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CivilTiger83
Clemson Fan
Member since Dec 2017
865 posts

re: There are some major issues lurking in the US financial markets
If Trump understood the issue as primarily a debt burden problem, he wouldn't be pitching hard for a big unfunded infrastructure bill.

Trump is like most Rs these days... Happy to cut taxes, but does nothing about spending and if anything only increases spending.


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Doc Fenton
LSU Fan
New York, NY
Member since Feb 2007
52607 posts

re: There are some major issues lurking in the US financial markets
quote:

the privacy issues are overblown


Yes. But they are overblown because...

quote:

the 'election interference'


Is much, much worse than anywhere here seems to realize is even possible. The known Facebook connections from Peter Thiel to Cambridge Analytica through the Mercers, and ultimately to RIS through Aleksandr Kogan, were already bad enough.

The recent Sheryl Sandberg revelations, and stories about using Definers Public Affairs, have made the situation look even worse. They have obviously stymied a full internal investigation of the depth of RIS support that they allowed to flow through their system, because they already know it's bad and much more serious than what they have previously reported.

Meanwhile the British are already circling in on Arron Banks, whom they know illegally used foreign funding to support the Brexit campaign. Even assuming that the U.K. and U.S. public never care enough to react harshly enough through their elected governments, the EU certainly will, as the pro-Kremlin influence campaigns were not limited to just those two countries. Places like Finland, Poland, and the Baltics, for example, are likely to push the EU to take a harsher stance against Facebook in coming years.

The election interference' backlash will be worldwide. It's going to be a titanic shitshow of absolutely epic proportions.


lynxcat
Rutgers Fan
Member since Jan 2008
19790 posts

re: There are some major issues lurking in the US financial markets
...because Facebook showed ads related to pushing a political agenda? Is that at the core of issue?


GREENHEAD22
LSU Fan
LafayettebywayofBush
Member since Nov 2009
12438 posts

re: There are some major issues lurking in the US financial markets
I dont mean to jump off topic but can someone explain exactly how there was election interference? All they were doing was advertising propaganda correct? I haven't kept up so excuse my ignorance.


lynxcat
Rutgers Fan
Member since Jan 2008
19790 posts

re: There are some major issues lurking in the US financial markets
That’s what I’m trying to wrap my head around as well.


Shepherd88
Member since Dec 2013
2329 posts

re: There are some major issues lurking in the US financial markets
What I’m gathering is, there seems to be a few who missed this massive bull run by sitting on the sidelines. They are trying to justify by all academic means possible for them to get that opportunity again.


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HYDRebs
Ole Miss Fan
Houston
Member since Sep 2014
956 posts

re: There are some major issues lurking in the US financial markets
People forget Facebook is much more than just Facebook. Their M&A over the last decade has been incredible. Instagram will lead the way for them on a social media platform, plus with huge investments into VR. AI, and copious amounts of data. See only growth for them as a company. Although, I do believe their recent drop has them at a more appropriate valuation


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Doc Fenton
LSU Fan
New York, NY
Member since Feb 2007
52607 posts

re: There are some major issues lurking in the US financial markets
quote:

...because Facebook showed ads related to pushing a political agenda? Is that at the core of issue?


No. Of course not. There are problems because (1) there continue to be political ads that are anonymously and untraceably funded (and are thus in violation of campaign finance laws) from foreign hostile intelligence services; (2) there are not just ads, but entire influence operations that revolve around creating false identities, false local community groups, and the repetition of purposely designed misinformation news stories (from those same HoIS); and (3) there have been credible allegations of data exchanges of proprietary voter information to HoIS that have allowed microtargeting to subsequently take place on Facebook's platform, facilitated by very lenient open door policies regarding third party data collection.

Whatever your political views on campaign finance laws, it doesn't take much reflection to see that this could be a huge problem for small vulnerable states like Moldova or Montenegro or Latvia. Google, Facebook, and Twitter already dominate the revenue streams for the journalism industry through the Chartbeat system ( LINK), and given that type of dominance, platforms like Facebook and Twitter are the key forums for political influence operations. Having those types of sensitive operations continue to be anonymous, malicious, and untraceable is simply unacceptable in the given state of the world today. Professional national security experts, with no strong partisan political affiliations one way or the other, understand this to be a very serious problem.

The domestic political implications are another story, but given that we are on the MT board and not the PT board, it should suffice to say that the Zuckerberg/Sandberg performance so far should not give potential investor any good feelings about the organization's instincts for crisis management or political risk management. In fact, the response pursued by management is almost guaranteed to lead to the worst result for shareholder value--an executive team that is consistently behind the news (rather than trying to get ahead of the story), and that has engaged in a cover-up-and-blame-others type of behavior that is sure to lead to a steady drip-drip-drip of bad press far into the future.

But we are getting way off course here in this thread, and none of what I wrote above is closely related to my other points in this thread. It's more of a separate issue on national security and intelligence that I also happen to know a good bit about.

To get back on track, let's get back to something you wrote in an earlier post:

quote:

They have some things to sort out but the ROI of social media ads, led by Facebook and Instagram are going to continue to outpace every other provider.


But what if outpacing every other provider is no longer good enough to justify current valuations? Facebook (and the FAANG stocks in general) have reached a degree of market saturation that is difficult to keep building upon with similar rates of growth. It varies somewhat (Amazon holding a relatively good strategic growth position, and Apple and Facebook in relatively bad ones), but the general story here has macro implications, because until very recently, FAANG had represented the holdout force most resistant to the larger global bearish momentum trend.

Regarding Instagram, I agree that it has a very strong future growth trajectory, as it's become a platform for hundreds of thousands of microinfluencers to actually earn enough to make a living through their social media accounts. (This is really amazing enough itself to create a whole separate thread.)

Even so, Facebook is sort of boxed in now, and doesn't have very much room to run in terms of user growth or user-eyeball-time growth. The everything-for-more-connectivity-as-a-positive-end-to-itself ethos of the organization (and which served it so well in the past) is now failing it, and its primary remaining bright spot is having a superior employee base from which to launch new types of revenue-creators. That might not make for a very solid future, however, because the platform itself is becoming toxic and may already be going out of style. So Facebook can try to imitate Instagram's stories all it wants, but the likely result will not be equally growing revenue streams, but rather a base of customers that begin to ask themselves, "Why not just pick one over the other?"

In any case, every FAANG stock is now in a bear market, and unlike the dot-com bubble from two decades ago, the overvaluation of U.S. equities is not overly concentrated in the tech sector. This time, it's more evenly distributed across the board.


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Doc Fenton
LSU Fan
New York, NY
Member since Feb 2007
52607 posts

re: There are some major issues lurking in the US financial markets
quote:

trotting out Larry Kudlow to offer promising hints on China, or jawboning the Fed a little bit, has been enough to trigger rallies


And this is exactly what we've seen the past couple of days.

Tuesday = yet another China-related "Kudlow Bounce"
Wednesday (today) = Powell appearing to cave toward Trump

Following the same logic as earlier rallies this year, we may see a top shortly after the G20 summit on Friday & Saturday in Buenos Aires (where President Trump is expected to meet with President Xi). After that, the longer-term bear market cycle will likely resume.

What was really surprising to me about the market's reaction to Powell's remarks today was the rise in yields of 30-year UST. In the category of "you learn something new every day", this was apparently the result of bond investors participating in the curve steepener trade.

quote:

One macroeconomic scenario in which using a curve steepener trade could be beneficial would be if the Fed decides to significantly lower the interest rate, which could weaken the U.S. dollar and cause foreign central banks to stop buying the longer term Treasury. This decrease in demand for the longer term Treasury should cause its price to fall, causing its yield to increase; the greater the yield difference, the more profitable the curve steepener trade strategy becomes.


This explains some of how we got the following effects during the big movement from about 11:57am ET to 12:10pm ET today:

3-month: 2.397% --> 2.392% (-0.005%)
1-year: 2.691% --> 2.676% (-0.015%)
2-year: 2.841% --> 2.801% (-0.040%)
5-year: 2.899% --> 2.860% (-0.039%)
10-year: 3.070% --> 3.045% (-0.025%)
30-year: 3.329% --> 3.318% (-0.011%)

S&P 500: 2,692 --> 2,723 (+1.15%)

And although there was a small whipsaw effect across different UST maturies near 1:00pm ET, it was most pronounced for 30-year UST, where the yield actually rose well above its earlier position at noon, going as high as 3.350% (+0.021%).

There was a decent explanation of this from a Societe Generale analyst quoted in a MarketWatch article ( LINK):

quote:

The rise in the 30-year bond yield, meanwhile, was probably “flow-related,” Subadra Rajappa, head of U.S. rates strategy at Société Générale, told MarketWatch.

She said the 30-year bond yield’s climb after Powell’s speech suggested traders could be buying short-dated Treasurys and selling their long-dated peers as part of so-called steepener trades, rather than investors expecting higher long-term growth from a slower hiking trajectory.


That makes sense to me. You have some minor flow-related effects related to large bond investors repositioning their allocations along the maturity curve, coupled with expectations that lower interest rates will result in a falling USD, and thus reduced demand for long-dated UST from foreign central banks.

However, it is likely that today's moves were an over-reaction, and that Powell was just being cagey with his words (which were quite non-committal) to protect the Fed's independence from the White House:

quote:

But as Treasurys rallied, analysts tut-tutted at what they saw as overreaction from investors. Economists disputed the idea that Powell would slow its rate increases next year. In keeping with previous remarks, Powell was only describing the current state of monetary policy and not easing investors into a potential pause to rate increases, they said.

After all, the central banks' range of estimates for the neutral rate is bound between 2.50% and 3.50%, with the median pointing to 3%. If the Fed raises rates in December, it would bring the fed funds rate near the bottom end of this range in line with Powell’s remarks but still well off the middle or top of the range.

“There is quite a lot of runway between where the target sits at present and the upper end of that range,” said Tom Porcelli, chief U.S. economist for RBC Capital Markets, in a Wednesday note.



Already tonight, the yield on the 30-year UST has dropped back down to 3.327%, erasing the earlier rise during normal trading hours today.
This post was edited on 11/28 at 10:16 pm


CajunTiger92
LSU Fan
Member since Dec 2007
1637 posts

re: There are some major issues lurking in the US financial markets
The foundation of a bull market is earnings. This is where we stand now. Bear markets don’t usually look like this. The bullet points copied screwy. It is easier to read them in the link.



quote:

Key Metrics Media Questions/Requests media_request@factset.com ? Earnings Scorecard: For Q3 2018 (with 96% of the companies in the S&P 500 reporting actual results for the quarter), 78% of S&P 500 companies have reported a positive EPS surprise and 61% have reported a positive sales surprise. ? Earnings Growth: For Q3 2018, the blended earnings growth rate for the S&P 500 is 25.9%. If 25.9% is the actual growth rate for the quarter, it will mark the highest earnings growth since Q3 2010. ? Earnings Revisions: On September 30, the estimated earnings growth rate for Q3 2018 was 19.3%. All eleven sectors have higher growth rates today (compared to September 30) due to positive EPS surprises and upward revisions to EPS estimates. ? Earnings Guidance: For Q4 2018, 67 S&P 500 companies have issued negative EPS guidance and 30 S&P 500 companies have issued positive EPS guidance. ? Valuation: The forward 12-month P/E ratio for the S&P 500 is 15.1. This P/E ratio is below the 5-year average (16.4) but above the 10-year average (14.5).


LINK


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Doc Fenton
LSU Fan
New York, NY
Member since Feb 2007
52607 posts

re: There are some major issues lurking in the US financial markets
Forward guidance is almost completely unreliable, and the main chart in your link is very misleading.

Here's EPS for the S&P 500 in the books: LINK.

Here's EPS for the S&P 500 based on forward estimates: LINK.

Do you really think EPS for the S&P 500 will hit 160 for 2019? It will not hit 160. It will not even be close.

It was 112 last year ( LINK), compared to 102 in 2006, and that was below where forward estimates had been. The first 3 quarters of 2018 have been very good, and yes, I admit they took me by surprise. But you can't trust typical Wall Street guidance for corporations that extrapolates that kind of growth into 2019. It won't happen.


CajunTiger92
LSU Fan
Member since Dec 2007
1637 posts

re: There are some major issues lurking in the US financial markets
From your links:

SP500 EPS
Actual Forward Guidance
Dec. 31, 2017 26.96 26.96
Sept. 30, 2017 28.45 29.80
June 30, 2017 27.01 27.01
March 31, 2017 27.46 27.46
June 30, 2018 34.05 34.05
March 31, 2018 33.02 32.71


quote:

Forward guidance is almost completely unreliable,


"almost"

I understand looking at other years gives a different picture but I was shocked at the correlation for 2017 and 2018 YTD.

We can argue this or that about the numbers but the bottom line is earnings were good and beat expectations. I don't see the bear market. I see this market making new highs by the end of December or the first part of January.
This post was edited on 11/29 at 11:34 am


Doc Fenton
LSU Fan
New York, NY
Member since Feb 2007
52607 posts

re: There are some major issues lurking in the US financial markets
Sorry. That was my fault for not explaining what I meant.

Forward guidance is almost completely unreliable in terms of performing fundamental valuations of stocks.

Obviously, it exists because it serves a valuable purpose as information for a particular corporations. But corporate earnings growth rates for the S&P 500 have a notoriously poor correlation to near-term stock market performance.

quote:

We can argue this or that about the numbers but the bottom line is earnings were good and beat expectations.


But that's not the bottom line at all. Earnings beat expectations so far for 2017 and 2018. So what? If the market was wildly overvalued to start with, then it's still wildly overvalued now.

Having corporate earnings beat expectations for a few quarters is no guarantee at all against an oncoming compression of P/E ratios, or a sudden unexpected downward revision of forward earnings guidance, or both. In fact, it has very little to do with any of it.

There are all kinds of complications for EPS related to corporate buybacks, debt leverage, accounting, etc. But corporate revenues are a more stable statistic. And corporate gross value added (GVA) is even better. That's what really matters here for people interested in long-term fundamental valuations.

quote:

I was shocked at the correlation for 2017 and 2018 YTD.


I think you were just misreading the YCharts. The forward estimate link was only meant for forward estimates. Theoretically, the correlation for past numbers should be 100%, but maybe someone didn't update the historical numbers, or maybe they were the last versions of estimates right before the final numbers came in.

Forward estimates are constantly changing, so if you're doing an analysis of how reliable they are (just in terms of accuracy, not in terms of valuation, which as I explained above is a bad idea), you need a more holistic analysis across time.

For example, here's something I downloaded from the summer of 2016 for annual S&P 500 earnings estimate for the year 2016:

3-31-2015 --> $135.03
6-30-2015 --> $132.36
9-30-2015 --> $129.37
12-31-2015 --> $125.56
3-31-2016 --> $118.12
6-30-2016 --> $114.31
Current (did I download this in July 2016?) --> $110.58

Actual = $99.04 (although there may be some discrepancy in GAAP versus pro-forma accounting that I didn't catch, since this kind of stuff always seems to have annoying complications)

If you want to download the most recent version of this time-varying evolution of forward S&P 500 earnings estimates, you can find it here under 'Index Earnings': LINK. The Excel filename is 'sp-500-eps-est'.

That version will show you forward guidance for 2018 that actually rose about 10% from the summer of 2017 to the summer of 2018, and very high guidance for 2019 (with the first data point at 3/31/2018).


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Doc Fenton
LSU Fan
New York, NY
Member since Feb 2007
52607 posts

re: There are some major issues lurking in the US financial markets
FYI, there was an article in MarketWatch on this subject just this morning: " Even after the latest correction, stocks aren’t cheap."

It gives the common arguments for using forward versus trailing 12-month earnings:

quote:

Willie Delwiche, investment strategist with R.W. Baird, prefers to look at trailing earnings numbers, rather than forward-looking earnings, when pricing the market, arguing in an interview with MarketWatch that using trailing numbers allows investors to avoid using earnings projections that are historically unreliable.


Honestly, though, both forward and trailing 12-month earnings statistics have terrible correlation statistics. Better to use a modified Buffett indicator or a modified CAPE statistic.

The more interesting snippet from the article was this:

quote:

Wibel pointed out that over the past 40 years, the most important determinant for stock price growth has been multiple expansion, and not earnings growth.

“Ironically when you have really strong earnings growth, the stock market doesn’t usually perform well,” because such profit growth has already been factored in by investors, who then expect profit growth to revert to the mean.

“In the long run, changes to multiples are almost always related to interest rates,” he told MarketWatch. He pointed to the bull market of the 1980s as an example. When then Fed Chair Paul Volcker pushed the fed-funds rate close to 20% in 1981, the S&P 500 was trading at between 6 and 8 times earnings. “Then you saw a steady decline in interest rates in the next decades, when you also saw multiples expand from 6 to 20,” Wibel said.


Here Wibel is making the point that recent earnings growth is often only a very small part of the story for explaining why the stock market is valued wherever it happens to be.


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Doc Fenton
LSU Fan
New York, NY
Member since Feb 2007
52607 posts

re: There are some major issues lurking in the US financial markets
quote:

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.


Speak of the devil: " German police raid Deutsche Bank offices on money laundering allegations; shares fall 3.4%."

If DB goes into bankruptcy, those people implicated in the Panama Papers are going to be so incredibly fricked. This is going to be very enjoyable to watch if it happens.


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Doc Fenton
LSU Fan
New York, NY
Member since Feb 2007
52607 posts

re: There are some major issues lurking in the US financial markets
quote:

Tuesday = yet another China-related "Kudlow Bounce"
Wednesday (today) = Powell appearing to cave toward Trump

Following the same logic as earlier rallies this year, we may see a top shortly after the G20 summit on Friday & Saturday in Buenos Aires (where President Trump is expected to meet with President Xi).


Following up on this, there were some interesting predictive markets data from Strategas Research on the probabilities for what will occur in Buenos Aires this weekend: " It's now up to President Trump to rescue the stock market from ending 2018 in the red."

Strategas Research Odds
40% odds -- Both sides announce they will negotiate, but U.S. tariffs on China remain on target to hit 25% in January.
30% odds -- Both sides announce they will negotiate, and President Trump announces that he will delay the tariff increases scheduled for January, and/or limit the planned expansion of tariffs to more goods.
20% odds -- Both sides announce they will negotiate, and President Trump announces a reduction in U.S. tariffs on China from the current level of 10% and/or their current scope of targeted goods.
10% odds -- Cessation of negotiations (i.e., total failure).


CajunTiger92
LSU Fan
Member since Dec 2007
1637 posts

re: There are some major issues lurking in the US financial markets
So where do you see the SP500 will be at the end of the year?


Doc Fenton
LSU Fan
New York, NY
Member since Feb 2007
52607 posts

re: There are some major issues lurking in the US financial markets
Oh, I don't know. I'd lean toward the 30% option occurring this weekend:

quote:

30% odds -- Both sides announce they will negotiate, and President Trump announces that he will delay the tariff increases scheduled for January, and/or limit the planned expansion of tariffs to more goods.


Which means that the S&P 500 should see a nice bump going into next week (maybe to 2,800 or so), and I'm guessing a longer downward slide after that (maybe to 2,650 or so). But any predictions within a month's time is more about fun speculation and guessing games than anything else.

What I'm really waiting on is a macro shift in investor risk aversion that will lead to a very large collapse in prices away from the current unstable equilibrium. It'll probably start with trouble brewing in leveraged corporate loans, but it's impossible to predict exactly when. It's possible it could even take another year.

I can look at things like 9-month momentum, peak employment, yield curve flattening, junk bond spreads, rising interest rates, median home sales prices, etc., and these can tell me when a bear market is likely underway (or else coming soon), but right now everything is signaling a transition zone (between bull and bear), and there's so many unexpected things that can and will happen in that small window of time between now and EOY.

So, yes, I tend to dip my toe in the water one way or the other based on uncertain signals, but ultimately I'm playing the long game here based on things that I know with greater certainty. And what I know with greater certainty is that the S&P 500 should fall toward a dramatically reduced bottom around 1,000 to 1,500 sometime over the next several years.


CajunTiger92
LSU Fan
Member since Dec 2007
1637 posts

re: There are some major issues lurking in the US financial markets
quote:

But any predictions within a month's time is more about fun speculation and guessing games than anything else.


While it is fun, I disagree. Serious money can be made in these opportunities. The Bulls will take take out the 2800 resistance level and then it’s on to all time highs.

Longer term, this bull market has more life than you think.



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Boatshoes
Member since Dec 2017
2541 posts

re: There are some major issues lurking in the US financial markets
quote:

Could be good to watch and give one foresight, but two different economies though, right?


Less different than you might think. Don't forget that following World War 2 they looked to us as a model for recovery. Differences include: a historically higher savings rate, less of a willingness to adopt consumer debt to purchase depreciating assets, and an unwillingness to approve mass immigration policies to keep population growth positive.


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