Down goes the Dow

Yeah, sure, that's why everyone's investing in Nigeria, right?

In all seriousness, stability is maybe the single most important dimension for business investment; or if not stability, then PREDICTABILITY. From one perspective, this absolutely disastrous administration has been great for business: they have been eminently predictable, and will likely continue to be so, which is one reason I have expressed faith in the continuity of the markets through the next while.

If the Republicans win the WH and the House, then all bets are off. There will be wild swings, who knows what the directions and durations will be; traders will prosper, investors have a 50% chance of suffering.

IMO

Maserati wrote:

absolutely disastrous administration

IMO

I stopped reading there

agip wrote:

Ghost of Igloi wrote:

agip,

Sure it is. That is how it works. The stock gets so over priced it cannot handle a setback. It is called multiple compression. The CMG burrito bar was trading at a PE of 45. Was it just going to grow to the sky?

Momentum investors were loading up on GPRO, VRX, and SYSS to name a few. The story is the same

Igy

my point is that any restaurant that starts poisoning people is going to take a hit on the stock price - doesn't matter what the PE is

I agree with Igy on this one. agip you are probably right, but that's not the issue; the issue is how much of a hit they take and how quickly, and to what extent and how quickly they recover. When things are way high like 45, they just have to be more sensitive to disturbance, because there are other options to be had.

Maserati,

You are confusing good companies with good investments. Good companies can be horrible investments: for example Cisco Systems in 2000 and Bank of America in 2007.

Igy

Maserati wrote:

agip wrote:

my point is that any restaurant that starts poisoning people is going to take a hit on the stock price - doesn't matter what the PE is

I agree with Igy on this one. agip you are probably right, but that's not the issue; the issue is how much of a hit they take and how quickly, and to what extent and how quickly they recover. When things are way high like 45, they just have to be more sensitive to disturbance, because there are other options to be had.

well sure a high PE stock will probably fall harder than a low PE stock, but

a) that's not guaranteed

and

b) Igy was citing chipotle as an example of how highly priced stocks are crashing. With the implication that the market is frothy and cracking.

But that stock would have crashed even if it were a cheap stock. It was a bad example of his thesis.

I was speaking from the point of view of an idealistically meritocratic western civilization. But you should read further, I give them high praise.

agip,

I am talking large cap stocks. In October 2002 S&P was at cyclical low of 768, AMZN was $19.68 which is exactly my point. There is little froth at market lows, and plenty at market highs.

Igy

No I'm not, which is why I said that "the question is at what level."

There are fundamentals, and there are fundamentals. Value is what it's about. Value is a perception, and leads to a willingness to pay. The advertising industry is airy-fairy, with performance measurement having absolutely nothing in common with scientific validation. All it takes is a split-second decision for the value in FB to disappear. Gone!

NFLX and AMZN, OTOH, actually do something, for a vast number of individuals and businesses. The value is widespread, and is not the result of irrational fantasy.

Ghost of Igloi wrote:

agip,

There is little froth at market lows, and plenty at market highs.

Igy

well sure

but there is always some froth

there's always a bull market somewhere

maser -

would you pls use the quote function? it's hard to know which posts you are responding to

Maserati and agip,

I look at stocks in a similar manner to any investment. That is, your return is inversely correlated to the price you pay. That is such a simple concept that many seem to miss. When something goes wrong, in the case of CMG listeria, in the case of VRX accounting, in the case of MU a strong dollar, the price of the stock comes down to match a more reasonable valuation. It is all pretty simple to me. Most investors are simply playing ticker symbols and not digging seriously into valuation.

Igy

Ghost of Igloi wrote:

Maserati and agip,

I look at stocks in a similar manner to any investment. That is, your return is inversely correlated to the price you pay. That is such a simple concept that many seem to miss. When something goes wrong, in the case of CMG listeria, in the case of VRX accounting, in the case of MU a strong dollar, the price of the stock comes down to match a more reasonable valuation. It is all pretty simple to me. Most investors are simply playing ticker symbols and not digging seriously into valuation.

Igy

So why haven't you been in cash since 1990 when stocks became historically overvalued by all the measures you now cite?

I agree that the price that you buy something will likely determine your long term returns. But valuation is anything but a precise measuring tool. and please don't cite 2000 - that was an insane bubble.

In non bubble situations...you can't let a market pe or 18 mean you have to stay out - it doesn't work that way. you have to live with highish valuations. Your returns will likely be lower but that's ok.

Like right now - a CAPE of 23 predicts a future return of around 7% per year. Is that so bad, Igy? So terrible?

agip,

My response would be, I am not advocating being out of the market. But for the market to move higher you need earnings to catch-up to valuations or investors preference for risk to elevate valuations further. That is how you get your 7%. However, earnings are tending down and investors risk aversion is rising.

Igy

Not endorsing any of this, but here is someone's take on earnings growth (or, rather, the lack of it):

http://viableopposition.blogspot.ca/2015/12/what-is-earnings-growth-telling-us.html

Maserati,

I am not familiar with OTOH, but NFLX trades at 300 times current earnings, and AMZN at 900 times current earnings. Those are just ridiculous multiples and an investor buying at this level is playing a lottery ticket. Both companies are investing large sums of money to build out their business, which is good for the business, but bad for investors buying at this multiple. None of this is my opinion it is in the math.

Igy

Maserati,

The article is using operatings earnings which excludes stock based compensation and other items that would detract from actual reported earnings. The year over year decline in reported earnings is worse at a little over -12%. The reason it doesn't get more play in the financial media is that it is an inconvenient truth.

Igy

lol Igy, OTOH is short for "On The Other Hand". Sorry about that confusion.

I agree that the current valuations are not supported by fundamentals, but both businesses have the opportunity to catch up, especially NFLX, whereas FB and Twitter are built on a house of cards.

Like I said, depends on the valuation, but at some level, the support is there. BTW no way I would own either at these levels (of course I do own tiny amounts in VFINX). BTW looks like all the gain in VFINX is thanks to AMZN.

Of course it would take a miracle for earnings to catch up to those levels, and I just don't think it will happen. I would buy them at lower valuations, however, because I do think they offer "fundamental value". FB, etc., not so much.

Marerati,

I have used AMZN throughout the year, we did have a NFLX subscription. We cancelled when the House of Cards story had the VP manage a trois with the wife and secret service agent. It seemed as if the writers had to go to the next level of bizarre rather than creating a plausible story line. Wife and I are no prudes but the story denigrated to the weirdsville. Most of the other selections were not our taste either.

Igy