Down goes the Dow

POTO,

You have a better memory than I.

Good companies and good investments differ in one aspect and that is valuation.

I can purchase a four-plex apartment property. It may have a perfect location, design and construction. If I pay too much it will be a poor investment.

I believe FB and GOOG will be added to my previous list of stocks who's stock prices compressed to meet their earnings.

I can be wrong.

Market history tells me I will be correct.

Igy

Market history also suggests it is more likely to go up than down.

Ghost of Igloi wrote:

Seriously here, when a stock like FB trades at 80 times current earnings, it is unlikely that the earnings will grow into the price. We have already seen the compression of stock prices of GPRO, VRX, CMG, TSLA, AMZN, NFLX, ILMN, NOW, and SYSS to name a few. Stock prices compress to match a reasonable valuation multiple. P/E or Price/Earnings is the appropriate metric. So if the price of FB advances at a greater rate than the earnings any value is erased.

None of the above is new. It is as old as Benjamin Graham and as current as Warren Buffett. One either believes stock valuations matter or one doesn't.

Igy

Not in every case. A few months ago, there was a guy who wanted to "buy and forget" some stocks but was gun shy because he lot some money in tech stocks around 2000. Since I rode 4 stocks in the 1990's to retirement in my 40's (MSFT, INTC, CSCO, ORCL), I looked up some numbers for what would have happened if I didn't phase out in 1998-2000.

In the case of Microsoft, I bought my shares on 1/2/1991. The company has eps data on its website going back to 1995, and the stock had diluted $0.14/share and a year ending price of $5.64, inclusive of stock split factor of 16X. i'm not sure if the company's historical eps data includes the splits or not, so the PE at the time was either ~40 or ~640. Either way, you would have called the stock overvalued.

Since 1/2/1991, Microsoft stock is up 4809%, which comes to an annualized CAGR of 16.9%. By comparison, the Graham-Dodd Berkshire Hathaway is up 2671%, and of those 4 stocks, ORCL is up over 20000% and the only one of my 4 core holdings that is up less than Berkshire is Intel (~2300%).

I am not claiming that every high PE stock performs like this, and it is about as likely that I will hold Netflix or Facebook once a top is confirmed as I held Chicos and Hovnanian after the summer of 2005.

But some companies DO grow into their PE.

The FED getting cold feet about interest hikes:

http://www.reuters.com/article/us-usa-fed-dudley-idUSKCN0VC1M6

You don't want to get hit when the Tower of Babel (China) comes falling down. I just happen to think it might be better to try to help the Babel makers keep their tower up there to begin with.

coach d,

Fair point on MSFT in 1991, but what about a purchase in 2000? Second point the only stock I have mentioned that is close to the MSFT's multiple is GOOG. I would venture to say that the current size of GOOG limits its ability to grow in the similar to MSFT in 2000. I am not at my desk, but I would say there has been little change in MSFT share price since 2000. Sure investors have collected dividends and a specialmdividend. FB being a newer company has a much better chance of growing into its multiple. AMZN and NFLX have close to zero chance to grow into their multiple.

Igy

POTO,

I believe that is an incorrect interpretation and if you own them I hope it works out. There has never been a large capitalization stock that has held a high PE throughout a full market cycle. Pull up coach d's MSFT on a chart.

That is my point.

Igy

I currently own none of them though I used to own Netflix and Amazon. Both turned out to be very positive investments for me. There's no requirement to hold anything through a full market cycle.

POTO,

"There's no requirement to hold anything through a full market cycle."

That is and always has been the point.

Igy

Coach, the only thing for which I disparaged M was its retail business, and I still think it is a failure going forward. I did separate that from their RE portfolio. I don't really have any comment on the overall state of their business. If I held M and it was currently up 16% YTD, I would sell immediately.

Igy, regarding FANG's growing into their valuations: these 4 businesses are not identical, although they do have some things in common, the most important being a positioning in an online space. All it will take for each of them to grow into their valuations will be the creep of online monetization. They are no doubt working on how to shift online culture, gradually and maybe stealthily, toward total monetization.

Although I agree that they are currently overpriced, I don't see them as totally absurd, as you do. There is more than mere hope underpinning those high valuations, IMO.

In other news, I bought a bunch of gold a week ago, just after I was musing on this board about buying it, IIRC. Will just hold it until I die, so shiny...my precious...lol actually it's in a bank vault.

coach d,

I understand what your point is.

In an effort to give perspective to valuation, here is some price history.

MSFT $59.97 12/1999 MSFT $52.16 02/03/2016

ORCL $46.47 09/2000 ORCL $35.69 02/03/2016

INTC $75,69 09/2000 INTC $29.34 02/03/2016

CSCO $82.00 03/2000 CSCO $23.10 02/03/2016

In each case these stocks never regained previous high prices attained in the earlier period some 15-16 years ago.

In case someone thinks that this type of valuation dispersion was limited to the tech bubble a similar valuation compression can be found in the housing bubble.

HOV $73.40 07/2005 HOV $1.45 02/03/2016

MS $75.50 07/2007 MS $24.32 02/03/2016

C $570.00 01/2007 C $40.36 02/03/2016

Maserati wrote:

Will still be in my range after today's drop. I admit that my range is pretty broad, but with one month of the year gone, my lower bound has held up well.

Every day I see a big move (which seems to have been quite often in 2016), I think back to that poster Chemical Reagent and his ETF's, or whatever he was trading, or whoever he was betting with. Assuming there is anyone out there who "knows what they're doing" on a daily basis, some fortunes must be being made on these moves.

Of course nobody who I know is in that group, although some have tried. Somewhere, somebody is making money off these moves.

Yeah agip, these are some big intraday moves!

PE for MSFT in 1/1991 was 30.47 as per Morningstar;

®ion=USA&culture=en_US ( PE was 58.93 in 1/2000.)

Total Returns 1/2000-1/2016 ( CAGR ) :

SPY 3.63%

MSFT 1.88%

ORCL 2.09%

CSCO -4.16%

INTC .30%

Here's an article from Jeremy Siegel on the Nifty Fifty written in August 1998, regarding valuations and subsequent returns.

coach d,

I understand what your point is.

In an effort to give perspective to valuation, here is some price history.

MSFT $59.97 12/1999 MSFT $52.16 02/03/2016

ORCL $46.47 09/2000 ORCL $35.69 02/03/2016

INTC $75,69 09/2000 INTC $29.34 02/03/2016

CSCO $82.00 03/2000 CSCO $23.10 02/03/2016

In each case these stocks never regained previous high prices attained in the earlier period some 15-16 years ago.

In case someone thinks that this type of valuation dispersion was limited to the tech bubble a similar valuation compression can be found in the housing bubble.

HOV $73.40 07/2005 HOV $1.45 02/03/2016

MS $75.50 07/2007 MS $24.32 02/03/2016

C $570.00 01/2007 C $40.36 02/03/2016

EWZ $102.21 05/2008 EWZ $19.72 02/03/2016

One can believe that GOOG, the most attractively valued FANG stock, can continue to advance the share price ahead of earnings. Here are the facts, the Q4 2014 to 2015 revenue and earnings growth was 4-5%. Yet over that same period the stock advanced from $530.66 to $788.33. After said earnings report the stock has retreated from $810 to as low as $725 today. Of course the argument is, well it went from here to there. Sure that is correct, if some time along the way you cash in your lottery ticket.

Igy

Maserati wrote:

But...but...but...Basel III !

The real news will come from Deutsche Bank, just wait.

Keep watching DB...

muy loca,

Some facts on MSFT:

GAAP Revenue 2014 $26.5 billion, 2015 $23.8 Billion

GAAP EPS 2014 $0.71, 2015 $0.62

There is hype and there are facts.

By the way MSFT is trading at a rich PE of 37 today.

Igy

Pointing Out the Obvious wrote:

There's a reason their valuations are high. I know you don't like it, but a lot of smart people think differently.

By smart people you mean people who agree with your predisposed view.

the street is bringing down forecasts...is that bearish or bullish?

in a note Thursday, UBS equity strategist Julian Emanuel revised his 2016 S&P 500 year-end target down to 2,175 from 2,275.

His target had been among the most bullish on Wall Stret at the end of last year.

But a lot has worsened since then, as he explained:

"The 'known unknowns' intensified in January – China equity market and FX instability, a renewed oil price plunge, questions as to whether the Fed made a policy error by hiking in December as US economic data has surprised to the downside. These have translated into softer CEO confidence (even as consumers remain resolute), sparking talk of an imminent US recession - a likelihood which UBS continues to believe is small in 2016.

When combined with the unprecedented uncertainty of US politics, market volatility has justifiably risen and is likely to remain elevated into the fall elections."

Emanuel noted that, already, volatility — measured by the Chicago Board Options Exchange's Volatility Index (VIX) — in 2016 is trending higher than the average going back to at least 2011.

And if any of the headwinds —particularly from China's economy — get worse, there's the risk that the S&P 500 could fall to as low as 1,750, or 8% below current levels, in the next few weeks, according to Emanuel.

On Thursday, the S&P 500 opened at 1,902.65.

He wrote, "And yet amid record individual investor caution, signs of stabilizing macro have begun to emerge, notably a "mindful Fed" catalyzing a weaker US Dollar. In this regard, "things going right" beyond expectations could result in upside volatility.

His target cut comes after UBS' chief US economist Maury Harris lowered his 2016 gross domestic product (GDP) forecast to 1.5% from 2.8%.

agip,

What I find interesting is that Wall Street analyst are mostly clustered around the 2100-2300 level. You would think there would be a couple of outliers in the 1800-1900 range, especially with earnings declining. I would describe that kind of thinking in terms of career risk, and not the type of being wrong, that is, not being bullish enough.

If the current market trends continue, Wall Street analysts will follow each others price targets lower. Brilliant.

Igy

Obviousest wrote:

Pointing Out the Obvious wrote:

There's a reason their valuations are high. I know you don't like it, but a lot of smart people think differently.

By smart people you mean people who agree with your predisposed view.

There are smart people who I agree with. There are smart people who I disagree with.