Down goes the Dow

Maserati, agip, coach d, Big Dog, et al:

I would love to entertain your comments on these facts: Last Twelve Months LTM) 2015 Q3 reported earnings came in at $90.66, that is 15% below year ago LTM 2014 Q3 of $105.96. That 3rd quarter of 2014 was a cycle high. Interestingly the last time we were at this LTM level of earnings was 2nd quarter of 2013. That quarter's reported earnings was $90.95 and the S&P closed the month at 106.28. So, if you believe the market heads higher, how and why?

Igy

Gentlemen and Ladies,

Sorry I left out a digit S&P 500 2013 Q3 closed the month at 1606.28.

Igy

I've said it before...it's not primarily about valuations. Ask yourself, why are the valuations high for some if these companies. There's a good reason for it.

Ghost of Igloi wrote:

Maserati, agip, coach d, Big Dog, et al:

I would love to entertain your comments on these facts: Last Twelve Months LTM) 2015 Q3 reported earnings came in at $90.66, that is 15% below year ago LTM 2014 Q3 of $105.96. That 3rd quarter of 2014 was a cycle high. Interestingly the last time we were at this LTM level of earnings was 2nd quarter of 2013. That quarter's reported earnings was $90.95 and the S&P closed the month at 106.28. So, if you believe the market heads higher, how and why?

Igy

A) I don't believe I can predict where the market goes

B) obviously if the market does go higher, it will be because it correctly predicted a temporary earnings valley caused by the crash in oil company profits and the strong dollar. If those two things moderate earnings will rise strongly.

Big,

I believe the high valuations are a function of speculation and not supported by cash flow.

Igy

agip,

1) OK, but you can make certain assumptions on valuation; you make assumptions on interest rates and bonds, why not stocks? 2) Alright.

Igy

Agip wrote:

Ghost of Igloi wrote:

Maserati, agip, coach d, Big Dog, et al:

I would love to entertain your comments on these facts: Last Twelve Months LTM) 2015 Q3 reported earnings came in at $90.66, that is 15% below year ago LTM 2014 Q3 of $105.96. That 3rd quarter of 2014 was a cycle high. Interestingly the last time we were at this LTM level of earnings was 2nd quarter of 2013. That quarter's reported earnings was $90.95 and the S&P closed the month at 106.28. So, if you believe the market heads higher, how and why?

Igy

A) I don't believe I can predict where the market goes

B) obviously if the market does go higher, it will be because it correctly predicted a temporary earnings valley caused by the crash in oil company profits and the strong dollar. If those two things moderate earnings will rise strongly.

C) It is a market of stocks, not a stock market. I don't care about MARKET multiples. I only care about valuation (PE/PEG) and eps/growth of stocks I want to buy. And if I'm buying the market as an index, I care about the trend. As Warren Buffett has pointed out this summer, there is not a stock bubble, but there are few bargains. If you want growth, you have to pay for it.

D) You might ask Carl Icahn if he'd rather have the value he got for his NFLX that he sold on 6/24/2015 or the 25% higher value I have by not selling. The NFLX I have I bought for split-adjusted $5.79 on 6/22/2009, near the bottom of the present cycle. The PE at the time was about 12. The stock is up 1922 percent since I bought it! Why would I want to sell a stock that is up 140% this year? Is Warren Buffett selling his best holdings because some silly valuation model (that was wrong in the mid-90s) says the market is overvalued (remember that Warren's preferred holding period is "forever")?

E) Savings glut shifts income from savers to consumers. Consumers buy more in the overall economy as they spend less on energy and other commodity products (but major pain to commodity producers) which increases corporate profits.

F) See Goldman Sachs 2016 macroeconomic outlook:

My strategy is still to be long tech and homebuilding, and short industrial commodities. If it works, don't fix it.

coach d,

OK, but Warren Buffett diesn't even sell his losers, he still has IBM. Also, would you consider it a mistake if NFLX goes to $50 and stays there for a decade? Unfortunately many consumers don't have two nickels to rub together. I just purchased my first car in fourteen years so auto sales are probably at a top. Best wishes for your trading in 2016, I will stick to my silly valuation models.

Igy

Ghost of Igloi wrote:

Big,

I believe the high valuations are a function of speculation and not supported by cash flow.

Igy

Well most speculation is at least partially based on cash flow. In the cases of companies like Amazon and Netflix revenues are the primary driver of stock price.

Ghost of Igloi wrote:

agip,

1) OK, but you can make certain assumptions on valuation; you make assumptions on interest rates and bonds, why not stocks? 2) Alright.

Igy

my assumption on stock prices is that they will likely be, over 10 years, the best returning asset class among stocks, bonds, commodities, cash, real estate.

This has not been true for every single 10 year period, but it is usually true so the odds are in their favor.

I acknowledge that stocks are moderately expensive now - I don't expect the full 10-12% per year that stocks have returned over time. Probably 7-9% is likely. Which is way better than cash, bonds and probably real estate and commodities.

But note that I own cash, bonds, real estate and eventually probably commodities.

note that over the last 10 years, even with the worst financial crisis since the great depression, a 50% stock crash, two flat years (2011 and 2015) stocks in the US are up 7.4% per year. (Vanguard total stock market index)

resilient little bugger, the US stock market.

And you are worried about a moderate over valuation.

Big,

Annual Revenue: Netflix $6.23 billion, Amazon $89 billion

Annual Revenue: Exxon $289 billion, WalMart $485 billion

The belief of investors is that Amazon and Netflix continue to expand their revenue exponentially. On the other hand, investors believe that Exxon and WalMart have declining revenue prospects. I suspect investors are to enthusiastic on the former and too pessimistic on the later.

Igy

agip,

My interpretation of data is that the domestic stock market is extremely overvalued. The fact that revenues are declining and not expanding are not just a factor of declining oil prices. Central Bank policies throughout the world have led to overcapacity thru mal-investment. I believe most investors learned nothing from the last economic downturn. I believe major investment firms do not encourage views that challenge conventional thinking. Conventional thinking was wrong in 2000-2002 and 2007-2009, and I believe it is wrong again.

Igy

Great, fun discussion. Will return after a meeting, can't wait to see the car in the ditch, wheels up!

Ghost of Igloi wrote:

agip,

The fact that revenues are declining and not expanding are not just a factor of declining oil prices.

Igy

what is your basis for thinking this? I don't think it is true.

According to Factset, excluding energy companies, SP500 revenues would be up 1.2%

page 5, at the bottom:

well actually that is forecasted sales for the 4Q, not actual 3Q sales.

ok found the real 3Q number - indeed, ex energy SP500 revenues would have been positive.

actual: -4.0%

ex energy: +1.1%

bottom, page 7:

http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_11.13.15/view

so the 'revenues are falling' argument doesn't hold oil.

IGY, PRICE IS NOT THE SAME THING AS VALUE.

If everything really was overvalued, nobody rational would be in the market. That is, people still perceive value in even highly-priced stocks.

"Value" can take many forms--pride of ownership, prospect of return, competitor blocking, filling in missing parts of a whole, etc. All these things, and more, apply to stocks and bonds--and the "more" can often be totally irrational, motivated by emotional need rather than considered reflection.

Also, market indexes do not wholly reflect economic activity; that is, economic downturn is not synonymous with market crash or correction. "People" learn different things from the two different types of experiences.

With the possibility of widespread market participation in the US via 401k's, etc., IMO it was hoped that everyone would feel as though they had a stake in market, and by extension, capital, and even maybe economic, performance. Unlike in a business that offers stock as compensation, however, the connection between the individual and the market/capital/economic performance becomes vastly more nebulous and remote. As far as "markets" go, many rationally understand that it is a game played with a marked deck, but nonetheless remain in, because of emotions like hope, fear, greed, etc.

And those things are your friends if you are trying to make money in the markets. If you are just trying to preserve wealth or go with the flow, the markets can be useful (although there may be better vehicles). Consider coach and his NFLX. Have the assets of NFLX appreciated as much as the stock price while he has been holding it? No. Projecting future performance, of both the business and the stock, is where the emotions come into play. Coach has profited handsomely from both his analysis and emotions, and from the analysis and emotions of others, same as he does with his short positions. He is in the market to MAKE money, and apparently, he does. I know other people who do the same.

The only answer you can have to the fact that he makes money on NFLX is an argument based on time-frame, or data windowing. He could realize gains today. For him, NFLX is NEVER "over-valued" while he is holding it, and lots of people hold NFLX, AMZN, AAPL, etc. As long as there is widespread holding of these stocks, value perceptions of people like you, who do not hold them, are at best only half the story--and probably less than half the story, because those who DO NOT own the stocks lack the control held by those who DO own the stocks.

You are arguing from a personal perspective. There is no absolute reference in this story, unless you wish to consider asset liquidation value of each business, which is an absurdity unless it does nothing other than hoard physical commodities.

This is why the boomers retiring and shifting out of equities may be troublesome going forward. They are retiring, and rebalancing, in droves. The overall social calculus is IMO likely to shift in your direction, toward a perception of over-valuation.

But for now, plenty of people are long on these stocks, and they have carried the day--and legitimately, at that, no matter what the current price.

That was an attempt at answering your initial question Igy, in a more long-winded but far less cryptic manner than Big Dog's attempt.

Illustration: consider coach d's statement "Why would I want to sell a stock that is up 140% this year?"

My personal answer would be that that is PRECISELY WHY I WOULD want to sell that stock. coach d is OK, but he's self-referential. He has absolutely no idea what Icahn did with the proceeds of the sale. He could easily have received more value in the interim than he missed out on, even if he just spent it on purchasing a yacht. Alternatively, he could have transferred it to another, better-performing investment, upon which he may or may not have yet realized a return.

Same as my having gotten out at 16.5k. I have realized far more value than I have missed out on, in the interim. That insane 30+% year was PRECISELY WHY I chose to exit at that time.