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

[LC]

I sold short dated OOM calls in Feb with strikes around the market highs of Jan/Feb; most of these I closed out for pennies.

 

In March I moved long stock positions into 2 year LEAPs to free up cash as a hedge (potentially costly, as you mention) but maintain long exposure.

 

Otherwise trying to strategically shift to more "antifragile" businesses to use a pop-art word.

[kab60]

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.

I mentioned Alliance Data Systems. While Airlines and Cruise Lines are possibly impaired, I asked in the Alliance thread for someone to kill the business, because I couldn't come up with a reasonable way to kill it. The jury is still out, but so far so good (and up close to 150 pct from the low).

[wescobrk]

I underestimated how powerful the Fed would be. The Fed today makes Bernanke look timid.

I think they have done a good job. Of course, we won't know the consequences for some time, but expanding their balance sheet by the trillions they have and the speed they have done, has certainly arrested that decline as quickly as the S&P stopped going down and they have spoken about ability to do even more they have done.

19% unemployment and S&P almost at 2900. Wow.

Powell will speak this afternoon. It will be interesting to see if he makes any unexpected comments.

[wabuffo]

One aspect of the Federal response to the crisis, that I haven't seen reported much is the change in Federal Tax Law due to the CARES Act that was passed by Congress in late March.  In the US, NOLs can only be carried forward (and can't be carried back to previous calendar tax years).  The CARES Act changed that.  The Act allows companies to apply tax losses from 2018, 2019 and 2020 up to five years prior (so a tax loss in 2020 could be applied to any year from 2015-2019 tax year).

 

This means cash tax refunds from the IRS.  There used to be an 80% limit on taxable income for any given year that could be used - that's been eliminated also so tax losses can be applied on the full amount of taxable income for any given year.  Finally, there's a bit of tax arbitrage added in.  The taxable loss recovers taxable income from previous years at the old Federal rates if they were in effect for that year (35% vs 21% now).

 

Given the sudden, large losses expected in 2020 from companies that were historically profitable going back and getting tax refunds at the previous 35% federal tax rate, I think many public companies will be getting large cash tax refunds.  That'll help cushion the blows a bit from what are going to be terrible 2020 results for most public companies.

 

wabuffo

[meiroy]

 

Yepp, "liquidity moves markets, not earnings".  Households get almost nothing so the real economy stays in the shits, but the markets go up because liquidity goes to those that can push it up.

 

[rkbabang]

Original poll results are interesting.  Less than 12% voted "No".  I didn't vote because I lost my crystal ball some time ago.

 

[mattee2264]

This looks like a relief rally. The worst case scenarios haven't materialised. Millions aren't going to die. Economies are starting to re-open already. The policy response has been spectacular. There is a clear path to a better future. There will be some short term dislocation and some horrible data this year. But you can look past that and the USA will rebound just like it always has. I can see the logic.

 

I think the real question is what happens to multiples. I think economic growth will probably continue to be sluggish. On the other hand interest rates will probably remain low for some time. So PE multiples could remain above 20 or go even higher. That would go a long way towards making up for a weak earnings recovery.

[Mephistopheles]

Interest rates will remain low for some time why? I know they have for 10 years, but I don't think its a given. Also, economies are starting to re-open but the fear is still there; you can't force people to travel or go to bars or concerts or sporting events.

 

At some point you need real economic activity, can't just print your way to stock returns.

 

Maybe I'm just talking my book though because I like mostly everyone else is hoping for a chance to buy at better prices.

[Jurgis]

A lot will depend on whether reopenings cause cases/deaths increase (a lot). If they don't, then people seem to be willing to go back to normal activities (see https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/what-activities-you-would-do-(if-your-local-economy-reopened)/ thread). This won't guarantee a full recovery, but it would lay foundations to mostly V recovery and then Mr. Market might be right to be at current prices.

[Gregmal]

How about change the title to "What's next? The Market is back in a Bubble, or I'm Waiting To Buy The Dip"

[buffetteer1984]

The idea of "retesting" the lows is psychologically detrimental to people investing.  People think money fall from trees?  If at the ultimate point of pessimism people could not bring themselves to buy stocks due to all their worse fears then why would the markets give you an "opportunity" to get in when there's more certainty?  If everyone and their grandmas is sitting on the sidelines with cash with the same idea I find it hard to imagine markets just lob up a fat pitch for the whole world to make money.  Instead, i think people should just focus on business cash flows over a longer term and value that to present day. 

[Gregmal]

Yup. All you can do is change your approach which involves psychological discipline and a contrarian predisposition. Otherwise, those declines happen for a reason, as you correctly point out.

 

Its funny but people spent the past decade making the mistake of crying bubble(because THEY didn't agree with valuations) and fighting the fed. Somebody with this mindset literally missed everything, or at least most of the run. Then, we get a do over of sorts, and we immediately revert right back to fighting the fed and avoiding stocks like the plague because we dont agree with the valuation.

 

I am guilty too. I went into the correction hoping to fix past mistakes in terms of the stuff I buy. I was adamant I'd focus more on high quality tech and solid operating businesses instead of the usual discount to NAV real estate garbage. I bought all that stuff, sold it a few days later for a nice short term gain, and now, look at my portfolio, what do I own? The same discount to NAV RE crap I did prior....breaking old habits is hard.

 

The only inference from history is that you are better off literally ignoring valuations(that arent obscenely excessive) and just buying the highest quality businesses the market offers. You'd likely already be on to new ATH if that was the case here. Uncomfortable? Take smaller positions or build in over time. Worrying about valuations, is just a smarter way of saying that you are timing the market. Which is cool and all...but...

 

Anyway, BRK is still "on sale" @ 192....

[buffetteer1984]

I think this thread title should be changed to "Do people WANT a retest of the lows".  I see alot people caught offsides on this one.  It was binary in march.  Either you believe the economy comes back at some point and with indexes down almost 40% it should be a buy (this already gave you margin of safety from permanent loss of capital) or we're headed into a great depression at which point everyone should probably sell everything cause the idea of compounding anything other than infections is gone for ages.

 

Yeah i think when markets crash that hard just go for quality or an index if you heed the advice of mr buffett himself.  And if i'm not mistaken, isn't retesting the lows some kind of technical mumbo jumbo? Someone should submit to warren what he thinks about us retesting the lows i'd love to hear his answer

[merkhet]

Yup. All you can do is change your approach which involves psychological discipline and a contrarian predisposition. Otherwise, those declines happen for a reason, as you correctly point out.

 

Its funny but people spent the past decade making the mistake of crying bubble(because THEY didn't agree with valuations) and fighting the fed. Somebody with this mindset literally missed everything, or at least most of the run. Then, we get a do over of sorts, and we immediately revert right back to fighting the fed and avoiding stocks like the plague because we dont agree with the valuation.

 

I am guilty too. I went into the correction hoping to fix past mistakes in terms of the stuff I buy. I was adamant I'd focus more on high quality tech and solid operating businesses instead of the usual discount to NAV real estate garbage. I bought all that stuff, sold it a few days later for a nice short term gain, and now, look at my portfolio, what do I own? The same discount to NAV RE crap I did prior....breaking old habits is hard.

 

The only inference from history is that you are better off literally ignoring valuations(that arent obscenely excessive) and just buying the highest quality businesses the market offers. You'd likely already be on to new ATH if that was the case here. Uncomfortable? Take smaller positions or build in over time. Worrying about valuations, is just a smarter way of saying that you are timing the market. Which is cool and all...but...

 

Anyway, BRK is still "on sale" @ 192....

 

+1 to all of this

[thowed]

I thought this was interesting to consider:

 

'We're only in Month #2. March '09 was 24+ months in after about 9 relentless months of bad news. We're in the late '07 "the subprime market won't impact the broader economy" stage of the crisis.'

 

+1 to the buy quality, (as long it really is quality - i.e. beware the Nifty Fifty situation) it seems an easier and lazier way to make money, but many of us think we can be smarter than that...

 

 

[TwoCitiesCapital]

I think this thread title should be changed to "Do people WANT a retest of the lows".  I see alot people caught offsides on this one.  It was binary in march.  Either you believe the economy comes back at some point and with indexes down almost 40% it should be a buy (this already gave you margin of safety from permanent loss of capital) or we're headed into a great depression at which point everyone should probably sell everything cause the idea of compounding anything other than infections is gone for ages.

 

Yeah i think when markets crash that hard just go for quality or an index if you heed the advice of mr buffett himself.  And if i'm not mistaken, isn't retesting the lows some kind of technical mumbo jumbo? Someone should submit to warren what he thinks about us retesting the lows i'd love to hear his answer

 

Saying being down 40%, but ignoring the starting valuation, is pointless. What if you're 10x overvalued - going down 40% just means you're now 6x overvalued. Still no margin of safety. 

 

We started off at 21x cycle high earnings of $160/share - that is 21x the highest earnings you can basically expect. The most optimistic scenario and the most optimistic multiple attached.

 

Now consider, the average recession knocks ~30% off corporate earnings which would take us down to ~$105/share. Slap a multiple of 20x on those "trough" earnings assuming a relatively robust recovery/rebound and you still end up with a fair value of 2100.This "fair value" is well below where we actually bottomed and is a fairly optimistic scenario as

 

1) It doesn't consider the risks of COVID coming in multiples waves and slowing the robust recovery

2) It doesn't consider the risks of earnings falling more than 30% given that this is a GLOBAL recession and likely to be worse than average

3) It doesn't consider the risks of stocks declining BELOW fair value of 2100 as they often do in bear markets

 

Ultimately, the "margin of safety" argument doesn't hold water unless if you think fair values for stocks are at 25x earnings or greater. 

[Gregmal]

Just playing devils advocate, but didn't we just see that, for the most part(obviously there are exceptions) that margin of safety is kind of bullshit because its largely a mental framework? Everyone's value stocks just got obliterated and sure you have some high flying poo poo still in the mix, but its the high quality tech stuff that showed everyone who's boss. So to a degree margin of safety sounds great and the term is sacred to value investors, but Ive come to realize that having a superior, long lasting and durable business gives you a bigger "margin of safety" than buying something at a nice PE multiple. And I say this as someone who's long held some stocks being a big believer in the value investor term "out of favor", waiting for the stock to become "in favor". Look at BRK holding GM...how cruel is "margin of safety" and "buying when out of favor" to those shareholders? They just spent an entire decade getting nothing but a $1.50 per year dividend on a 5x PE stock and now have significant and material losses, no dividend, and well, a company in bad shape...now compare this to basically any QQQ company...

[TwoCitiesCapital]

Just playing devils advocate, but didn't we just see that, for the most part(obviously there are exceptions) that margin of safety is kind of bullshit because its largely a mental framework? Everyone's value stocks just got obliterated and sure you have some high flying poo poo still in the mix, but its the high quality tech stuff that showed everyone who's boss. So to a degree margin of safety sounds great and the term is sacred to value investors, but Ive come to realize that having a superior, long lasting and durable business gives you a bigger "margin of safety" than buying something at a nice PE multiple. And I say this as someone who's long held some stocks being a big believer in the value investor term "out of favor", waiting for the stock to become "in favor". Look at BRK holding GM...how cruel is "margin of safety" and "buying when out of favor" to those shareholders? They just spent an entire decade getting nothing but a $1.50 per year dividend on a 5x PE stock and now have significant and material losses, no dividend, and well, a company in bad shape...now compare this to basically any QQQ company...

 

I don't disagree. Higher quality and higher growth deserves a premium. Just not certain I'm willing to pay 30x+ for it.

 

Or 20x+ for the watered-down version mixed with the crap.

 

Google is one of my favorite companies in the world. I used to own the stock and still admire the company. It's crazy for me to think that they can continue to put up the profit growth/profits if all the companies they rely on are struggling. This, I have a hard time paying 30x for their quality and their growth when I think both are somewhat compromised. This would suggest either it was dirt cheap in February or it's massively expensive now. I believe I have more evidence supporting the latter. Similar for all of the other hyper growth, high multiple, high cash balance, tech cos.

[buffetteer1984]

I think just using p/e multiples is WAY too simplistic of a way to value anything.  So many analyst go on tv and just state past multiples and now we’re trading at x multiples etc. so we’re trading too expensively.  Shouldn’t we be valuing earnings over the life of a business? Who cares what earnings are this year?

 

As for margin of safety it doesn’t apply to every company that goes down by 40%. That should be obvious (ie look at airlines and travel) ergo I said quality.  And if you get quality even if prices go lower it should eventually recover.  Google trades in the high multiples cause of its durable business, long term growth potential etc.  also all valuations automatically get jacked up just simply cause we’re using lower discounting rates now.

[Gregmal]

Ha tell me about it. I love GOOG and cut down my many year position about 50% between January and last week. Average sale price probably around $1300. There is no way ad spend doesnt fall off a cliff I thought. Then they post earnings and its up $100 per share and again I'm reminded to stop trying to outsmart the market. I really do hope I get to repurchase it lower. But thats basically been the theme song of sorrow for any GOOG/AMZN/NFLX, etc type shareholder for at least the last decade.

 

Personally, like you, I am trying to make sense of the market. Quite often, its me thats missing something rather than the market who's missing something. A tough pill to swallow as a disciple of the value investing doctrine.

 

[LC]

So much easier to own great businesses - they have a much better chance of "re-rating" higher.

 

I don't mind owning a crappy business, but I want it to be kicking me back cash at every chance it gets. Betting on Mr. Market to re-value your crap business to a "fair" value is a painful experience.

 

 

[TwoCitiesCapital]

I think just using p/e multiples is WAY too simplistic of a way to value anything.  So many analyst go on tv and just state past multiples and now we’re trading at x multiples etc. so we’re trading too expensively.  Shouldn’t we be valuing earnings over the life of a business? Who cares what earnings are this year?

 

As for margin of safety it doesn’t apply to every company that goes down by 40%. That should be obvious (ie look at airlines and travel) ergo I said quality.  And if you get quality even if prices go lower it should eventually recover.  Google trades in the high multiples cause of its durable business, long term growth potential etc.  also all valuations automatically get jacked up just simply cause we’re using lower discounting rates now.

 

Google went down over 60% in 2008 crisis. From over $700 a share down to as low as $250/share - all the while showing double digits revenue and profit growth. It was easy to buy back then.

 

This time around, they're not at 40+x their earnings, but they're also likely not growing profits and revenues at double digits over the next 9-months IMO so I still think a larger correction is a bigger risk.

 

Yes - businesses are worth the DCF over the life of the business, but no one has the outlook 10 years from now. What is somewhat more clear is the next 1-3 years, and I'm not comfortable paying 30x earnings I'm fairly confident are going lower. If I wanted that type of nominal return, is just buy a corporate bond.

[buffetteer1984]

I’m with you man I trimmed a bit of googl today too and am already regretting it.  I find owning companies with huge cash flow, lower debt and dominant positions in their industries to always trade at multiples people just can’t call cheap.  But problem is they’ll never get down to to those cigarbutt multiples and for good reason but the growth more than compensated for it. 

 

Ha tell me about it. I love GOOG and cut down my many year position about 50% between January and last week. Average sale price probably around $1300. There is no way ad spend doesnt fall off a cliff I thought. Then they post earnings and its up $100 per share and again I'm reminded to stop trying to outsmart the market. I really do hope I get to repurchase it lower. But thats basically been the theme song of sorrow for any GOOG/AMZN/NFLX, etc type shareholder for at least the last decade.

 

Personally, like you, I am trying to make sense of the market. Quite often, its me thats missing something rather than the market who's missing something. A tough pill to swallow as a disciple of the value investing doctrine.

 

[mattee2264]

 

  Yup re-testing the lows is a technical pattern you sometimes see in bear markets. There is some psychological logic to the pattern as sometimes the market prematurely assumes the worst is over and gets taken by surprise when things get a lot worse. You saw that during the Great Depression and during the Great Financial Crisis. But those were more structural bear markets. For event driven bear markets a 30% decline is pretty typical as are V shaped recoveries. You saw that during the Asian crisis and after the European debt crisis. Of course history doesn't repeat but it often rhymes.

 

  Here the event is not so much the pandemic but the unprecedented response of locking down economies. If economies can be re-opened and stay open then the worst probably has passed and while the market may have gotten a little ahead of itself and may drift down a little it is difficult to see it going back to the March lows when much worse outcomes seemed possible.

 

  I think investors get into a lot of trouble trying to value the market. Valuation standards and the composition of indices change over time. 2020 earnings and probably 2021 earnings will be lower than 2019 earnings. But a higher market multiple can fully offset that.

 

For example perhaps investors will demand a lower risk premium because they now trust more than ever that the Fed will act swiftly and aggressively at the start of every bear market. FANG stocks now represent even larger proportions of the indices and perhaps investors now believe they are not only fast growers but also recession proof justifying even higher multiples. And of course interest rates are lower than a year or two ago and it is difficult to imagine the Fed risking another tightening cycle until it is sure the economy is on a sound footing.

[undervalued]

if this board is Mr Market, then Mr Market is wrong. Close to 60% voted it might retest recent low. :P