Thoughts from Friday, July 31, 2020

Earnings from Big Tech Don’t Matter

  • Stimulus put more $ into the economy.
  • Travel and entertainment spending simply moved to tech.
  • Services spending plummeted while people still bought stuff online.
  • Everyone was online significantly more than ever.

3rd and 4th quarter are what really matter. How will these companies do when there is no stimulus? When unemployment affects finally take root? While re-opening has been shaky at best, people are beginning to spend elsewhere.

Don’t get me wrong. These companies should still grow. But not at the rate Wall Street expects and not at a rate that justifies their current valuations.

Thoughts from June 25, 2020

Why I am still a bear – Part 2

Sorry for delay in continuing this series.  It has been a long week, but let’s get to it for today!

Reason #2: Earnings matter:  Price/Earnings ratios mean revert over long periods of time, whether there is Fed intervention or not

There is this funny premise that some of us old guys adhere to regarding the stock market:  a stock’s earnings (now and future) should be the primary basis of value.  That may seem logical, but many investors don’t think of stocks that way.  They think stocks are more like “sophisticated gambling”…of course, many think it is a can’t lose game.  But I digress…

Don’t be mean

As much as my kids are saints, there are times when they argue continuously.  I get it.  It’s hard to have a roommate called your brother, but at the end of the day, as a parent you implore them to resolve it and “DON’T BE MEAN”.

Well, the world of stocks, we have have different kind of mean.  It’s called the reversion to the mean.  Statistically, it means that over time what ever statistic you value tends to “revert” to its historical average.  In the case of earnings for stocks, we have been ahead of or significantly “over” the average for quite some time, so a reversion means that earnings should be headed down.  If earnings were below the mean, then we should expect them to rise.

First, know that earnings last year on the S&P 500 were lower than in 2018, so they were already trending lower before the crisis.

Second, as we discussed last week, most “experts” and Wall Street prognosticators believe that “This Time Is Different”.  Basically, the belief is that we are smarter, more sophisticated investors and that companies are better now than in the past so they should be permanently valued “HIGHER” than in the past.  Oh…and then there’s the Fed.  We will talk about that in a minute.

Below is an historical chart of the Shiller P/E ratio as far back as data goes. The historical “Mean” or “Average” is 16.72.  Today, the ratio is 28 and climbing.  In fact, once we get updated earnings for this past quarter, my guess is that the ratio will spike to an all time high.

But let’s take a quick detour…the Federal Reserve bank was created in 1913 and since that time has forced its policy upon the US financial system.  In the beginning of the Great Depression, they were slow to adopt easy monetary policy and then during what looked like recovery, they were quick to raise rates.  They also led us through the hyperinflation days of the 1970s (which seemed never-ending), and then eased interest rates starting in 1982 basically until now.  Their actions and policies have resulted in numerous boom and bust cycles since their inception.  In recent history – 2000 was no exception.  2008 no exception.  2020 will be no exception.

There is an underlying theme on Wall Street today that “fighting the Fed” is a losing proposition.  Unfortunately, rolling with the Fed results in all the booms and busts.  Maybe the highs and lows are exacerbated by the Fed’s actions, and maybe not.  I am not an economist.

From what I can tell, regardless of Fed actions, the earnings of companies and the prices you pay for those earnings matter.   Look at the peaks in the chart above.  That is paying a high price for the earnings received.  This gets back to one of the basics of stocks – buy low, sell high.

In today’s environment, the P/E ratio is extremely high and historically, it is due to revert back to its average.  A closer look at that chart above will tell you that over the past 27 years, we have had only one year when the Shiller P/E ratio was at its average (2009).  One year.  

Some additional insight on what’s to come: 
The earnings decline will be greater than expected, and this will only cause the P/E ratio to spike significantly higher (and as I commented above…potentially to all time highs).  As it stands, Wall Street currently only expects a quick 20% decline in earnings…even though over 1/2 of the S&P 500 companies have pulled “guidance” for at least the 2nd quarter.  That basically means that companies don’t know what their business is going to look like or how much they will sell/earn. It is hard to project when COVID-19 brought so much to an immediate halt!

With the great earnings unknown ahead, be prepared for record P/E ratios and what is to follow…a reversion to the mean.

Thanks for listening…tomorrow will be fun as we look at managing money compared to trading stocks. They are very different beasts!

God bless,


Thoughts from June 19, 2020

Why I am still a bear – Part 1

Everywhere I turn, the bears seem to be running for the hills.  There are fewer and fewer of us.  It reminds me of February.  Granted, there are a number of very famous investors that have fired warning shots lately regarding the stock market (Buffett, Druckenmiller, Marks, and Grantham to name a few).  It is important to note that none of these investing geniuses are actually bearish.  They have simply backed off their bullish outlook.

The investor and advisor surveys are also a bit misleading.  In the latest AAII survey (, the bears outweigh the bulls.  The recent advisor surveys show a neutral stance.  So maybe there are other bears out there?  Surveys are nice, but only have so much clout.  They are more about what people say than what they actually do.  What we do know is that most investors remain invested.  Retail investors are all the rage with day-trading, and all the data coming out of the last 2 months showed most 401k investors held on during the Feb-March correction.

So why am I not a bull now?  Can’t I see that the Fed is the backstop to the market and I shouldn’t fight the Fed?

I come back to a few guiding principles that I learned the hard way (in 2001-03 and 2007-09):

  • Every generation believes at some point that stock only ever go up, and that financial instability should not affect them
  • Earnings matter:  Price/Earnings ratios mean revert over long period of time, whether there is Fed intervention or not
  • Managing money and trading stocks are not the same thing and require completely different skill sets
  • Market cycles last longer both to the upside and downside than basically anyone thinks possible

I want to tackle each of these over the next four days, so here we go.

#1 – Generational Ignorance

Do you remember when you were 25?  Seems like yesterday to me, but here we are 20 years later with a wife, 4 kids, a major career change, a failed startup company and a whole heckuva lot of experience under my belt.  I hope to have learned a few things.

But when I was 25, I was invincible and entitled, but knew very little of how things worked.  Did that stop me from day-trading back then?  No.  At the time, we had the Internet bubble/bust.  EVERYONE thought Internet/technology companies were worth gold – even those that didn’t have a business plan.  Sound familiar?  Maybe this time is different.

But it’s not.  You don’t have to look very deep into history to see similar behavior.  Late 1920s – early 1930s, late 1950s, early 1970s, late 1990s-2003, 2007-2009 – each time, there is a belief that “easy” money can be had “risk-free” and that certain companies have the advantage of being on the cutting-edge of technology and therefore “can’t lose.”

And now here we are.  I am hearing the chatter in the grocery stores about day-trading. High schoolers are posting their trading “winners” all over the Internet. There was even a twitter post about a 10-year old’s friend group giving up video games and turning to day-trading. Even Wall Street analysts give technology companies more “value” just because.  Look at the 800lb gorilla known as Amazon.  Despite rarely making a profit, it’s value is $1.3T – a value greater than the GDP of Mexico, and they have a P/E ratio of 128.  Now, I like Amazon.  I think they are a valuable company, but is this maybe a little out of hand?  The idea that they can only ever go up and will continue to grow at a break-neck speed is naive.

The day-trading craze, partially a result of COVID-19 forcing everyone to stay home on top of eliminating sports, gambling and many other avenues where folks like to spend a few bucks, is getting tragic.  Just this week, a young-20s Robinhood “trader” took his own life after seeing his account had a -$700k balance.  I don’t know the details of how that can even happen, but it is incredibly sad and one more indication that the the retail frenzy is wild.  Robinhood, TD Ameritrade, E*Trade and Charles Schwab all reported a combined 5 million NEW retail trading accounts between March & April.  We even have a new celebrity behind day-trading with Dave Portnoy pitching mostly junk stocks since the stock market lows in March with the advice of “stocks only go up, up, up!”.

This time is indeed different…the scale is different, the ideas different, the technology different, the recession/pandemic background is different, but the behavior is the same. And the behavior is what matters.

Which leads me to valuations & earnings…

Thoughts from June 17, 2020

  1. Hertz front and center!

Well someone at the SEC finally watched CNBC and took notice that maybe the Hertz offering is bad for the general pubic.  Amazingly, the stock rocketed 21% higher this morning before settling around yesterday’s close price.  Anyone trading this stock at this point would be better off finding a roulette table!

  1. SMCCF Re-Announced and Re-Ignites the stock market

With the stock market bulls running out of steam (and Wall Street justifying current levels based on earnings in 2022), the Fed had to come to the rescue.  This time, the program was not new, but they needed to re-announce it since they took their time to actually DO anything.  Consequently, the stock market was re-ignited for one day as media pundits discussed the program already discussed 8 weeks ago that was part of the Fed acronym bombardment.  Nothing new to see here…except they actually started the program and are illegally buying corporate bonds. Did I say illegal?  Oh that’s right.  According to the Federal Reserve Act, they are not allowed to buy corporate bonds – they are only allowed to buy gvt and mortgage securities.  But they are anyway.  Why?  Because no one dares stop them.  Congress has the power but not the backbone.  But I digress…maybe we will get into that another time.

  1. Corporate bond yields hit all-time lows.

It is now cheaper for a lot of companies to borrow than at anytime in history!  Think of that.  In the midst (some even say the beginning) of a pandemic/depression, when companies are becoming evermore financially fragile, they can now borrow MORE $ EVEN MORE CHEAPLY!!!!  My clients and followers know my concerns about the exponentially growing debt burden around the globe, and this is just one more example of the irrationality of the financial system.  Sadly, it has been the actions of Reserve Banks around the world that have created this, and it is hard to imagine how it ends without painful consequences.

  1. Nikola – another auto company worth more than Ford?

Interested in buying a “green” technology company focused on the truck industry?  Not, not Tesla.  Nikola.  When I first hear the name, I thought of Ricola, but that is a throat lozenge.  Since its’ IPO earlier this MONTH, shares of NKLA are up 93% and now have a market capitalization greater than Ford Motor company.  That is no big deal, really.  Except Nikola has no revenue….and of course profits for that matter.  They have a lot of debt of course, but in this upside-down world, maybe more debt and less revenue/profits = higher stock prices???  I am thinking that is it.  Maybe they will be an amazing company in a few years, but who is going to buy their expensive trucks when companies are cutting CAPEX, reducing costs, and just trying to survive.  Seems a tad overvalued to me.

Thoughts from June 16, 2020

  1. Buffett scolded again…and again…and again.  

It has been a rough few years for Mr. Buffett, but don’t think he hasn’t seen this before.  Is this time different?  This time valuations don’t matter?  Has this generation finally outsmarted the financial markets and established a new higher plateau where prices can only go higher?  Mr. Buffett, heralded as one of the greatest investors of all time, has been through more market cycles than any of us.  He has learned from his mistakes, and he understands and respects the past.  And he doesn’t care what people think.  He will do what he wants.  I would not bet against him.

  1. Royalty Pharma IPO +59% in one day.

Recent IPOs have exploded as irrational exuberance continues to flood the stock market with more speculation than actual investing.  In some ways, however, this one is refreshing.  The company is profitable and pays a dividend, which is unlike nearly any company we have seen IPO in the past 18 months.

  1. Industrial Production “Rebounds” or “Slow to Gain”

It is always amusing to see how the media spins news.  Today, Industrial Production “rebounded” 1.4% after falling nearly 20% over the past 2 months combined.  Most of the media called it a “rebound” (check similar stories at CNBC, MarketWatch, Yahoo, Bloomberg, WSJ).  ING called it “slow to gain” – they are not a media outlet of course and that is at least a little refreshing.  The bottom line with the report is that businesses that make stuff are still not making very much.  A 20% decline followed by a 1.4% gain means as much.  We will be watching this closely over the coming months to really gauge whether manufacturing is coming back with reckless abandon (which is what Wall Street is pricing in) or if we have a new normal, which is what I suspect we will see.

Thoughts from June 15, 2020

  1. CalPERS borrowing $BILLIONS

In a short few weeks, it will mark the 7th anniversary of moving my family from Los Angeles to Raleigh, NC.  The list of reasons why is long.  CalPERS is just another ridiculous organization that I am glad to be away from, but sadly, the stable retirement of many friends and family is dependent upon CalPERS.  This is an insane practice, but one which has been used before and will be used many times over in the years to come by pensions that can’t keep up with their obligations.  Any deepening of the stock market correction for any significant period of time will blow the whole thing up anyway.

  1. Tesla #1

Shares of Tesla are now up 139% YTD while everything about the company seems to be trending in the wrong direction.  Sales down.  Deliveries down.  Earnings non-existent.  Factories offline.  Demand down.  But with all of that as a background, Tesla became the largest Automaker IN THE WORLD (in terms of value…not actual making anything), surpassing Toyota.  I am not surprised in the least considering we are in the age of valuing only the distant future while completely discounting the past.

  1. Jobs lost from Demand Destruction will not come back

While many of the 40M+ jobs that were lost over the past few months will come back as the economy reopens, many will not.  And not just from restaurants closing or small businesses shutting their doors.  Ultimately, when demand stops, companies cut.  Those cuts are permanent and will only be replaced when demand returns to a robust pace.  For many industries, it may be years.  Recessions (and dare I say Depressions) change people’s behavior.  The financial security there once was is now in question.  There will be more saving, and therefore less spending.  With many out of work, they also will be spending less.  Less spending means less revenue for companies which typically means less profit which means more job cuts.  It is and likely will be a vicious cycle.  I keep reminding people.  We are only 3 months into this.  3 months.  There is a lot more coming.

  1. Speculation is not investing

Hertz did announce today a $500m follow-on offering, but was quick to note that is was very likely the shares are worthless.  Wow.  Typically I am more of an anti-gvt involvement kinda guy, but this is one where I wish the SEC would step in and protect investors.  There is very little moving Hertz stock except retail speculators.  More to come on some of these other companies that should be worth next to nothing.|linkedin&par=sharebar

Thoughts from June 12, 2020

  1. Robinhood’s user activity might be speculation

Robinhood, a free trading platform adopted by many a day-trader during this crisis, is showing us that retail investor activity is heavy bent on speculation.

  1. Bankrupt companies stock is still worth $0

Hertz filed for bankruptcy and Chesapeake Energy has said bankruptcy is basically imminent.  These companies will not disappear due to bankruptcy.  That’s not how it works.  Debt holders will become the new equity owners and current stockholders (equity owners) will get wiped out.  That is how a re-organization works.  Trading a bankrupt company’s stock is like a 2-year old playing with fire…it always turns out badly.

  1. Starbucks closing 400 cafes – I’m not happy

For those of you that know me well, you know that coffee is important.  Next to God and family, coffee is highly ranked.  My kids roll their eyes when dad is heading to Starbucks at 2p for a coffee!  Speaking of Starbucks, they are closing/modifying 400 cafes.  This was after refusing to pay rent at thousands of locations affected by COVID-19.  Sadly, there may  be more changes coming.

  1. COVID-19 “second wave” or “lingering nemesis”

I guess COVID-19 is still with us.  I didn’t think it was eradicated, but it has been thoroughly ignored over the past month or so.  The hope of the economy re-opening coupled with social justice issues has diverted our attention (and right so).  Momentum and focus is shifting again, and it is coming to many as a surprise.  I have been saying all along that this is going to last awhile as more of a “lingering nemesis”, and we need to figure out how to live with it, treat it well and protect those vulnerable.