How is this NOT a US Stock bubble??

[Dtail]

IMHO, there's more differences than similarities....

Key Risk Differences of CD to Bonds:

• Credit Risk - CD none
• Liquidity Risk - bond prices may go down, so haircut taken if need to get money out
• Concentration Risk - Not applicable to CD
• Market/Interest Rate Risk - Bond values fluctuate, CD doesn't

One just sleeps better with a CD than they would with a Bond, so that's enough difference for me.

Bolded by me
Actually if one has a brokered CD, then one can trade it without penalty no different than a bond with fluctuating market values.

ETA - I see PB already addressed this point in post #42. Sorry...

 

[bobandsherry]

How is that different from a CD? A brokered CD would be sold if you need the cash before maturity and you would incur interest rate risk. I guess there are some CDs that you can just redeem (for example, those bought directly from a credit union), but most would incur a penalty. And, pb4uski did specifically state that the comparison is with brokered products. In that space, they act the same.

My original comment was in response to OP, don't think he had brokered CD's. But if frame an argument around a very specific set of parameters, then OK, you win. But even pb4uski said he bought CD's from credit unions (actually "prefers" them"), so not unreasonable to view "CD's" as more than brokered.

That is part of the reason why I prefer credit union CDs at this point. In 2019 when you could snag 3.0% and 3.5% 5-year CDs.... that was good enough to entice someone who had previously only owned one CD in his life* to dive into the pool head first.

But when interest rates are declining it is painful to see bond funds like Total Bond provide a superior return.

* PenFed 3.0% 5-year that matured in Dec 2018

Moving on....

 

[finnski1]

I bought 50 march 2020 $325 puts today for $3.3

I just have a feeling that we have not quite seen the full extent of the wu-flu and things could pull back a tad over the next week or two as cases pop up in the USA.

I am not looking to make a fortune here, but even a 5% pullback would make those puts go from $16,500 to about $50,000.

Of course if it only drops to $325 then they expire worthless as you know.
I dabble in options myself and it is not easy (as you know) to get the timing and direction right.
Good luck with it. I generally do much smaller amounts than 50 contracts at $16500. I'm too cheap to risk that much in any one option. I've hit 1200 % gains in only a few weeks but have also had several expire worthless. Net/net I have not made a lot but I enjoy the game.
I think we are ripe for another pullback but I have been wrong many times before LOL.

 

[Spock]

I get your point, but to say CD's are bonds, well they really aren't. Bonds re-act differently that fixed income CD's. In a decreasing rate environment Bonds would show appreciation in their underlying value, CD's don't. ....

My brokered CDs increased in value as they can be sold at a price to reflect the higher than current market interest rate.

 

[Running_Man]

Did you even read my post before responding?

Tell me about the differences between a brokered CD with a Treasury bond as suggested in my post... let's say a 5 year brokered CD and a 5 year Treasury bond, both issued in January 2020.

CD's compete against other banks and the interest rate and 5 year treasury rates are indirectly controlled by the FED. CD's are sometimes earning quite a bit more than 5 year treasuries and sometimes the same or slightly less.

The market for an individual brokered CD is far less liquid than Treasuries so the bid/ask prices can be quite wide. Right now 5 year treasuries on Fidelity are offering 1.42% and 5 year CD's 1.90%. That is quite a difference in interest payments over five years (25% less interest).

 

[pb4uski]

.... Furthermore, regarding the timing, if you look at past bubbles, there were many opportunities to exit and re-enter later that, while not exactly nailing the peak upon exit, nor catching the exact low upon re-entry, still yielded better results with significantly less volatility than simply holding. (For instance, you could have exited the market in 1998, about two years after Greenspan's irrational exuberance comments, missed the incredible gains that followed in 1999 and early 2000, and re-entered anytime between 2002 - 2003 and done better than simply holding the whole time, while earning interest during the out-of-the-market period. Similar story for the up and down around the Great Financial Crisis.) Point is: It's like horse shoes; close enough is good enough.

SO....does anyone disagree with my original thesis that aggregate profits have been flat for 7+ years, and interest rates are no lower now than then, and therefore the 2x+ jump in stock prices is unjustified? Does someone have an argument disproving the data points, or a point of view that I'm totally missing regarding overvaluation?

I don't disagree that the stock market "feels" overvalued and may well be a bubble... t one probably could have said that a year and 30% ago. I don't know if I'm smart enough to get out and get in at the right times so I'll likely just stay with my AA through thick and thin... besides, if I rebalance and buy more stock as it falls I'll end up ahead and I am an experienced enough investor to stomach the roller-coaster ride.... besides, it might be different this time (I don't really think so though).

IME it is hard enough knowing when to get out, but the knowing when to get in is even trickier... how many do we know who got out in 2008 and never got back in?

 

[Jerry1]

IME it is hard enough knowing when to get out, but the knowing when to get in is even trickier... how many do we know who got out in 2008 and never got back in?

I got out in 2008 and was happy with myself, but I did get back in, but even doing so, left a lot of money on the table.

 

[Fermion]

Of course if it only drops to $325 then they expire worthless as you know.
I dabble in options myself and it is not easy (as you know) to get the timing and direction right.
Good luck with it. I generally do much smaller amounts than 50 contracts at $16500. I'm too cheap to risk that much in any one option. I've hit 1200 % gains in only a few weeks but have also had several expire worthless. Net/net I have not made a lot but I enjoy the game.
I think we are ripe for another pullback but I have been wrong many times before LOL.

I sold them this morning for a ~$2700 gain but then when the market recovered I bought 50 March 2020 $320 puts for $2.70. Not quite as much money in the purchase of those and still quite protective against a drop.

The market looks ahead, but maybe they have their dims on? This China slowdown/shutdown of manufacturing is going to be felt in the coming months. March 20 is a bit early but I figure *someone* in the market is going to look toward next quarter earnings early.

 

[samclem]

so I'll likely just stay with my AA through thick and thin... besides, if I rebalance and buy more stock as it falls I'll end up ahead and I am an experienced enough investor to stomach the roller-coaster ride.... besides, it might be different this time (I don't really think so though).

IME it is hard enough knowing when to get out, but the knowing when to get in is even trickier... how many do we know who got out in 2008 and never got back in?

Yes, just doing normal rebalancing does a lot to reduce the overall impact of bubbles/bubble pops. You're selling shares as they appreciate, buying more as they get cheaper.
I wouldn't feel comfortable with an "all in/all out" approach to stock allocation. But just varying my stock allocation within my comfort range and having mechanical PE10 based triggers for adjusting the allocation within that range allows me to keep emotion out of it. I don't need to hit the highs and lows, being just a "little more right" is enough for me. And it's no more trouble than the annual rebalancing I'd do anyway.

 

[VanWinkle]

I got out in 2008 and was happy with myself, but I did get back in, but even doing so, left a lot of money on the table.

Thanks for your honesty Jerry1!!

VW

 

[RenoJay]

To the OPs point. I think earnings have grown. Look at the S&P 500

View attachment 33781

Thanks for the chart. From what I can tell, it's showing earnings per share. My issue with this is that we all know buy backs have been used to reduce share counts. (Hence my example that a company with 100 shares outstanding earning $10 share should be no more valuable than the same company with 50 shares outstanding earning $20 per share.) It sort of reminds me how everyone went gaga over stock splits in the 90's, even though they were simply an accounting move that should have had no impact on the fundamental value of the business. That's why I sought an "aggregate earnings" chart.

So my question: Is my thinking flawed, i.e. is there a reason that share buybacks SHOULD add to market cap, aside from simply emotion? Or do you think I'm mistaken and that aggregate earnings are actually increasing, in addition to per share earnings? (the latter having clearly increased a lot per your chart.)

 

[audreyh1]

S&P500 earnings are up since 2012 (7 years) https://www.multpl.com/s-p-500-earnings/table/by-month

Overall real earnings growth is positive since 2012 in spite of some negative years. https://www.multpl.com/s-p-500-real-earnings-growth/table/by-year

 

[pb4uski]

... So my question: Is my thinking flawed, i.e. is there a reason that share buybacks SHOULD add to market cap, aside from simply emotion? Or do you think I'm mistaken and that aggregate earnings are actually increasing, in addition to per share earnings? (the latter having clearly increased a lot per your chart.)

Yes, I think your thinking is flawed. While I'm not necessarily a fan of buybacks, at the end of the day it it earnings per share that support valuations because people buy shares.

Using your example, if the P/E is 20, your stock that earns $20/share is worth $400/share since it has earnings to support that level of valuation.

As would be expected, the total enterprise value is unchanged by the stock buyback since 100 shares outstanding * $10/share earnings * 20 P/E is $20,000 and 50 shares outstanding * $20/share earnings * 20 P/E is also $20,000.

In fact, I could argue that the remaining shareholders will be better off in the long run because ROE will be better since lower earning cash has been jettisoned and what remains is (presumably) higher earning operations.

 

[RenoJay]

Yes, I think your thinking is flawed. While I'm not necessarily a fan of buybacks, at the end of the day it it earnings per share that support valuations because people buy shares.

Using your example, if the P/E is 20, your stock that earns $20/share is worth $400/share since it has earnings to support that level of valuation.

As would be expected, the total enterprise value is unchanged by the stock buyback since 100 shares outstanding * $10/share earnings * 20 P/E is $20,000 and 50 shares outstanding * $20/share earnings * 20 P/E is also $20,000.

In fact, I could argue that the remaining shareholders will be better off in the long run because ROE will be better since lower earning cash has been jettisoned and what remains is (presumably) higher earning operations.

Ok, thanks for the example. So if I'm understanding you correctly, the main reasons why overall enterprise value should increase is because:

With few shares outstanding, any additional benefits to the bottom line are distributed among fewer shares, therefore adding additional benefit to existing shareholders. So the thought process for new buyers is, "Let me get in on this now, since this company keeps buying shares and with declining share counts, it'll eventually help me even though I'm new."

Is that basically correct?

On that basis, do you feel the run up since 2012 is justified or inflated?

 

[pb4uski]

No, the purchase premise would be that I like $20/share earnings from this business. i would not buy anticipating buybacks.

On the second question, see post#56.

 

[Chuckanut]

I really enjoy Jonathan Clements’ perspectives on money and investing. He has a blog called Humble Dollar and last fall he wrote an article that contemplated the topic of overvalued stocks and how we should respond. Here’s a link:


https://humbledollar.com/2019/11/signal-failure/

Mr. Clements is one of the few financial cognoscenti who are worth listening to, IMHO. I found this statement interesting to say the least:

What if you combine the S&P 500’s 1.9% dividend yield with the so-called buyback yield—the percentage of their own shares that the S&P 500 companies are repurchasing each year? The total annual cash return to shareholders appears to be more than 5%.

Trying to guess the market's future direction is just not possible for me. My crystal ball is cracked, I can't read minds, and my time machine is broken. So, I stick with my chosen AA.

 

[Hamlet]

It can be like this for a lot longer than a few years.
I don't think it makes sense to be all in or all out of stocks based on CAPE. What I do is vary my stock allocation within a window based on CAPE. CAPE/PE10 is a crummy, imprecise (timing and trigger points) tool for market timing, but it's not worthless (or, hasn't been historically). But to use it you have to be willing to be wrong for a long time.

I think this is very sensible. As the market has gotten more overvalued ( IMO ), I have edged down my stock allocation.

I normally tend to a fairly high stock allocation. I was pretty much 100% stocks from about 2003-2015. In late 2016, valuations started to feel a little bit stretched to me, and I was getting into my mid-40s with two small children and big mortgage, so I dialed it back to about 90% or so, and started focusing more on paying down the mortgage with any extra after tax money rather than additional equity investments.

Each big up year since had me trimming back stocks a little more and focusing more on paying down the mortgage a little more. I'm now at about 65% stocks or so, with a much more manageable mortgage outstanding.

That's still probably higher than a lot of people's comfort level, but I feel like a major market timer having so little in the market

 

[audreyh1]

I think the market is way overvalued even by post 2000 measures, but I know it can take a very long time to to resolve, so I am content riding the wave, rebalancing on the way up. Like Samclem I also have an AA range based on CAPE10.its a small adjustment.

I’m not worried about my fixed income. Rate changes will be gradual. I maintain short to intermediate duration anyway, including cash/short-term CDs.

Trying to guess the market's future direction is just not possible for me. My crystal ball is cracked, I can't read minds, and my time machine is broken. So, I stick with my chosen AA.

Yep.

 

[Dtail]

I think the market is way overvalued even by post 2000 measures, but I know it can take a very long time to to resolve, so I am content riding the wave, rebalancing on the way up. Like Samclem I also have an AA range based on CAPE10.its a small adjustment.

I’m not worried about my fixed income. Rate changes will be gradual. I maintain short to intermediate duration anyway, including cash/short-term CDs.

Yep.

IIRC, your Cape 10 adj down is based on a Cape 10 valuation >25.
Okay understand, but when was the last time Cape 10 was under 25 for any reasonable time frame?

 

[audreyh1]

IIRC, your Cape 10 adj down is based on a Cape 10 valuation >25.
Okay understand, but when was the last time Cape 10 was under 25 for any reasonable time frame?

Just looking at Januaries: 2003, 2008 thru 2014, 2016.

July 2002 through Aug 2003.
Jan 2008 through May 2014.
Jan through Feb 2016.

 

[Dtail]

Just looking at Januaries: 2003, 2008 thru 2014, 2016.

July 2002 through Aug 2003.
Jan 2008 through May 2014.
Jan through Feb 2016.

Okay much more frequent than I would have guessed.

 

[triangle]

Another factor affecting the question in your original post is the composition of the index itself. The S&P 500 is market cap weighted so the bigger the company the bigger its influence. So a few big components like MSFT, AAPL could have rising profits compared to 20 other companies that are declining more in aggregate and the market could still be up. A non-linear relationship at least. And then there is magic divisors used by the SPY and DJI....I have never understood how they manage to accommodate changes to the index when a company shrinks, merges, or worse case goes bankrupt.

For instance back in 2008/2009 as the Dow index dropped below 8000 some were predicting it would continue to fall to 6000, but the share price of the lowest 10 companies could have gone to zero and because of the share price weighting, the index would not have reached 6000.

I have never understood (or researched) how mergers and buyouts affect the index. For example company #50 merges with company #400. Now the S&P 500 index would seemingly have an instant injection of "market capitalization" when next biggest company joins the index after re balancing.

 

[TheHobbit]

Interest rates. Any other questions I can help with?

Those charts are also pretty misleading. Here's some better ones:

EPS vs. S&P 500 over last 30 years:

Since 1928:

As you can see, there's nothing to see here. Just EPS going up and Mr. Market reacting accordingly. You can moan and groan how Wall Street pulled off this feat (e.g. tax cuts, tax avoidance, borrowing, paying workers peanuts for wages etc), but they are pulling it off -- until they aren't.


Source: https://www.macrotrends.net/1324/s-p-500-earnings-history
A good read: https://www.yardeni.com/pub/ppphb.pdf (the comp chart at the end is rather telling)
Another good read: https://www.wsj.com/articles/huge-d...-profits-hints-at-something-amiss-11576328400 (they somewhat backup the claim being made here, but note that EPS is going higher, and that you can't really compare nation wide profits with that of S&P or cap weighted total market indexes).

 

[BeachOrCity]

I think the market is way overvalued even by post 2000 measures, but I know it can take a very long time to to resolve, so I am content riding the wave, rebalancing on the way up. Like Samclem I also have an AA range based on CAPE10.its a small adjustment.

I’m not worried about my fixed income. Rate changes will be gradual. I maintain short to intermediate duration anyway, including cash/short-term CDs.

Yep.

I have always valued your insight. Can you point me to a post of your where you documented you AA CAPE10 thesis and rebalancing method?

 

[audreyh1]

https://www.early-retirement.org/forums/f44/allocation-according-to-cape-94078.html

Interestingly, that thread wonders what will happen when 2008/2009 data exits the average. Well it has, and we are still above 30! It did drop a couple of points for a while and perhaps that was due to old data leaving the average, although we also had a 20% correction during that time. However, CAPE10 has since regained >30 status.