Will S&P 500 Retest Recent Low By End of April

[TwoCitiesCapital]

The trouble I have is the uncertainty. The stock market SEEMS to be reacting to liquidity and has certainty of a quick recovery, but is overlooking ALL of the risks - many of which are likely more probable outcomes.

 

Things like:

 

1) Fed intervention works and now we get inflation of 4-5% a year which will still wreak havoc on 60/40 portfolios as both stocks and bonds adjust (probably our best case scenario)

 

 

I think the problem is quite the opposite. We will see very low inflation or deflation.

 

To get inflation

 

1. You need companies to be rising the prices for goods/services because of an increase in demand for those goods/services.

 

2. You need people whose wages are increasing rapidly because there is a shortage of workers.

 

You need both 1 & 2 to get inflation.

 

Do you believe there is going to be a spectacular sustained rise in demand for goods/services and a massive growth in employment? Not for a quarter or two but for years.

 

Vinod

 

Covered in item 6.

 

I'm in the deflationary camp for now. No matter how much the Fed prints, if it doesn't circulate it's not inflationary. That's what I took from 2008.

 

This time around it won't sit in excess reserves, but go directly to consumers and businesses, so inflation is a much higher risk here. But the money still won't circulate if people are afraid to go out and we have rollings starts/stops of the economy which is what I anticipate. Just covering my basis of uncertainty, but the point is either scenario seems negative for equities at these valuations.

[vinod1]

The trouble I have is the uncertainty. The stock market SEEMS to be reacting to liquidity and has certainty of a quick recovery, but is overlooking ALL of the risks - many of which are likely more probable outcomes.

 

Things like:

 

1) Fed intervention works and now we get inflation of 4-5% a year which will still wreak havoc on 60/40 portfolios as both stocks and bonds adjust (probably our best case scenario)

 

 

I think the problem is quite the opposite. We will see very low inflation or deflation.

 

To get inflation

 

1. You need companies to be rising the prices for goods/services because of an increase in demand for those goods/services.

 

2. You need people whose wages are increasing rapidly because there is a shortage of workers.

 

You need both 1 & 2 to get inflation.

 

Do you believe there is going to be a spectacular sustained rise in demand for goods/services and a massive growth in employment? Not for a quarter or two but for years.

 

Vinod

 

Covered in item 6.

 

I'm in the deflationary camp for now. No matter how much the Fed prints, if it doesn't circulate it's not inflationary. That's what I took from 2008.

 

This time around it won't sit in excess reserves, but go directly to consumers and businesses, so inflation is a much higher risk here. But the money still won't circulate if people are afraid to go out and we have rollings starts/stops of the economy which is what I anticipate. Just covering my basis of uncertainty, but the point is either scenario seems negative for equities at these valuations.

 

6) Fed intervention was NOT enough and we still have 10+% unemployment when this all settled down

 

I am not seeing the path from #6 to inflation.

 

At the end of the day, it has to be result in wages skyrocketing and demand for goods/services exceeding supply. How is that going to happen?

 

If either of those things happen why can't the Fed reverse back whatever it is doing and control inflation? That is why I am interested in hearing how do you think #6 leads to wages and demand for goods/services exceeding supply?

 

Vinod

[vinod1]

Vinod, I think you need to extend point 1.  You need companies to increase prices because demand exceeds supply.  In normal times that means an increase in demand.

If supply gets cut due to say a global pandemic you can also meet that condition.

 

You are right of course.

 

Vinod

[vinod1]

Also I think we really do not have enough data/examples to say why very low inflation or deflation is bad for stock valuations. Just on top of my head, the cases of deflation had been associated with severe economic problems (1930s in US) and or extreme overvaluations (1990's Japan) and that explains low equity returns.

 

If we have say +1 or -1% inflation and real economic growth rate is say 1%, and economy grows slowly but does not have severe recessions or problems, why cant stocks be worth 25x or 30x earnings?

 

So you have a choice of cash yielding 0%, bonds yielding 1% and stocks generating 4-5% returns.

 

We have about 150 years of history with stocks and bonds and economy has evolved a lot during that period and financial paradigms have changed a lot in this while. If you think of long term as 30 years, we really have 5 coin tosses from which to make decisions on. So there is a hell of a lot of uncertanity in being able to say if stocks are valued reasonably or not.

 

I just do not think 6-7% real returns that investors experienced in the last 100-150 years, provides any justification to say what is the right level is for stock markets. I mention this because at the end of the day this required return (6% or 7% real) is what is driving many people's view of the justified market value.

 

Vinod

[TwoCitiesCapital]

The trouble I have is the uncertainty. The stock market SEEMS to be reacting to liquidity and has certainty of a quick recovery, but is overlooking ALL of the risks - many of which are likely more probable outcomes.

 

Things like:

 

1) Fed intervention works and now we get inflation of 4-5% a year which will still wreak havoc on 60/40 portfolios as both stocks and bonds adjust (probably our best case scenario)

 

 

I think the problem is quite the opposite. We will see very low inflation or deflation.

 

To get inflation

 

1. You need companies to be rising the prices for goods/services because of an increase in demand for those goods/services.

 

2. You need people whose wages are increasing rapidly because there is a shortage of workers.

 

You need both 1 & 2 to get inflation.

 

Do you believe there is going to be a spectacular sustained rise in demand for goods/services and a massive growth in employment? Not for a quarter or two but for years.

 

Vinod

 

Covered in item 6.

 

I'm in the deflationary camp for now. No matter how much the Fed prints, if it doesn't circulate it's not inflationary. That's what I took from 2008.

 

This time around it won't sit in excess reserves, but go directly to consumers and businesses, so inflation is a much higher risk here. But the money still won't circulate if people are afraid to go out and we have rollings starts/stops of the economy which is what I anticipate. Just covering my basis of uncertainty, but the point is either scenario seems negative for equities at these valuations.

 

6) Fed intervention was NOT enough and we still have 10+% unemployment when this all settled down

 

I am not seeing the path from #6 to inflation.

 

At the end of the day, it has to be result in wages skyrocketing and demand for goods/services exceeding supply. How is that going to happen?

 

If either of those things happen why can't the Fed reverse back whatever it is doing and control inflation? That is why I am interested in hearing how do you think #6 leads to wages and demand for goods/services exceeding supply?

 

Vinod

 

The point of my post wasn't to say I think inflation or deflation are the likely outcomes. My point was to point out potential risks that are varying levels of possibility that the market doesn't appear to be pricing in.

 

I'm not saying which of those 8 is the most likely. Only that ANT if the 8 likely result in equity prices substantially lower than where we trade today.

[vinod1]

The trouble I have is the uncertainty. The stock market SEEMS to be reacting to liquidity and has certainty of a quick recovery, but is overlooking ALL of the risks - many of which are likely more probable outcomes.

 

Things like:

 

1) Fed intervention works and now we get inflation of 4-5% a year which will still wreak havoc on 60/40 portfolios as both stocks and bonds adjust (probably our best case scenario)

 

 

I think the problem is quite the opposite. We will see very low inflation or deflation.

 

To get inflation

 

1. You need companies to be rising the prices for goods/services because of an increase in demand for those goods/services.

 

2. You need people whose wages are increasing rapidly because there is a shortage of workers.

 

You need both 1 & 2 to get inflation.

 

Do you believe there is going to be a spectacular sustained rise in demand for goods/services and a massive growth in employment? Not for a quarter or two but for years.

 

Vinod

 

Covered in item 6.

 

I'm in the deflationary camp for now. No matter how much the Fed prints, if it doesn't circulate it's not inflationary. That's what I took from 2008.

 

This time around it won't sit in excess reserves, but go directly to consumers and businesses, so inflation is a much higher risk here. But the money still won't circulate if people are afraid to go out and we have rollings starts/stops of the economy which is what I anticipate. Just covering my basis of uncertainty, but the point is either scenario seems negative for equities at these valuations.

 

6) Fed intervention was NOT enough and we still have 10+% unemployment when this all settled down

 

I am not seeing the path from #6 to inflation.

 

At the end of the day, it has to be result in wages skyrocketing and demand for goods/services exceeding supply. How is that going to happen?

 

If either of those things happen why can't the Fed reverse back whatever it is doing and control inflation? That is why I am interested in hearing how do you think #6 leads to wages and demand for goods/services exceeding supply?

 

Vinod

 

The point of my post wasn't to say I think inflation or deflation are the likely outcomes. My point was to point out potential risks that are varying levels of possibility that the market doesn't appear to be pricing in.

 

I'm not saying which of those 8 is the most likely. Only that ANT if the 8 likely result in equity prices substantially lower than where we trade today.

 

I do understand your point and agree largely with you overall. Not trying to argue, but this is the one thing that holds me back from having a stronger view about the overall market. Looking for reasons why this argument could be wrong.

 

What I am trying to point is market might be right. So if you look at last year this time, there is a concern that long term rates might increase for whatever reasons. Now it seems likely that interest rates are going to be low for a long time. So if interest rates are going to be 0 to 1% for say the next 10-15 years, is the stock market overvalued even if every other point you mention (other than inflation rate) come true?

 

Tech, health care, communications services, utilities and large part of financial services and consumer staples are not really going to be impacted. This is like 60% or more of the economy. No reason why these industries are going to be less profitable long term and if rates are going to be low would be worth a lot more.

 

So a lot is going to be dependent on if rates are going to be low long term. So all the factors you mention would be mitigated by this one factor.

 

Vinod

[Fitz]

I have no opinion on weather we will be more likely to see inflation vs deflation in the aftermath of this stimulus and recession.

 

But you can definitely have inflationary pressures from currency devaluation as it will cause the price of the many items we import to become more expensive and our exports to become cheaper and more in demand. Just my two cents, inflation doesn't have to come only through wage growth and consumer demand. A decent portion of the items that make up the CPI are import related and this arbitrary number is most referenced for our "inflation" barometer.

[Mephistopheles]

Revisiting this poll, close to 57% of the (76/134) respondents expected we hit a new low in the S&P by end of April. Unless we hit that new low over the next two days, safe to say they were wrong. The sentiment is that the market will fall again, across the investment universe, professionals and amateurs alike. We've heard Icahn, Tepper, Bill Gates imply that they think prices should fall again. Buffett hasn't spent his cash for all we know.

 

A colleague at work who knows very little about stocks told me how he's upset he missed the bottom. I'm sure many of us feel similarly.

 

Seems like the unpopular, unheard of sentiment is that we hit our bottom and stocks are a good buy right now.

 

What does it all mean?

 

I'm in the camp that stock prices seem strange compared to the economy. I'm looking at the Bureau of Labor Statistics which shows that Retail, Leisure and Hospitality employs 20% of the workforce.

 

Whatever happens with lockdowns, whether we have them or not, a significant portion of these workers will remain unemployed until everyone is vaccinated. People will avoid travel, dining out, entertainment regardless of lockdowns. Even if we find that Remdesevir or any of these drugs work, who wants to risk getting the disease in the first place?

 

People won't feel confident until we have a majority of the population vaccinated which is several years away. Remember 18 months is the time frame to discover a vaccine but that vaccine still needs to be manufactured, distributed and administered.

 

I don't think the market is pricing in the logistics of this, or human behavior. People think that you flip on a switch for the economy and everything will go back to normal overnight.

 

It's weird, it seems everyone is expecting market to go back down while simultaneously expecting a quick recovery created by this "artificial" government induced recession. Both can't happen at the same time.

 

Thoughts?

[thowed]

Thoughts?  Investing is hard!

 

Unless you're like Druckenmiller at his peak, or can pick off undervalued special situations, I think the only way to play it is agnostically.

 

I play the old Peter Bernstein line, What If I'm Wrong to try and balance my equity exposure i.e. enough to make some money if it keeps going up (which as you say, doesn't really make sense) and enough cash etc. so that if things do go down again, I can take advantage.

 

Would love to hear alternative ideas, but after years of trying to be clever and getting it wrong, this is the thing that I feel most comfortable with at the moment.

 

Of course, there are many other strategies, and certain posters here have good trading skills and can exploit single stock short-term inefficiences, which are always around. 

[Gregmal]

Personally, the leg down was like nothing we've seen before. There was absolutely forced selling, margin selling, liquidity gaps, etc. I would not expect to see this type of thing again. I agree the market appears strange here. I also think there's stuff that contributes to "the index" that is insanely cheap, such as real estate. As a whole though, I would think if we are a bit(or a lot) too optimistic in terms of whats priced in, it will be a gradual grind lower, rather than the floor falling out of everything again. In other words, a stock pickers market.

 

I am watching this week carefully as a lot of the earnings will be coming in from the hardest hit companies. Ford(I am short this) today for instance is one of them. How the market reacts to these earnings IMO should give us a decent read on whats "priced in" or not.

[LC]

Agreed on Greg’s last point. We will see if depressed earnings are priced in. UPS gave some indication this morning...

[TwoCitiesCapital]

Agreed that new lows by the end of April isn't going to happen, but I'm still in the "high certainty" group that new lows are made.

 

The economy was slowing already going into this. Now it's slowing dramatically because of COVID-19. Even if the virus disappeared tomorrow, you still have lasting damage from what is likely to be a pretty big/deep global recession. And I also don't believe the virus disappears tomorrow - I think there is a high probability that this thing comes in multiple waves and so you'll continue to see depressed global economic activity.

 

Earnings from Q1 so far have been a disaster - we're looking at -15% year-over-year (annualized) so far with only having 2-3 bad weeks in the quarter. We're already well past 2-3 bad weeks in Q2 and even with the economy reopening there will be plenty of jobs that are permanently lost and plenty of people still hesitant about immediately going back out to crowded areas. I think my initial assumptions of the average -30% adjustment to annual earnings may prove optimistic.

 

I couldn't imagine paying 21x trailing earnings for the index in early 2020. I similarly can't imagine paying 22x my expected earnings for 2020 after adjusting for my -30% revision. Maybe you can make the argument the index is trading on 2021 earnings - but I have no clue what those will be and, as mentioned above, think its a high probability that they're optimistic.

 

I've selling equities into the rally and adding put spreads to my already large put position.

[valueinvestor]

it’s weird that all the equities priced for bankruptcy such as hotels, cruises, branded credit cards, etc are up mid to double digits, while tech stocks are going to down and they have the best chance weathering this pandemic.

 

I don’t know if I ever seen this before - it’s almost like the market is rebalancing itself.

 

???

[kab60]

The index isn't cheap, but you got good businesses trading at less than five times earnings, so why not just shoot fish in a barrel instead of trying to time the market? I don't get the large inclination to try and play that game if one is agile (as in not a Billionarie), has permanent capital and a long time horizon. Eveyone here sounded smart (and plausible) suggesting things would keep crashing down. Here we are with a lot of names up 200 pct. I know I'd have a hard time buying a lot of stuff at these levels, if I choked in mid March and couldn't pull the trigger on what seems like the best opportunity in more than ten years (Like Greg said: non-fundamental selling, liquidations etc...).

[TwoCitiesCapital]

The index isn't cheap, but you got good businesses trading at less than five times earnings, so why not just shoot fish in a barrel instead of trying to time the market? I don't get the large inclination to try and play that game if one is agile (as in not a Billionarie), has permanent capital and a long time horizon. Eveyone here sounded smart (and plausible) suggesting things would keep crashing down. Here we are with a lot of names up 200 pct. I know I'd have a hard time buying a lot of stuff at these levels, if I choked in mid March and couldn't pull the trigger on what seems like the best opportunity in more than ten years (Like Greg said: non-fundamental selling, liquidations etc...).

 

It's not shooting fish in the barrel because when the market moves down, so does just about everything else. We saw this before the downdraft - two of my holdings, EXOR and Farifax India, were @ 30% discounts to reasonable estimates of NAV in January 2020.

 

Exor went from EUR 70+ per share down to EUR 35 per share - a discount to its expected cash balances and a massively larger discount to its NAV and only partially recovered. Was this a buying opportunity at  EUR 35? Absolutely! Buy it shows that being cheap going into a downdraft is NOT enough protection.

 

Fairfax India also fell ~50% and hasn't really recovered. Hard to say what the NAV has done, but I doubt it's down by 50% so the NAV discount also widened.

 

The problem is cheap gets cheaper if the market as a whole is moving down - a rising tide lifts all boats and an outgoing tide lowers all boats. I'm not trying to call the bottom. I'm trying to avoid what appears to be a high probability of loss based on the market as a whole trading at 21-22x earnings we know are still declining.

 

It'll be "shooting fish in the barrel" when you can throw a dart at the S&P 500 and do reasonably well over the next 3-5 year period no matter where it lands. 21x collapsing earnings does not appear to be that situations. For those companies trading at "5x" earnings? That is trailing earnings and 2020 and 2021 are likely be to be much worse so still plenty of room pessimism in such names even if they are "cheap" now.

 

I don't know where the market bottom will be. I have pre-set triggers that I will start buying at based on on my expectations for EPS. 2300 is the first buy point. 2000 is the next. And 1800 is the next. Not calling the bottom - just doing my best to avoid investing at the top.

[kab60]

I'm not saying things won't crash again. Or that the market as a whole doesn't look expensive. Who knows. But in March you (almost) could throw darts and expect to do well if sidestepping the occasional donut (balance sheet strength, enough liquidity). Yes, the selloff was brutal, nothing was spared, but isn't that what we were waiting for? Why the S&P targets instead of just investing bottom up? What I'm saying obviously only makes sense if one doesn't think volatility equals risk (and I got punched in the gut, down almost 50 pct from recent top to bottom).

 

Sure, trailing earnings. But you also had things at 1xearnings. If one does a fancy model, year 1 and 2 CF doesn't matter much.

[TwoCitiesCapital]

I'm not saying things won't crash again. Or that the market as a whole doesn't look expensive. Who knows. But in March you (almost) could throw darts and expect to do well if sidestepping the occasional donut (balance sheet strength, enough liquidity). Yes, the selloff was brutal, nothing was spared, but isn't that what we were waiting for? Why the S&P targets instead of just investing bottom up? What I'm saying obviously only makes sense if one doesn't think volatility equals risk (and I got punched in the gut, down almost 50 pct from recent top to bottom).

 

Sure, trailing earnings. But you also had things at 1xearnings. If one does a fancy model, year 1 and 2 CF doesn't matter much.

 

I started buying at the lows. We spent two days right around the 2300 level and incrementally edged into some equities and high yield bonds 

 

But your observation that you could've thrown darts and done well is literally based on 6 weeks of hindsight. Very short term and will no longer be true if we revisit those lows so I don't think it's enough to qualify for me just yet.

[rb]

I'm not saying things won't crash again. Or that the market as a whole doesn't look expensive. Who knows. But in March you (almost) could throw darts and expect to do well if sidestepping the occasional donut (balance sheet strength, enough liquidity). Yes, the selloff was brutal, nothing was spared, but isn't that what we were waiting for? Why the S&P targets instead of just investing bottom up? What I'm saying obviously only makes sense if one doesn't think volatility equals risk (and I got punched in the gut, down almost 50 pct from recent top to bottom).

 

Sure, trailing earnings. But you also had things at 1xearnings. If one does a fancy model, year 1 and 2 CF doesn't matter much.

I wasn't too phased about the volatility. I actually like it, don't need circuit breakers to change my pants.

 

But the fact is that in March you weren't looking at the occasional doughnut. There's actually not many businesses with good balance sheets right now. Years of buybacks and financial engineering made sure of that. The ones that went down to 1-2x trailling PE had horrid balance sheets! That's why they went that low. Some of the better stuff was so expensive going in that even with the selloff weren't that appetizing. There was some good stuff for sure at the bottom. But it wasn't anywhere close to dart throwing/fishing with dynamite level stuff.

[TwoCitiesCapital]

I'm not saying things won't crash again. Or that the market as a whole doesn't look expensive. Who knows. But in March you (almost) could throw darts and expect to do well if sidestepping the occasional donut (balance sheet strength, enough liquidity). Yes, the selloff was brutal, nothing was spared, but isn't that what we were waiting for? Why the S&P targets instead of just investing bottom up? What I'm saying obviously only makes sense if one doesn't think volatility equals risk (and I got punched in the gut, down almost 50 pct from recent top to bottom).

 

Sure, trailing earnings. But you also had things at 1xearnings. If one does a fancy model, year 1 and 2 CF doesn't matter much.

I wasn't too phased about the volatility. I actually like it, don't need circuit breakers to change my pants.

 

But the fact is that in March you weren't looking at the occasional doughnut. There's actually not many businesses with good balance sheets right now. Years of buybacks and financial engineering made sure of that. The ones that went down to 1-2x trailling PE had horrid balance sheets! That's why they went that low. Some of the better stuff was so expensive going in that even with the selloff weren't that appetizing. There was some good stuff for sure at the bottom. But it wasn't anywhere close to dart throwing/fishing with dynamite level stuff.

 

+1

[Viking]

Agreed that new lows by the end of April isn't going to happen, but I'm still in the "high certainty" group that new lows are made.

 

The economy was slowing already going into this. Now it's slowing dramatically because of COVID-19. Even if the virus disappeared tomorrow, you still have lasting damage from what is likely to be a pretty big/deep global recession. And I also don't believe the virus disappears tomorrow - I think there is a high probability that this thing comes in multiple waves and so you'll continue to see depressed global economic activity.

 

Earnings from Q1 so far have been a disaster - we're looking at -15% year-over-year (annualized) so far with only having 2-3 bad weeks in the quarter. We're already well past 2-3 bad weeks in Q2 and even with the economy reopening there will be plenty of jobs that are permanently lost and plenty of people still hesitant about immediately going back out to crowded areas. I think my initial assumptions of the average -30% adjustment to annual earnings may prove optimistic.

 

I couldn't imagine paying 21x trailing earnings for the index in early 2020. I similarly can't imagine paying 22x my expected earnings for 2020 after adjusting for my -30% revision. Maybe you can make the argument the index is trading on 2021 earnings - but I have no clue what those will be and, as mentioned above, think its a high probability that they're optimistic.

 

I've selling equities into the rally and adding put spreads to my already large put position.

 

+1. The economy has now entered the ‘twilight zone’. The virus hit so fast and the lock downs happened so fast the economic news/situation is surreal. People do not yet feel/see the true extent of all the economic carnage; it will take months (perhaps years) to play out. In the near term, massive government spending has given equity markets a short term boost (as per normal). There is no resolution to the virus (treatment or vaccine) with lots of uncertainty about its future path.

 

Governments are spending at unprecedented levels and this cannot continue indefinitely; when this ends my guess is  stocks will once again sell off. And guess what governments will do when that happens? (Yup, more massive spending :-) They have no other choice. And the US will have an election in Nov and if we were ever going to see helicopter money it is now; Trump/US Treasury will print as much as they can to juice the economy/stock market in the coming months.

 

In terms of what to do with your portfolio? Depends on your objectives (capital preservation or return?), situation (age, job security), risk profile, strategies etc. There is no one ‘correct’ answer of what should be done.

 

I do think investors are being given a gift right now: opportunity to re-balance their portfolios.

 

I voted low conviction that we would re-test lows in April. My vote stays the same if we drop ‘April’ and add ‘at some point in 2020’. There are too many unknowns to be more specific on timing. How long can governments continue to spend at current levels? The global economy is currently broken. What will it look like in 8 weeks and in the fall? How successful will phase 2 be in containing the virus? Will the virus come back in Sept/Oct? Globalization is on life support and supply chains are messed up. Italy health/fiscal situation? Emerging markets? Oil? Deflation? US election? So much important stuff is simply unknowable right now.

 

But stocks are in rally mode so all must be well :-) The Fed has done its job.

[Jurgis]

I voted "yes", but I missed the "By End of April" part (or it was not there when I voted). I took a look at OP and it does not mention "April", though the thread title does. My bad, shoulda learn to read - or shoulda make note on what I read.

 

Overall, I am +1 with rb.

 

I don't know what went at 1-2 PE at March bottom, but I doubt it was anything I was looking at. Good/great companies were moderately attractive: I bought FB and GOOGL, but they were not even close to 10 PE, and definitely not 1-2PE. V probably did not go below 25PE (too lazy to lookup :)).

 

I also bought DFS, EXPE, BKNG, but these are not going for 1-2 PE either, since EXPE and BKNG definitely will have large losses and DFS... who knows.

I also bought some airline related stocks that I have since sold. I can't say they went for 1-2 PE either.

 

I still think that market is not forward looking enough and not discounting the slow grind back to normal enough.

But it's possible that Fed will just continue puking $$$$ and govt may continue to add stimulus. So then market may not go down to March lows.

 

All that said, I have sold some stuff (that I may regret selling) and I am at ~30% cash now.

 

Disclaimer: I may change my opinion at any time and buy/sell/etc. Do your own DD. My opinions may carry no alpha, beta, gamma or any other letters of greek alphabet.

[SHDL]

I voted "yes", but I missed the "By End of April" part (or it was not there when I voted).

 

Me too (or, in other words, “I failed the exam because I didn’t read the instructions”). I still think a large drawdown is quite possible unless we get a miracle cure for the virus soon.

 

FWIW, SPX and NDX just retraced around 60% of their initial drop which is very close to what they did during the first bear market rally in the spring of 2008. So we’ve now reached a technical level that I’m sure a lot of traders/algos are paying attention to. Is it a coincidence that we got here right before the FOMC meeting and big tech earnings? I think not. Fundamentals are still murky enough for the market to keep trading on such “voodoo” for a while IMO.

[kab60]

I'm not saying things won't crash again. Or that the market as a whole doesn't look expensive. Who knows. But in March you (almost) could throw darts and expect to do well if sidestepping the occasional donut (balance sheet strength, enough liquidity). Yes, the selloff was brutal, nothing was spared, but isn't that what we were waiting for? Why the S&P targets instead of just investing bottom up? What I'm saying obviously only makes sense if one doesn't think volatility equals risk (and I got punched in the gut, down almost 50 pct from recent top to bottom).

 

Sure, trailing earnings. But you also had things at 1xearnings. If one does a fancy model, year 1 and 2 CF doesn't matter much.

I wasn't too phased about the volatility. I actually like it, don't need circuit breakers to change my pants.

 

But the fact is that in March you weren't looking at the occasional doughnut. There's actually not many businesses with good balance sheets right now. Years of buybacks and financial engineering made sure of that. The ones that went down to 1-2x trailling PE had horrid balance sheets! That's why they went that low. Some of the better stuff was so expensive going in that even with the selloff weren't that appetizing. There was some good stuff for sure at the bottom. But it wasn't anywhere close to dart throwing/fishing with dynamite level stuff.

I'm talking my book here, since these are the ones I know best, so sorry about that, but Alliance Data Systems was down to some 1xestimated 2020 earnings. I believe that was with corporate leverage around 1,5x and well capitalized banks. Sure, it won't make compounder bros drool (or anyone for that matter...), but there were others to pick from. Best-in-class car dealerships at 3-5 times trailing earnings despite 40-48 pct. of GP from service. Or a plastic maker like Berry Global at a plus 25 pct. FCF yield.

 

Either way, I appreciate the input, and I do feel like somewhat of an optimistic idiot. I agree with most that has been written, but some businesses are still trading in a way that'll probably make for plus 100-200 pct. returns in a post-Corona world if they can just survive. And a lot of them will - probably a lot more than people will expect. I guess my point is that we're not buying the indexes. Yes, we'll get slaughtered like pigs if indexes are cut in half, but fundamentals do matter, and I bet some of these businesses will be around for a long time - despite what is obviously at least one awful year.

[kab60]

I voted "yes", but I missed the "By End of April" part (or it was not there when I voted).

 

Me too (or, in other words, “I failed the exam because I didn’t read the instructions”). I still think a large drawdown is quite possible unless we get a miracle cure for the virus soon.

 

FWIW, SPX and NDX just retraced around 60% of their initial drop which is very close to what they did during the first bear market rally in the spring of 2008. So we’ve now reached a technical level that I’m sure a lot of traders/algos are paying attention to. Is it a coincidence that we got here right before the FOMC meeting and big tech earnings? I think not. Fundamentals are still murky enough for the market to keep trading on such “voodoo” for a while IMO.

I don't think a miracle is needed, but it will obviously take some time. At the same time, it's actually quiet encouraging how Companies, governement agencies etc. are working together globally to find a treatment and a vaccine for this thing. It's impressive of what we're capable of achieving if we focus and work together. Imagine if we tried to tackle climate change (I won't go into a discussion!) with the same determination and ressources (https://seekingalpha.com/news/3565740-covidminus-19-vaccine-be-ready-for-emergency-use-fall)

[samwise]

People hold cash or puts to hedge themselves, but these are costly. Cash has opportunity costs if the market runs away from you. Puts on the SPY are pretty expensive currently. For you to make much money the market would have to fall a lot, and VIX to stay same or more. Is there a cheaper way that people prefer? maybe put spreads or some other way to express a view?

 

BTW people mentioned 1xPE. I don't remember any, but I think we got to almost 2x (pre-civid earnings) in some airlines and cruiselines.