Down goes the Dow

J. Hardy wrote:

Ghost of Igloi wrote:

Let’s use a star like Apple to illustrate how expensive the market is. We will compare the five year period by examining the Annual Reports of 9/30/2015 and 9/30/2019.

Net Income: $53.4 to $55.3 Billion

Liabilities: $91.4 to $142.3 Billion

Share Count: 5.8 to 4.6 Billion shares

Stock Price: $110.30 to $223.97

So Net Income is up 4%, Liabilities up 60%, Share Count 20% lower and stock price double. Bottom line, investors are willing to pay more.

It’s basic economics: supply and demand. The question is, however, does it matter? Stock valuations have been high for several years, but so far without consequence.

N=1 is not a valid argument

But yes, PEs have gone up and earnings have not. That could be a bubble or that could be the market forecasting better profits ahead.

In the case of Apple trading at $299/share the earnings better come thru. You poo poo CAPE 10 yet believe the market can forecast the future. That didn’t workout out too well 3/2000 or 10/2007.

Exactly right about the HK situation. In summer 1997 I convinced a friend to buy a Pt Grey monster home for $360k, practically a giveaway, pretty close to St. George’s. Best thing he has ever done. There was a really quick, really deep pullback at that time. His parents were rich anyway, but good for him. I would have bought it, had I had the money. People pretty much accepted only cash offers in those days, as they were so easy to come by.

I have always viewed RE as either pure rental, or a place to live. I can’t imagine owning an expensive or nice property and renting it—as a matter of fact, better buildings around the world don’t permit rental. Even in Van, where policy is to reduce vacancy, there are buildings that prohibit rental.

Good luck, you’re in the thick of it now!

Ghost of Igloi wrote:

I meant mean invert.

I Googled “mean invert” and “mean inversion” and got bubkes. Can someone here help me out? (He said it’s not supposed to be “mean revert”.)

beyond reversion to mean = mean inversion

Ghost of Igloi wrote:

beyond reversion to mean = mean inversion

So this is term that you made up?

Yes, and it accurately reflects what happened in 2009.

I should say I have heard it before, so not truly original.

Ghost of Igloi wrote:

I should say I have heard it before, so not truly original.

As I said, I googled it and literally got nothing. I think it’s all yours!

wondering wrote:

Ghost of Igloi wrote:

I should say I have heard it before, so not truly original.

As I said, I googled it and literally got nothing. I think it’s all yours!

Ghost of Igloi wrote:

wondering wrote:

As I said, I googled it and literally got nothing. I think it’s all yours!

https://mobile.twitter.com/jessefelder/status/1214339225803468800

Not seeing “mean invert” there.

I've thought a lot about the CAPE (some long readers of this thread may remember my own invention of the "I-E-S-CAPE" or "idiot-something-something-CAPE" which sounded cute at the time) and its dogmatic reliance on P/E ratios as a governing metric for market behavior.

It's a well-accepted principal that the intrinsic value of a stock is related to expected future earnings, which might be loosely to strongly associated with past earnings, inferred from P/E. However, anybody I've ever discussed investments with is much more interested in future growth of the stock than future earnings and associated dividends, so value is, in my mind, much more strongly linked (in the psychology of the crowd, not that of selected investors, say value investors) to expectations of growth, which are often disconnected from past earnings (and maybe strongly anti-correlated; solid dividend stocks are rarely also high growth stocks).

Also, the intrinsic value of something is often only loosely linked to its market value. Looking at home values, one might expect a strong connection with the cost of building the home, and this is very frequently the case, perhaps in most markets, where the cost of land is a small fraction of that of the value of the house plus land. However, in expensive housing markets, the value of the land (which has no intrinsic meaning, only an emotional / psychological one) governs the cost / value of the house plus land.

When stock markets fluctuate upward above the historic trend, whether in true bubbles or large (but less steeply rising) random fluctuations, total valuation becomes less connected to intrinsic value (of the underlying value of the company) and more controlled by emotions, and what people (the crowd) are willing to pay for the possibility of further growth.

My own view is that the cycles we observe in all financial markets are the result of "noise traders" (all of us) ratcheting prices up and down based on chaotic collective action, independent of true information about the future value of the market (my belief is that no such information exists), and largely independent of the intrinsic value of companies being bought and sold. Very rapid rises are likely to be followed by significant negative corrections, and vice versa. The rest, I think, is noise.

So I think. Of course, Shiller's CAPE may very well turn out to prove me a bigger idiot than I already think I am. :-)

Apparently Shiller agrees:

https://www.nytimes.com/2020/01/02/business/gut-feelings-are-driving-the-markets.html

Ghost of Igloi wrote:

In the case of Apple trading at $299/share the earnings better come thru. You poo poo CAPE 10 yet believe the market can forecast the future. That didn’t workout out too well 3/2000 or 10/2007.

the market is not infallible, but for your two instances of the market being wrong, there are obviously many, many, many more instances of the market predicting the future correctly. I'll take those odds any day.

Ghost of Igloi wrote:

Apparently Shiller agrees...

Maybe, but I think this is default market behavior, and I gather he's suggesting it's "different this time" (for the time being) because of all the noise about Trump.

Let me add.... I think market value is driven nearly 100% by supply and demand, with gradual upward trends in US markets (for example) reflecting a growing demand relative to available supply of things for people to trade in the hope of growing wealth. I call this (idiotically) the "another fool theory" which is similar in concept to, but substantially different than, the idea behind the "greater fool" theory. You don't need to find a bigger fool (is my argument) since we are all fools. You just need to find another fool. And the machinations of the markets are a reflection of the aggregate effect of all us fools running around looking for other fools. This looks like a ponzi scheme from time to time when the supply of other fools gets too low and a bubble bursts...

I just pulled that out of my rear end just now, how does it work? :-)

so the worry is that as population growth falls to zero in America...what does that mean for the economy and the stock market? Will there be a reduced aggregate demand and therefore fewer fools to buy stuff and buy stocks?

Is that lack of population growth why Japan and Europe have had garbage stock markets for 10 years or more?

agip wrote:

so the worry is that as population growth falls to zero in America...what does that mean for the economy and the stock market? Will there be a reduced aggregate demand and therefore fewer fools to buy stuff and buy stocks?

Is that lack of population growth why Japan and Europe have had garbage stock markets for 10 years or more?

agip, I'm making this up as I go... :-) Also, I am trying to convey a very simple picture of a very complex mechanism / phenomenon / machine, which is doomed to land imperfectly, being "mostly wrong" for most people for any variety of perfectly valid reasons. That said, the simple idea of supply and demand is a perfect law, but understanding how the demand and supply each form and then extend to meet each other in a marketplace for exchange is a messy, complex, chaotic beast. I'm not sure I would equate supply growth with population growth directly, but I suppose there must be a link. The pool of investors is not drawn from the whole population, just from some small fraction, mainly residing in the upper X % where wealth concentrates, and in corporations / funds / governments / etc.... I don't pretend to have any idea how they combine to form a growing, stagnant or shrinking buyer base (and aggregate demand). If I were you, I would dismiss my idiotic ramblings...