“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
- Benjamin Graham
You may have noticed a bit of manic activity in the stock market. You may have also noticed inflation (as measured by various government agencies) is quite low, despite a supply interruption in numerous goods and services.
These aren’t separate events. Both are consequences of the pandemic. Specifically, they result from the government and central bank response to the pandemic. As necessary as their actions may have been, they have side effects, many unintended and some of which will not be known for years. These hastily conceived programs have even more side effects than usual.
I think we actually have high inflation, but due to these side effects it is showing up in stock prices instead of consumer prices. I believe this, not V-shaped recovery expectations, is the main reason stocks are up. Today we’ll explore why this is, and how investors should respond.
This letter will be different than usual. We’ll start with a dozen or so charts showing the market is either very highly valued, or extremely overvalued, or merely stretched. But in general, you will see markets are indeed at the upper end of historical valuations.
Then we’ll consider some reasons why this is so, and why stocks could even go higher. Every previous recession had an accompanying equity bear market, often quite vicious. Why not this time? That is what we will try to answer.
I sent a note out earlier this week to my friends asking for their favorite valuation charts. Let’s look at what they sent plus what crosses my desk in a normal week.
(Warning: Printing this letter will take more pages than normal as charts take room.)
We’ll begin with some charts from Jim Bianco. This first one looks at the S&P 500 versus “forward” earnings, i.e. analyst projections. Analysts tend to run in herds, usually tracking one another. Furthermore, they almost always overestimate even in good times.
So we can pretty much assume that earnings will be worse (because, after all, it is a recession) than projected below, but even that leaves 1999–2000 bubble-level valuations.
Chart: Bianco Research
From Jim:
The bulls cry foul… we know that the earnings over the next year are wrecked because of CV19/shutdowns. So, let’s invent a new metric, P/E ratio looking ahead two or three years.
This chart uses 3-year forward earnings estimates. That is, Jun 2022 to June 2023. You are still paying over 21 for these earnings. Not cheap!
Chart: Bianco Research
Then Jim goes on to demonstrate that three-year forward earnings are generally very optimistic:
In a true bull market, you see most stocks rising, often to new highs. A rising tide should lift nearly all boats. These next few charts from Peter Boockvar and Doug Kass will demonstrate that is not the case now.majority of stocks making
Let’s look at the percentage of NYSE stocks closing above their 200-day moving average, which is 37% now. It was near 70% in January.
Another way to look at valuations is the ratio of price to sales rather than earnings. Here again, we have exceeded the 1999–2000 bubble.
Tony Sagami sent me a few charts from Twitter. It turns out that much of the S&P 500 returns come from just 10 companies: Microsoft, Apple, Amazon, Google, Facebook, Visa, Mastercard, Nvidia, Netflix, and Adobe. As a group they are up 35% since the beginning of the year. As a group, the other 490 are down more than 10%.
Jesse Felder writes an amazing newsletter called The Felder Report. This is from his latest commentary.
Just three stocks make up more than 16% of the S&P 500 Index and over a third of the Nasdaq 100 Index. I bet you can guess which three. Apple, Amazon and Microsoft together are now valued at nearly $5 trillion. That’s larger than the entire economy of Germany and nearly the size of the Japanese economy.
What is really most astounding, though, is the aggregate valuation of these three behemoths relative to their free cash flow. Only at the peak of the Dotcom Mania did we see anything like it. The difference today is that these companies are growing free cash flow at a tiny fraction of the rate they grew it back then. If that was a bubble, then what is this?
Chart: The Felder Report
About all you can say is “Wow.” These three stocks, larger than Germany, have separated from their free cash flow more than any time other than an outright bear market. If the concept of reversion to the mean holds, either their sales are getting ready to explode, or their stock prices are going to fall. Or some combination. These three stocks, in terms of free cash flow, are well more than three standard deviations above their average, and significantly more than even during the tech bubble.
We can’t talk about valuations without turning to old friend Ed Easterling of Crestmont Research. Where are we now and what are future returns likely to be? He takes us all the way back to 1900. [My comments in brackets.]
Crestmont P/E July 24, 2020: This is a basic chart of P/E. It includes the long-term average and a dot to update (and highlight) the current level of P/E in relation to history since 1900. Even though the market index is about the same level as it was at the start of the year, the CAPE P/E10 EPS (trailing 10-year real EPS) is up slightly over the past six months (mostly because recent EPS exceeds the periods at the start of the 10 years). [The only time this was exceeded was in the 1999–2000 dot-com bubble.]
Chart: Crestmont Research
Crestmont P/E+ July 24, 2020: This is the basic chart of P/E with bands that reflect the typical starting and ending levels of P/E for secular stock market cycles. As reflected in the graph, we’re at levels that are well above the typical start of secular bears and well past the end of most secular bulls (except the tech bubble of 2000).
Chart: Crestmont Research
Crestmont OpsEPS P/E July 24, 2020: This is a Crestmont original. This chart provides P/E based upon forward, operating EPS. Wall Street bulls that want to make the market seem cheap often promote P/E in the most optimistic light. As you know, operating P/E is based upon a measure of earnings (for the denominator) that adds back a series of supposedly one-time charges to reported earnings (the EPS from which dividends are paid and capital is retained).
S&P has data for operating earnings back to 1988. Prior to that year, Crestmont built a series of comparable data using the historical relationship of operating earnings to reported earnings and a forward factor to reflect the typical relationship between forward earnings and trailing earnings.
Most often, the Wall Street bulls not only use a P/E based upon forward, operating earnings, they compare that value to the historical average for P/E based upon trailing, reported earnings. Yet, the difference in the averages is almost 4 points… 30%.
Chart: Crestmont Research
Crestmont Gazing July 24, 2020: This chart overlays stock market performance and valuation. The power of this chart is that it (1) demonstrates the strong effect that valuation has on future returns, and (2) provides a gaze at the future for likely returns over the next 10 years!
The line in the chart is valuation, as measured by P/E. The bars in the chart reflect the 10-year total return for the S&P 500 Index. The line is shifted forward 10 years so that the P/E aligned with each bar is the value for P/E at the start of the 10-year period.
Peaks in the line correspond to troughs in 10-year returns. Similarly, dips in the line correspond with peaks in 10-year returns. Valuation matters!
The rightmost bar on the chart is the period 2010–2019. P/E fell significantly in 2009, setting up the potential for great returns over the subsequent decade. The market delivered! Since then, P/E not only rose, it surged! The current level of P/E is very high, which portends a decade that will likely deliver low compounded returns.
The future bar under the end of the line (and dot marking July 2020) will reflect the cumulative compounded average return for 2020–2029. If history is a guide, and the principles of valuation remain true, a low single-digit percentage appears optimistic.
Chart: Crestmont Research
The next chart comes from Ned Davis Research via Steve Blumenthal. Notice that it shows the median price/earnings ratio is merely in the overvalued range, and nowhere near its all-time high. That means there’s still some historical room to run.
Chart: Ned Davis Research
Now let’s look at possible reasons why stocks are where they are today and why they could even go higher for longer than we might think. I think some of this shows a different perspective on the current mania. Little things add up.
Back in March as the coronavirus spread in the US, organizations started cancelling large events. We didn’t know as much about the virus then but it was clear that crowds were hazardous. That includes sporting events.
On Wednesday, March 11, the National Basketball Association suspended its season after a player tested positive. But it was headed that direction anyway. Earlier the same day, the Golden State Warriors announced the team would play home games without fans present.
That was clearly the right move, health-wise, but it had a side effect no one considered at the time. Thousands of people who work for the teams and arenas, or in other related businesses, lost income. But sports gambling is a giant business in itself. The millions of people who wager billions of dollars suddenly had nothing to bet on. That proved important, for reasons we will see in a minute.
A few weeks later, Congress passed the bipartisan CARES Act which, among other things, gave most American adults a $1,200 one-time stimulus payment and added a $600 weekly federal payment to state unemployment benefits. This occurred as most of the country was in various levels of lockdown and many businesses closed. The payments were intended to help people through what we thought would be a short interruption.
All this happened very fast—so fast that it had to be simplified. Why not $500 or $700 for the unemployment benefit? I don’t know—but any number they chose would have been too little for some workers and more than enough for others.
As it turned out, the $600 from the federal government plus state benefits left many jobless workers making more than they did while working. This has helped. People are mostly making their rent and mortgage payments, for instance. Consumer spending held up better than expected, though its composition changed significantly.
Still, that left a lot of extra money in the hands of people accustomed to spending whatever they have. The lower-earning half of the population has little experience with saving or investing.
As noted above, sports betting was also unavailable. So where did all that money go?
Well, many of the recipients did what comes naturally: search online for advice. That led to data like this.
Source: Liz Ann Sonders
Of course, simply being interested in tech stocks, and having a few hundred or a few thousand extra dollars, only goes so far. You need some minimal amount of money just to open a brokerage account. Or at least, you used to.
Financial markets have been slowly “democratizing” for decades. In the 1960s, mutual funds gave the middle class a convenient way to own a diversified stock portfolio. Then came many more mutual funds, discount brokers, exchange-traded funds, and other innovations. All had the same effect: More people could invest more money in more kinds of markets.
Now we have a new stage in that process: commission-free stock trading, quickly accessible over the mobile device you already have, and in small amounts. Apps like Robinhood make investing simple and affordable. They do the same for day trading. But while they simplify the process, you still have to make the right decisions at the right time.
So now we have large numbers of small, inexperienced investors with spare cash from the government and an app in their pockets that looks a lot like a video game. And then there’s the sports connection, personified by now-famous blogger Dave Portnoy, who colorfully insists stocks can only go up and urges his large audience (which includes many idled sports bettors) to throw more money into the market. What could go wrong?
So far, not much. Portnoy has been largely right about stocks this year. His audience is fairly small but it’s big enough to matter. They are a subset of the red and pink areas in this personal income chart.
Chart: Gregory Daco
Recall, markets were very weak early in the corona crisis. February and March were volatile with several mini-crashes. But the benchmark indexes bottomed just as the CARES Act passed and the government began distributing stimulus cash in April. They’ve kept rising since then.
The payments to individuals were only the start. At the same time, we had the Federal Reserve pumping huge amounts into not just Treasury and agency securities but also various private assets, including corporate bonds. But the specifics of what they bought are not so important. The salient point is the cash they injected into markets, which found its way to other assets.
So, the current bull market is a kind of perfect cash flow storm. We have…
Legions of new investors using stimulus money to buy whatever makes them feel good
Bored gamblers looking for action, and
Large institutions brimming with Fed liquidity
plus traders of all sizes, small investors to monster hedge funds, chasing momentum—a perfect witches’ brew
… all in the context of ultra-low interest rates that make cash and fixed-income holdings unattractive. You could not have designed a better perfect storm in which to create a market mania, and that’s exactly what we have.
If this were all Fed-driven, we would still be seeing a bull market but it would be different. Institutional investors consider fundamental factors like valuation and earnings. They wouldn’t plunge a lot of money into small-cap cannabis stocks, for instance.
For the moment, the all-in strategy seems to be working better than the cautious one. Yet history shows fundamentals eventually matter, and many of today’s buyers probably won’t like what happens.
Here’s another chart from Doug Short and Jill Mislinski, calculated as of July 6, 2020.
Source: Advisor Perspectives
We see here that the S&P 500 P/E10 is presently higher than it has been 94.4% of past periods. Stocks are in the zone (and not just in the zone, but high in it) where Easterling shows above-average returns are unlikely. It is above the 2007 peak and approaching the 1929 peak. The only higher points were during the 1990s Tech Bubble.
Now, think back to that Google search data I showed above. Interest in tech stocks is again extraordinarily high. History rarely repeats so nicely, but it sure looks like we may be in Tech Bubble II (plus Mastercard and Visa).
At the very least, now looks like a terrible time to buy stocks if your intent is to hold them a long time. If your intent is to buy high and hope to sell even higher, good luck to you. It might work. History also shows manias can persist much longer than most people think. Back in 1999, I and many others thought there was no way the bull market could go on. Yet it did, with the Nasdaq actually doubling in 1999.
Overvalued markets don’t turn down on their own. Something usually triggers them. What could it be this time?
In the medical world, stimulants have legitimate uses but the dosage is critical. Too little and you don’t get the desired effect. Too much can cause great harm. And once you find the right dosage, suddenly stopping it can be dangerous.
As of this morning, the added unemployment is still set to expire at month-end. Negotiations are underway so maybe we’ll know more later this weekend or next week. But what happens when/if that stimulus goes away?
We should by now realize jobs are not going to come back to where they were a mere six months ago. We will still be in recession-level unemployment well into next year. The rest of the world is reeling. Those earnings projections that we looked at above? For the most part, they are going to be wildly wrong.
Eventually, earnings matter. Now, also eventually, we will get a vaccine or herd immunity. We will begin to come out from our isolation cells. But the world will look significantly different, and businesses, from the very smallest to the very largest, will have to adjust. That means earnings are going to have to adjust.
The world is getting ready to be repriced. Everything is going to seek a new value. Real estate, stocks, commodities, food, medical costs, college costs, government, entertainment, sporting events, clothes… Everything. Some price adjustments will be minor and some will be significant. I expect many to be deflationary, although some markets and items will see significant price increases.
“Inflation” in the general sense might be very difficult to calculate and even more difficult to understand. Your personal inflation rate will depend on what you buy. If you are trading the markets, I would tighten your stops. I firmly believe you’re going to have a much better and significantly lower entry point in the future.
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Marine mammal longevity study reveals remarkable advances in animal welfare
A new study provides compelling evidence that animal care and management practices at zoos and aquariums have significantly improved over time. The study,…
A new study provides compelling evidence that animal care and management practices at zoos and aquariums have significantly improved over time. The study, led by Species360 and University of Southern Denmark Research Scientist Dr. Morgane Tidière in collaboration with 41 co-authors from academic, governmental, and zoological institutions around the world, is the first to examine life expectancy and lifespan equality together as a proxy of population welfare in marine mammal species.
Credit: A. Monnier – Planète Sauvage, France
A new study provides compelling evidence that animal care and management practices at zoos and aquariums have significantly improved over time. The study, led by Species360 and University of Southern Denmark Research Scientist Dr. Morgane Tidière in collaboration with 41 co-authors from academic, governmental, and zoological institutions around the world, is the first to examine life expectancy and lifespan equality together as a proxy of population welfare in marine mammal species.
The study also found that marine mammal species live longer in zoological institutions than in the wild as a result of advances in animal care practices centered on animal welfare. The results have been published in Proceedings of the Royal Society B: Biological Sciences.
Study authors used the same statistical methods used to assess improvements in human population welfare to analyze data from the world’s largest database of information on wildlife in human care – the Species360 Zoological Information Management System (ZIMS).
The study examined 200 years’ worth of data from ZIMS, dating as far back as the early 1800s up until 2020, to look at whether four marine mammal species – the harbor seal, California sea lion, polar bear, and common bottlenose dolphin – have seen improved conditions of life in human care, and whether that can be observed through a progressive concentration of individuals reaching old age.
Applying the same methodology using additional data sources for wild populations, the authors examine whether these four marine mammal species are living longer lives in zoos and aquariums, compared to their counterparts in the wild.
The study authors found that the life expectancy of the four marine mammal species has increased by over three times, and that the rate of deaths in the first year of life has declined by up to 31% over the last century in zoos and aquariums included in the study. Additionally, the life expectancy of these species in zoos and aquariums is currently two to three times longer than their counterparts in the wild.
In addition to looking at how long these four species are living, researchers looked at how many of them are living well by examining lifespan equality, which can show if a population is consistently living longer lives and avoiding less predictable, earlier causes of death. Researchers found conclusively that the four species have a progressively increasing lifespan equality across time in zoological institutions. They also highlight that current populations of the four species living in zoological institutions included in the study have a higher lifespan equality than their counterparts in the wild.
The researchers found a significant improvement in longevity and lifespan equality for the four species from the 1990s onwards, which is believed to be a result of advancements in zoological practices, such as implementing advanced veterinary, environmental, nutritional and enrichment measures, as well as the voluntary cooperation of animals in routine examinations through positive reinforcement training.
These improvements in how progressive zoos and aquariums care for animals are a result of the establishment of regional and national zoo associations, accreditation standards, coordinated breeding programs, shared databases and professional networks which foster knowledge sharing – thereby collectively improving animal welfare.
Lead study author, Dr. Morgane Tidière, Species360, commented on the significance of the study, saying; “Our findings indicate that significant progress has been made in enhancing the welfare of marine mammals in zoological institutions, as a result of improvements in management practices in progressive zoos and aquariums. Professional zoos and aquariums of today cannot be compared to zoos 30 years ago.” Dr. Tidière continues: “This kind of research is possible as a result of the standardized data collected and shared by Species360 member zoos and aquariums around the world.”
The study authors note that these results reflect the average welfare of marine mammals in Species360 member facilities, rather than demonstrating a global minimum standard achieved by all zoos and aquariums worldwide. Nonetheless, these findings serve as evidence of positive progress in the management and care of animals within leading zoological facilities. The researchers hope the findings inspire other institutions, which are not part of professional zoo and aquarium bodies, to invest time and resources into enhancing their animal management practices.
The results of this study contribute to the ongoing dialogue surrounding the wellbeing of animals in zoos and aquariums and may help inform future policy decisions. It demonstrates the importance of scientific research in understanding and improving the lives of animals in zoological institutions. The preliminary results have already informed legislative decisions in France and Spain, guiding evidence-based choices regarding the care of marine mammals in these settings.
The full study can be read here: https://royalsocietypublishing.org/doi/10.1098/rspb.2023.1895.
Journal
Proceedings of the Royal Society B Biological Sciences
DOI
10.1098/rspb.2023.1895
Method of Research
Data/statistical analysis
Subject of Research
Animals
Article Title
Survival improvements of marine mammals in zoological institutions mirror historical advances in human longevity
Article Publication Date
18-Oct-2023
COI Statement
In accordance with our ethical obligations as researchers, we hereby disclose that the Species360 ConservationScience Alliance received funding from our Species360 members, which share their data by means of the Species360 Zoological Information Management System (ZIMS). Our members include over 1300 zoos, aquariums, rescue centres, sanctuaries and other worldwide wildlife organizations that believe in sharing standardized records of more than 22 000 species through ZIMS. One of the main aims of data standards and sharing is to obtain sufficient sample sizes to develop research and analytics to support evidence-based decisions on animal care and species conservation. In addition, 25 co-authors work in zoological or aquarium organizations, including non-Species360 members.
Google argued in its motion to dismiss the claims that using publicly available information shared on the internet is not “stealing,” as claimed.
Big Tech player Google is seeking to dismiss a proposed class-action lawsuit that claims it’s violating the privacy and property rights of millions of internet users by scraping data to train its artificial intelligence models.
Google filed the motion on Oct. 17 in a California District Court, saying it’s necessary to use public data to train itsAI chatbots such as Bard. It argued the claims are based upon false premises that it is “stealing” the information that is publicly shared on the internet.
“Using publicly available information to learn is not stealing. Nor is it an invasion of privacy, conversion, negligence, unfair competition, or copyright infringement.”
Google said such a lawsuit would “take a sledgehammer not just to Google’s services but to the very idea of generative AI."
The suit was opened against Google in July by eight individuals claiming to represent “millions of class members” such as internet users and copyright holders.
They claim their privacy and property rights were violated under a Google privacy policy change a week before the suit was filed that allows data scraping for AI training purposes.
Google argued the complaint concerns “irrelevant conduct by third parties and doomsday predictions about AI.”
It said the complaint failed to address any core issues, particularly how the plaintiffs have been harmed by using their information.
This case is one of many that have been brought against tech giants that are developing and training AI systems. On Sept. 20, Meta refuted claims of copyright infringement during the training of its AI.
In what seems like an act of desperation, the Joe Biden campaign joined President Trump’s Truth Social platform, and posted a message asking for “converts”, prompting a torrent of responses essentially telling them where to go.
In a second post, the Biden campaign used a clip of Ron DeSantis claiming Trump added $7.8T to the national debt, in a blatant attempt to sow division among conservatives:
The campaign told Fox News that it is attempting to have “a little fun” on Truth Social, as well as holding “MAGA accountable on their own platform.”
President Trump’s campaign spokesperson, Steven Cheung, said “Crooked Joe Biden and his team are finally acknowledging that Truth Social is hot as a pistol and the only place where real news happens.”
Cheung added, “Unfortunately for Biden, his continuation of spreading misinformation to gaslight the American people in order to distract from his disastrous record won’t work and they’ll be ratio’d to oblivion.”
How long before Biden’s handlers realise this just isn’t the place for them?
The Biden campaign just posted its first Truth Social post, and I just became the first person to welcome them to the platform pic.twitter.com/UdYy6iGxrN
Meanwhile, Trump himself commented on a gag order placed on him by a DC judge, noting “I’ll be the only politician in history that runs with a gag order where I’m not allowed to criticize people, can you imagine that? I’m not allowed to criticize people.”
He added that he’s been indicted “more than Alphonse Capone.”
Former President Trump: "Today, a judge put on a gag order. I'll be the only politician in history that runs with a gag order where I'm not allowed to criticize people." pic.twitter.com/nl5nfq9XuO
In a separate appearance Trump said that he is willing to go to jail to beat Biden, noting “They think the only way they can catch me is to stop me from speaking, they want to take away my voice.”
“This is weaponry, all being done because Joe Biden is losing the election, losing very, very badly to all of us in the polls. He’s losing badly,” Trump added.
President Donald Trump in Iowa: "But what they don't understand is that I am willing to go to jail if that’s what it takes for our country to win and become a democracy again.” pic.twitter.com/ELp0AgLQQi
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