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The ‘Ultimate Pain Trade’
No one is talking about the inevitable dovish pivot. Or almost no one, anyway.
In part, that's because the hawkish pivot isn't even real yet. Until March, it's still theoretical -- it exists in the minds of Fed officials, but the only place it's actually manifested is in markets, from front-end rates to real yields to equities.
One of the most interesting things about recent weakness at the index level (and accompanying chatter about bursting bubbles) is that the most blatant examples of specu
As much as anything you’ve written recently, this post, for me, captures the complex reality of our current situation.
Thank you for the clarity. Stock market started behaving itself. Being the reserve currency complicates matters for the Fed.
This is a very worthy post, thanks.
If we’re in a period when valuations matter – quaint, but let’s suppose – then we should decide if we think the SP500 is undervalued yet.
I’ve been doing some work on that. Take every name in the SP500, build a DCF for each using consensus FCF as well as a multiple-based valuation (PE or PS, PB), and roll it up by sector and for the entire index. Then play with rF, ERP, FCF, terminal growth, multiples, and so on. See what it looks like.
With stress testing, of course. Don’t use today’s rF, use the expected rF by mid-year. Don’t use today’s consensus FCF, give it a haircut for the expected economic slowdown. Don’t use multiples from the past two years, use multiples from the last period rF was at the expected level. And so on.
No strong conclusions yet, at least none I feel are strong enough to share pending more work. But so far, I’m not seeing that the SP500 is obviously and significantly undervalued – yet. Some sectors do look to be, as well as some big names.
Again, fussing over valuation is quaint, it matters little in the ultra short term and can get run over by + and – catalysts in the short and medium term. If PCE falls to 4% next month while ISM crushes on the upside, valuation may no longer matter – for a time.
As a retail trader who got caught out in cannabis and some IPO/SPAC growth names, I applaud this post. However, I would still claim there’s some still a bit of froth out there (SHOP, GME, AMC, MSTR, TSLA), and sorry H, crypto.
AMC is down 80%. I mean, I still wouldn’t buy it, but I wouldn’t buy ARKK either. The point isn’t that this stuff can’t go lower. It’s not a comment on the prospects for various manifestations of “froth” and hyper-growth. And I’m not trying to call the bottom on the indexes down a mere 10%. The point is just that there’s been quite a bit of damage done without a single rate hike and with QE still going on.
On crypto, you don’t have to apologize. It’s still less than 1% of my invested assets. If it all went to zero on Monday I’d care more about writing a good article on it than I would the money lost.
Hartnett’s tail risk is almost my base case. The 5-7 hike scenario with balance sheet reduction only works if Covid is an afterthought by June. If you believe that I have the Brooklyn Bridge for sale….
BTW, stocks are sentiment driven at least for the next 3 months. If you think valuations matter over that time frame, you will be disappointed. Sentiment is in the process of bottoming out in my view. We probably have another few weeks before we get a real bounce back rather than churn.