

 

S&P 2000 and the announcement of the recession will be the time to start buying. Each rally is a selling opportunity until then.

 

Also, for what it's worth, I also work w/ retail investment clients. For the most part, they're doing as they should and staying the course and some are even adding. The "buy-the-dip" mentality has not been sufficiently punished for this to be the end of the selling.

 

Going to change my tune here. The last two business days have been filled with clients wanting to change to less volatile asset allocations (a la sell equities and buy bonds....).

 

Still not seeing people say sell everything yet, but we're getting closer.

[no_free_lunch]

Financials and cyclicals are getting hit hard right now. So many banks down 50%.  It makes sense if there is an extended downturn.  Small businesses and average joe won't be able to make their mortgage payments and will certainly delay spending.  It could be really ugly.

 

If you think all of this will happen I just don't see how it won't impact other industries more downstream.  If it is this bad then it has to ripple through. I think it will make its way through to tech.  Still very bubbly there.  Perhaps tech spending will get cut by smaller businesses and ad spending will be put on hold.

 

If I'm wrong I just don't see the banks going under and they are a bargain now.

 

Just some random thoughts.

 

 

[stahleyp]

 

We're still @ like 16x trailing earnings. When has a bear market and a recession EVER ended @ 16x earnings? And those earnings haven't even really been revised down yet.

 

S&P 2000 and the announcement of the recession will be the time to start buying. Each rally is a selling opportunity until then.

 

Also, for what it's worth, I also work w/ retail investment clients. For the most part, they're doing as they should and staying the course and some are even adding. The "buy-the-dip" mentality has not been sufficiently punished for this to be the end of the selling.

 

Going to change my tune here. The last two business days have been filled with clients wanting to change to less volatile asset allocations (a la sell equities and buy bonds....).

 

Still not seeing people say sell everything yet, but we're getting closer.

 

two, please keep us updated on what you're seeing there.

[longlake95]

Just had a call from an acquaintance, who is terrified, and has sold a a good portion of his holdings, including some 3X-ETF type stuff. The word depression came up several times.  Maybe that was the bottom tick?

[TwoCitiesCapital]

Just had a call from an acquaintance, who is terrified, and has sold a a good portion of his holdings, including some 3X-ETF type stuff. The word depression came up several times.  Maybe that was the bottom tick?

 

When you start hearing that from people who weren't in 3x leveraged stuff, I'd be listening

 

The leveraged players are always the first ones out because they can't handle the ride down.

[gfp]

My next-door neighbor told me this morning from his front porch that he sold everything for him and his wife today - which will be this afternoon's closing price because it was all open ended mutual funds and index funds.  They are one year away from retirement and they just couldn't take it anymore.

[gfp]

Neighbor's liquidation at yesterday's closing price followed by 11.4% up day on the Dow Jones Industrial Average... 

 

My next-door neighbor told me this morning from his front porch that he sold everything for him and his wife today - which will be this afternoon's closing price because it was all open ended mutual funds and index funds.  They are one year away from retirement and they just couldn't take it anymore.

[netnet]

My next-door neighbor told me this morning from his front porch that he sold everything for him and his wife today - which will be this afternoon's closing price because it was all open ended mutual funds and index funds.  They are one year away from retirement and they just couldn't take it anymore.

 

Sigh...we humans are our own worst enemy.

[TwoCitiesCapital]

 

We're still @ like 16x trailing earnings. When has a bear market and a recession EVER ended @ 16x earnings? And those earnings haven't even really been revised down yet.

 

S&P 2000 and the announcement of the recession will be the time to start buying. Each rally is a selling opportunity until then.

 

Also, for what it's worth, I also work w/ retail investment clients. For the most part, they're doing as they should and staying the course and some are even adding. The "buy-the-dip" mentality has not been sufficiently punished for this to be the end of the selling.

 

Going to change my tune here. The last two business days have been filled with clients wanting to change to less volatile asset allocations (a la sell equities and buy bonds....).

 

Still not seeing people say sell everything yet, but we're getting closer.

 

two, please keep us updated on what you're seeing there.

 

Still seeing mixed feedback. For every client adding risk, there are clients reducing risk. At this point, accounts are automatically rebalancing back to equity targets so we're net buyers, but that happens w/o client input so not sure it helps in measuring the sentiment of the crowd.

 

I still down think buy-the-dip has been punished enough and not seeing the kind of panic that I saw even during late-2018. Makes me think this isn't over.

 

Particularly since we still have yet to see the worst of this in the U.S. , Spain, India, etc.

[bookie71]

Is it really an uptick or is it another "dead cat" bounce?

[gurpaul88]

Who knows?

[TwoCitiesCapital]

Is it really an uptick or is it another "dead cat" bounce?

 

Deadcat bounce.

 

Until you have clarity on what the virus' impact will be on earnings, the fear of the virus will drive more selling IMO.

[Kaegi2011]

Is it really an uptick or is it another "dead cat" bounce?

 

Deadcat bounce.

 

Until you have clarity on what the virus' impact will be on earnings, the fear of the virus will drive more selling IMO.

 

I agree.  However, these rallies can be volatile and go on longer than than one would expect.  I know I was taken for a few rides during 08/09 when I thought coast was "all clear" and I basically end up being the sucker that top ticked the bounce.  So this may go on for another 5, 10, 15% - who knows, but I don't think what we've seen this cycle is even close to representative of an usual bear market (e.g., much slower grind down vs. just a massive drop in the span of a couple of weeks). 

[Spekulatius]

My next-door neighbor told me this morning from his front porch that he sold everything for him and his wife today - which will be this afternoon's closing price because it was all open ended mutual funds and index funds.  They are one year away from retirement and they just couldn't take it anymore.

 

Sigh...we humans are our own worst enemy.

 

It might be a wise decision if further market erosion would impact his retirement plans and he can live with what he got at this point. Plus he got out on a strong up day, so there is that.