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Message
There are some major issues lurking in the US financial markets
Posted on 10/23/18 at 4:26 pm
Posted on 10/23/18 at 4:26 pm
I will keep this very simple
1. Quantitative easing: If you think six years of buying up bonds and suppressing yields will have no long term effect once rates start to rise again, I don't know what to tell you. The FED is about to back itself into a corner. Keep the economy overheating with fake money or raise rates and watch money start to flock towards long term treasuries.
2. Earnings: We have somehow convinced ourselves that a one trillion dollar company with 20 times earnings is "cheap." That company, Apple, by itself comprises 4.19% of the S&P. Amazon, the third largest company in the S&P, valued at over 862 billion, trades at 140 times earnings. That is not sustainable. One weak guidance by any of the main players can and will have a domino effect.
3. We are starting to see funds withdrawn from top asset managers. LINK
4. The FED chair said the economy was remarkably positive and that it may be too good to be true within the span of a couple minutes.
LINK
5. Macro Debt: US Gross Federal Debt as a percentage of GDP averaged 61.7 percent from 1940-2017. Right now it is 105.4 percent.
Micro Debt: ATT lists net debt at 180 billion.
Probably not great when 80 billion of that is current and they have 50 billion in cash.
LINK
1. Quantitative easing: If you think six years of buying up bonds and suppressing yields will have no long term effect once rates start to rise again, I don't know what to tell you. The FED is about to back itself into a corner. Keep the economy overheating with fake money or raise rates and watch money start to flock towards long term treasuries.
2. Earnings: We have somehow convinced ourselves that a one trillion dollar company with 20 times earnings is "cheap." That company, Apple, by itself comprises 4.19% of the S&P. Amazon, the third largest company in the S&P, valued at over 862 billion, trades at 140 times earnings. That is not sustainable. One weak guidance by any of the main players can and will have a domino effect.
3. We are starting to see funds withdrawn from top asset managers. LINK
4. The FED chair said the economy was remarkably positive and that it may be too good to be true within the span of a couple minutes.
LINK
5. Macro Debt: US Gross Federal Debt as a percentage of GDP averaged 61.7 percent from 1940-2017. Right now it is 105.4 percent.
Micro Debt: ATT lists net debt at 180 billion.
Probably not great when 80 billion of that is current and they have 50 billion in cash.
LINK
16
Posted on 10/23/18 at 4:45 pm to LSUtoOmaha
thanks dude.. good stuff.
Posted on 10/23/18 at 4:49 pm to LSUtoOmaha
quote:
5. Macro Debt: US Gross Federal Debt as a percentage of GDP averaged 61.7 percent from 1940-2017. Right now it is 105.4 percent.
Micro Debt: ATT lists net debt at 180 billion.
Probably not great when 80 billion of that is current and they have 50 billion in cash.
Easy to Cherry pick the AT&T debt numbers after their court order to buy Comcast goes through. Of course their debt burden looks higher after they just spent $40 Billion in cash + acquired Comcast occurring debt. Would be more prudent to judge their debt capacity after having enough time to see how this merger plays out.
Posted on 10/23/18 at 6:04 pm to HYDRebs
quote:
Easy to Cherry pick the AT&T debt numbers after their court order to buy Comcast goes through.
Posted on 10/23/18 at 7:07 pm to LSUtoOmaha
quote:
We have somehow convinced ourselves that a one trillion dollar company with 20 times earnings is "cheap." That company, Apple,
I agree that 2019 will be a rough year, IMO, but P/E ratio of 20 is pretty healthy. Most “stable” companies are between 20-25, right?
Posted on 10/23/18 at 11:24 pm to LSUtoOmaha
So should I move my whole 401k to cash right now to ride out the impending doom?
Posted on 10/24/18 at 12:02 am to LSUtoOmaha
The stock market is 100% going to take a beating as rates rise as it has most every single time especially the dividend paying "safe stocks" like utilities, this is not breaking news.
I will continue to hold them as the dividend/repurchase will rise as the price falls, however I will also be diverting more towards FDIC insured instruments and less to stock purchases as rates rise.
I will continue to hold them as the dividend/repurchase will rise as the price falls, however I will also be diverting more towards FDIC insured instruments and less to stock purchases as rates rise.
Posted on 10/24/18 at 6:53 am to LSURussian
Hahahah true. yeah that was definitely worded incorrectly my bad
Posted on 10/24/18 at 3:53 pm to LSUtoOmaha
quote:
There are some major issues lurking in the US financial markets
You only have to track the Japan stock market to know how things are likely to turn out. They are a couple decades ahead of us with the QE from when they had a huge housing crisis wreck the stock market.
Posted on 10/25/18 at 3:07 pm to zatetic
quote:
There are some major issues lurking in the US financial markets
There is no sign of the debt going away.What are you predicting?
quote:
You only have to track the Japan stock market to know how things are likely to turn out. They are a couple decades ahead of us with the QE from when they had a huge housing crisis wreck the stock market.
Could be good to watch and give one foresight, but two different economies though, right?
Posted on 10/25/18 at 4:05 pm to hottub
Normal trailing PE of the US stock market has averaged 15-17 I believe. It is currently overvalued in general.
Posted on 10/25/18 at 4:14 pm to LSUtoOmaha
quote:
5. Macro Debt:
More detail can be added here. Macro debt levels that rise too quickly over a short span of a time can be a useful indicator for upcoming turbulence in the markets, but in terms of finding a narrative for the so-called "everything bubble" that we find ourselves in, I think low-quality corporate debt might be it.
From 2002-2005, very low interest rates encouraged a proliferation of MBS, along with rising commodity prices. For 2011-2018, I think the story will be that very low interest rates encouraged an epidemic of covenant-light, low-quality corporate debt for Fortune 500 types of companies, along with an outsized degree of share repurchases that have been causing rising stock prices.
See the Bloomberg article from October 11, " A $1 Trillion Powder Keg Threatens the Corporate Bond Market."
Anyway, for me the news of the day is that Deutsche Bank finally broke below the infamous $10/share barrier. That was a commonly-cited warning threshold from a couple of years back when I started that " Deutsche Bank Litigation / Bailout Watch" thread in September 2016.
Posted on 10/25/18 at 6:56 pm to Doc Fenton
That Bloomberg article is great
Posted on 10/25/18 at 7:19 pm to slutiger5
quote:
Could be good to watch and give one foresight, but two different economies though, right?
Of course, and the reserve currency. But if nothing fundamentally different happens then it is a good guide. I mean virtually the exact same crash happened with the same solutions, it was the same play. That is all I'm saying.
Or maybe it is all the algorithms are doing quirky things independent of rational thought:
https://postimg.cc/yDG0FWdD
Posted on 10/25/18 at 8:49 pm to LSUtoOmaha
Downvote. This “correction” is just pricing in the slowing growth. Forward 12-month PE of the SAP500 is ~15. The lifetime average is about 16.5.
Stock picking is dead and so are hedge funds. Too many people just accept a market level return, just look at the AUM growth of the QQQ and SPY.
Credit markets haven’t been under any stress during the sell off, which means it’s just a standard pull back.
The only thing to be worried about right now is if the Chinese are still willing to purchase U.S. T-notes.
To reiterate this is natural and the market is not expensive. I get why everyone panics becuase when we think “recession”, we think 2008-2009. Something like that is once in a lifetime. Next slowdown will be the typical 6-8 month variety.
Stock picking is dead and so are hedge funds. Too many people just accept a market level return, just look at the AUM growth of the QQQ and SPY.
Credit markets haven’t been under any stress during the sell off, which means it’s just a standard pull back.
The only thing to be worried about right now is if the Chinese are still willing to purchase U.S. T-notes.
To reiterate this is natural and the market is not expensive. I get why everyone panics becuase when we think “recession”, we think 2008-2009. Something like that is once in a lifetime. Next slowdown will be the typical 6-8 month variety.
Posted on 10/25/18 at 8:54 pm to LSUtoOmaha
quote:
5. Macro Debt: US Gross Federal Debt as a percentage of GDP averaged 61.7 percent from 1940-2017. Right now it is 105.4 percent.
Micro Debt: ATT lists net debt at 180 billion.
Probably not great when 80 billion of that is current and they have 50 billion in cash.
With rates still as low as they are this doesn't seem to be a problem. The spread between long term inflation rate vs. long term debt is quite small, so it makes perfect sense to borrow as much as possible for 30 years.
Posted on 10/26/18 at 8:47 am to foshizzle
How long can the U.S. service it's debt with rising rates is real question. Every eight years the debt seems to double. We are reaching a point that debt becomes unserviceable without severe consequences. This isn't new news, but even Trump pointed it out too
Posted on 10/26/18 at 11:38 am to Doc Fenton
I have purchased some longer term puts in "HYG" which tracks corporate high-yield bonds.
Posted on 10/26/18 at 2:12 pm to LSUtoOmaha
Not bad thinking. The high yield spread has jumped to over 3.6% recently, but that's nothing like the 7-8% spread that would indicate true stress, so you might be getting a good deal buying cheap.
I'm looking at more vanilla stuff at the moment. I've got a little bit of SPXU, but nothing significant, as I want to wait to make sure this isn't another feint like Jan/Feb.
I did make an investment in long-dated UST, thinking that the recent spike in yields will likely subside soon (although within a larger cycle of increasing rates, of course). If we are comparing to the Jan/Feb rate-spike-plus-stock-correction, recall that the dating for back then went something like this:
Fri., 1/26 = local stock peak at 2,872.87
Fri., 2/9 (T+14 days) = local stock trough at 2,532.69 (intraday)
Wed., 2/21 (T+26 days) = local 30-yr UST yield peak (with S&P 500 reaching an intraday high at 2,747.75, recouping over 1/2 the correction losses)
Then yields generally relaxed to lower levels through mid-to-late August. I think we might see something similar over the next 2-3 weeks, where the stock market recoups about half its earlier losses as bond yields crest... especially given the recent 3Q reading of only 1.6% growth in the PCE.
I'm looking at more vanilla stuff at the moment. I've got a little bit of SPXU, but nothing significant, as I want to wait to make sure this isn't another feint like Jan/Feb.
I did make an investment in long-dated UST, thinking that the recent spike in yields will likely subside soon (although within a larger cycle of increasing rates, of course). If we are comparing to the Jan/Feb rate-spike-plus-stock-correction, recall that the dating for back then went something like this:
Fri., 1/26 = local stock peak at 2,872.87
Fri., 2/9 (T+14 days) = local stock trough at 2,532.69 (intraday)
Wed., 2/21 (T+26 days) = local 30-yr UST yield peak (with S&P 500 reaching an intraday high at 2,747.75, recouping over 1/2 the correction losses)
Then yields generally relaxed to lower levels through mid-to-late August. I think we might see something similar over the next 2-3 weeks, where the stock market recoups about half its earlier losses as bond yields crest... especially given the recent 3Q reading of only 1.6% growth in the PCE.
Posted on 10/26/18 at 2:45 pm to LSUtoOmaha
We have a moron in the White House. God help us when investors figure that out. Maybe they have.
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