Multiples vs. Growth

We are in the "value-trap" innings of the game

May 22

The S&P 500 briefly entered bear-market territory (-20%) this week while the Nasdaq 100 is skimming -30%.

A lot of investors who entered the market during the 2020 Corona Panic have been conditioned to buy-the-dip. However, a lot of things that were true in the last couple of years are no long true now.

Pretty much every large economy in the world is experiencing above-target inflation. Even Japan, where the BOJ was fighting deflation over the last 20 years, clocked in 2.1% (Japan's inflation hits 7-year high) And this has led to most CBs tightening financial conditions through interest-rate hikes, QT, etc.

So, unless the war ends and China lets go of its Zero-COVID policy, BTFD is unlikely to be a wise strategy.

If you take a step back and think about why equity prices go up, it is basically either multiple expansion (investors are willing to pay more for the same cashflow) and/or earnings growth (free-cashflow grows.)

So far, equity markets have gone down purely on multiple-compression. Most of the prior growth estimates have largely remained intact. Except for some obviously shit business models, analysts have not taken a scythe to forward estimates.

If Putin’s war continues to put upward pressure on energy and food prices, financial conditions are going to tighten to a point where growth turns negative and equity analysts will be forced to cut. We are yet to reach that point.

If the only reason you are buying a stock right now is because it is down 50% from the top, then it is likely to be a value-trap rather than a bargain.

This thread sums it up well:

Walter @walt373

Out of all the trading aphorisms, I'm guessing "buy low, sell high" is the one that has led to the most losses, along with variations like "be greedy when others are fearful" and "buy when there's blood in the streets." Thread:

So, keep your powder dry and remember the sage words of PTJ: “Losers average losers.”

Markets this Week

Links

Apple tells suppliers it wants to manufacture more in India and Southeast Asia. (wsj)

China Insists Party Elites Shed Overseas Assets. Party directive bars senior officials from owning property abroad or stakes in overseas entities, whether directly or through spouses and children. (wsj)

Christophe Barraud🛢🐳 @C_Barraud

🇺🇸 Traders expect ~200bps more #Fed tightening by year-end (effective rate is 0.83%). *The move is likely to push the U.S. economy into #recession, which should result in 44bps cut between 2023 and 2024, according to market pricing.

Carl Quintanilla @carlquintanilla

"The end of the labor shortage," writes the B of A desk. "Did co's double-order.. people?.. $WMT and $AMZN are the 2 biggest private employers.. and both have made comments on their calls.. on being 'overstaffed'.. the 'labor shortage' narrative officially died in the past week."

Damodaran: A company with pricing power, low input costs & short term/flexible investments is better positioned to weather inflation.

Aswath Damodaran @AswathDamodaran

As a follow up to my last post on inflation, where I pointed to its effect on asset classes (bad for financial assets, better for real assets), I look at its disparate effects across companies, and why some are more exposed to inflation than others.

A Follow up on Inflation: The Disparate Effects on Company Values!A blog about markets, finance and all things money related.bit.ly

Neat thread on price-insensitive flows.

Kris Sidial @Ksidiii

Just keeps getting larger and the intraday vol continues to demonstrate the knock on effects that this has. It’s not to say that this means equities have to crash 10% or spike 10%. But when you see those nasty intraday whips blowing through the order book at key times

Michael Goodwell @MichaelGoodwell

👀 $1.9tln of option notional expires on 20-May 🔹 $460 billion of derivatives across single stocks is scheduled to expire. 🔹 $855 billion of S&P 500-linked contracts will expire. (via GS) https://t.co/rORzzUsLJH

Narratives are powerful as long as you don’t drink the Kool-Aid. Ride them when they are strong but don’t forget to get off before the crazies take over.