Author Topic: Wilshire 5000 market cap / GDP exceeds dot-com peak  (Read 8524 times)

JRM

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #20 on: January 11, 2020, 05:27:07 AM »
i would argue that most regulated utilities are over-earning right now.  The spread between cost of capital and allowed ROE is obscene for many regulated utilities.  I'm not sure if the spread has ever been this high.  Not sure how long the current low interest rates will hold alongside regulators allowing high ROE in a low interest rate environment. 

Also, low interest rates have led investors to search for yield and likely using utilities as a bond replacement.  Potentially very dangerous, imo.


Cigarbutt

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #21 on: January 11, 2020, 06:28:05 AM »
Corporate debt to after-tax corporate profits currently at 5.42X  (average for the last 65 years = 5.43X)  Max was in 1990 = 9.08X, Min was in 1966 = 3.32X

In a recession, profit dips, so the ratio will increase, but it doesn't look like businesses would be starting from an overleveraged position (relative to history).
...
wabuffo
Corporate debt/ Pretax ratio would be a better measure since interest is paid from $. Since the tax rates are at a historic low, using post tax numbers does skew the ratio a bit. but overall, the point is valid.
In fact, at all levels (gross and operating margins, interest, tax, generous EBITDA "add-ons"), some may suggest that this as good as it gets.
I work with the assumption that wabuffo is right but can't help remembering what Mr. Buffett suggested, in 1999, (one of the very rare occasions when he talked more specifically about the 'market' in general) that expectations that net profit margins could go higher than 6% for any sustainable time..
https://fred.stlouisfed.org/graph/?g=gt9
were not reasonable and, in the event that it would occur, this would likely trigger the modern monetary theory (he did not exactly say that but that's a 'final value' (in 2020) that can be inferred from the comments. Where is Jim Bowerman when you need him to explain that debt doesn't matter?

(The following is not meant to be snarky, it's just relaying a state of mind)
In 1945, (if my numbers are correct), corporate debt to GDP was about 10 to 15% and this number has crept up pretty much linearly (if you forget some bumps and note that interest rates have been low before). Apologies for going back in history but I'm reading these days about the early banking merchants in city states in Northern Italy. A message form many history books touching on debt and interest rates (at least the books that were printed before the rise of central banks) implies that using higher leverage is a sign of sophistication and keeping interest rates low, a sign of collective intelligence. I guess we'll find out how far this can go. Anyways, why worry as the corporate debt, in the event that profitability suffers in a reflexive way, could always end up social debt. All for one and one for all. So, in the unlikely event that we go down this path, I suggest that we just skip the step (others are doing it already) where the Fed would buy corporate bonds (top S&P quality, fallen angels and toxic) and, instead of being a lender of last resort, simply becomes The Lender to the corporate world, its populace and, why not, The World and finally achieves the ability to match its assets with virtual book entry liabilities.

Enough time spent (wasted?) on this topic. FWIW, I need to spend time on REV and AMC and, apparently, need to understand that, fiduciary duty notwithstanding, these free cash flow generating entities are smartly using leverage and need to stop worrying that their incremental return on additional debt has been on the decline. 8)



wabuffo

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #22 on: January 11, 2020, 08:14:09 AM »
in 1999, (one of the very rare occasions when he talked more specifically about the 'market' in general) that expectations that net profit margins could go higher than 6% for any sustainable time..were not reasonable

Buffett is not a great macro-forecaster (and he admits as such).  Remember his "how inflation swindles the equity-investor"?  Well the publication of that article pretty much marked the top for inflation in the US.  As I continue to point out - there are two major valuation inputs that have changed since Buffett's iconic 1999 Fortune article. 

1) At the time of the article, the 30-year Treasury was yielding over 6.5%.  Today it is 2.3%.  Buffett admitted in that article, that this was a factor that could change his forecast (though he didn't predict it).  This input is a two-fer for valuation purposes.  Corporate America is paying less for its debt - plus discount factors for equity valuations have to be pegged lower.  This was also a reason Buffett was bearish at the time - in 1999, 30-year Treasuries were yielding a higher rate than the earnings "yield" on Corporate America.  That is not the case today.

2) The Federal tax rate on corporate pre-tax income was 35%, today it is 21%.  Uncle Sam has decided to transfer 14% of his ownership stake in Corporate America to us, the private sector owners, at no cost.  I think that's a big deal.

It seems to me, one would have to adjust a time series of market cap ratios for these two important input factors.  Whether these input factors continue to stay at their current values, I have no idea (though I am not betting against it).

wabuffo
« Last Edit: January 11, 2020, 08:24:28 AM by wabuffo »

RuleNumberOne

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #23 on: January 11, 2020, 09:09:10 AM »
1) Buffett never predicted whether inflation would go up or down in "how inflation swindles the equity investor." He explained how it affects return on capital and business investment decisions, didn't predict the future.

2) If generating prosperity were as easy as keeping rates low so that extremely high P/Es could be justified ("rates are 1%, a P/E of 50 is low"), Europe and Japan should have been booming. Instead  Europe and Japan are dying. You need to wash away the mal-investments from time to time.

Instead of exposing failure, Europe and Japan just cover everything up forever and their media participates in the coverup. Europe has had negative rates for 5 years (under the pretext of 1.4% inflation but really to cover up insolvency) and what are the results? If we had a Fed Chairman with a backbone, he would have raised US rates and told the IMF+ECB to go to hell.

3) Every Dem candidate wants to take the corporate tax rate back to where it was. It will eventually happen because many in the US population feel very entitled to all the good stuff even if they contribute nothing back to the system.


in 1999, (one of the very rare occasions when he talked more specifically about the 'market' in general) that expectations that net profit margins could go higher than 6% for any sustainable time..were not reasonable

Buffett is not a great macro-forecaster (and he admits as such).  Remember his "how inflation swindles the equity-investor"?  Well the publication of that article pretty much marked the top for inflation in the US.  As I continue to point out - there are two major valuation inputs that have changed since Buffett's iconic 1999 Fortune article. 

1) At the time of the article, the 30-year Treasury was yielding over 6.5%.  Today it is 2.3%.  Buffett admitted in that article, that this was a factor that could change his forecast (though he didn't predict it).  This input is a two-fer for valuation purposes.  Corporate America is paying less for its debt - plus discount factors for equity valuations have to be pegged lower.  This was also a reason Buffett was bearish at the time - in 1999, 30-year Treasuries were yielding a higher rate than the earnings "yield" on Corporate America.  That is not the case today.

2) The Federal tax rate on corporate pre-tax income was 35%, today it is 21%.  Uncle Sam has decided to transfer 14% of his ownership stake in Corporate America to us, the private sector owners, at no cost.  I think that's a big deal.

It seems to me, one would have to adjust a time series of market cap ratios for these two important input factors.  Whether these input factors continue to stay at their current values, I have no idea (though I am not betting against it).

wabuffo

wabuffo

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #24 on: January 11, 2020, 09:32:37 AM »
Buffett never predicted whether inflation would go up or down in "how inflation swindles the equity investor." He explained how it affects return on capital and business investment decisions, didn't predict the future.

Sure - he never made an outright prediction - but he was pretty gloomy about inflation being a perpetual issue in the US.  Here's the "money" quote that ends the article:
Quote
"On balance, however, it seems likely that we will hear a great deal more as the years unfold about underinvestment, stagflation, and the failures of the private sector to fulfill needs"

...this is how the long-term stagflation environment looked like after the publication of his article.  I'm not knocking Buffett here - you are correct that his purpose was mostly educational.  But if we give him credit for "Buy Stocks, I am" in 2008, then he gets dinged for the pessimism in this article, IMHO. 



wabuffo
« Last Edit: January 11, 2020, 09:41:05 AM by wabuffo »

wabuffo

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #25 on: January 11, 2020, 09:40:07 AM »
If generating prosperity were as easy as keeping rates low so that extremely high P/Es could be justified ("rates are 1%, a P/E of 50 is low"), Europe and Japan should have been booming

I'm trying hard to avoid pulling back the curtain on my weird devil's-den of macroeconomic theory,... but I'll just say this.

1) Perhaps we are very wrong about what a central bank does, and how limited its power truly is.

2) Perhaps we are also very wrong about deficits and how they work for a fiat currency issuer that is also a global reserve currency.

This is why its so tough to make predictions about macroeconomic theory. 

wabuffo


Cigarbutt

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #26 on: January 12, 2020, 09:06:57 PM »
If generating prosperity were as easy as keeping rates low so that extremely high P/Es could be justified ("rates are 1%, a P/E of 50 is low"), Europe and Japan should have been booming

I'm trying hard to avoid pulling back the curtain on my weird devil's-den of macroeconomic theory,... but I'll just say this.

1) Perhaps we are very wrong about what a central bank does, and how limited its power truly is.

2) Perhaps we are also very wrong about deficits and how they work for a fiat currency issuer that is also a global reserve currency.

This is why its so tough to make predictions about macroeconomic theory. 

wabuffo
Thanks for sharing some wise words. On my part, real concerns with this conundrum are relatively recent and I will try to come around.
-3 lingering concerns

1) In the last two to three cycles, easing has become more significant and unconventional and tightening (taking the punchbowl away in central bank ivory tower talk) has become more timid and incomplete.
https://fred.stlouisfed.org/series/BOGMBASE
which prompted the following central comment in 2009: "The epitaph to this curious case of monetary base expansion is yet to be written."
https://www.stlouisfed.org/publications/regional-economist/july-2009/the-curious-case-of-the-us-monetary-base

2) In this last part of the cycle, corporates have accumulated significant debt, not because they needed to but because they could. Isn't that weird?

3) Fiat money is now taken for granted as a concept but the whole thing has a troubled history. I'm told that two significant changes contributed to public acceptance of fiat money: accountable government and an independent central bank.

Even if you read the above, there is no need to respond. FWIW, I think I understand your devil's den comment and I just want to say that I visited the 'real' devil's den a few years ago, in Gettysburg. The den area is quite unremarkable even if it may have hidden a snake but the whole Gettysburg site is fascinating from a strategic point of view and something tells me that you would like it.

TwoCitiesCapital

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #27 on: January 13, 2020, 11:43:43 AM »
I see little credit risk in the entirety of the S&P 500. I'm not talking just the top 10, not talking about my holdings, I'm talking all of it.

In the S&P 500 ex financials (439 companies), 263 have 5 yr CDS  spreads below 56 basis points, and a further 138 ar between 56-106 bps, so 400 / 439 have credit spreads below 106 bps.

There are like 3 companies above 200 bps: Apache, Occidental and L Brands.

Now we are on COBF so we don't believe in perfect market efficiency and that low credit spreads is necessarily evidence of low credit risk, so let's take a look at some fundamentals.

247 of those companies are less than 2x levered using trailing EBITDA. Only 80 are above 4x. the median is 1.7x levered. Even at higher borrowing rates, these companies will be fine.

Listed below are the scary companies that are over 5x levered and that's just using bloomberg dumb data, not adjusted or anything.
I see a bunch of well covered real estate companies and some onese that actually carry a fair bit of leverage (TDG for example).

I'm not trying to completely dismiss the macro risk. But the data is the data. I see a bunch of very healthy credits in publicly traded corporate america; i see a bunch of highly levered private equity portcos where the lenders are CLO's and private debt funds that themselves aren't levered and comprise a small portfion of various institutional investors portfolios. Perhaps the risk of LBO, CLO, etc. will bleed into the economy there'll be a recession and stocks go down. But don't look to big publcily traded corporate america to start experiencing credit events.

fear not the all time high corporate debt ratios if you hold broad indices. if you hold individual stocks you can avoid that too. I happen to have a large position in the 4th most levered company on this list. I think it has virtually no net corporate debt.

Equifax Inc
Newell Brands Inc
Edison International
Vornado Realty Trust
Alliance Data Systems Corp
CarMax Inc
Williams Cos Inc/The
Zimmer Biomet Holdings Inc
SL Green Realty Corp
Campbell Soup Co
General Electric Co
Digital Realty Trust Inc
Hologic Inc
Harley-Davidson Inc
Apartment Investment & Management Co
Dominion Energy Inc
TransDigm Group Inc
Western Digital Corp
Kimco Realty Corp
Healthpeak Properties Inc
Boston Properties Inc
Molson Coors Beverage Co
Welltower Inc
Noble Energy Inc
Dollar Tree Inc
SBA Communications Corp
NiSource Inc
Essex Property Trust Inc
Ventas Inc
American Airlines Group Inc
Entergy Corp
Alexandria Real Estate Equities Inc
Conagra Brands Inc
Extra Space Storage Inc
AES Corp/VA
CMS Energy Corp
Federal Realty Investment Trust
Duke Energy Corp
Simon Property Group Inc
PPL Corp
Realty Income Corp
Constellation Brands Inc
Kinder Morgan Inc/DE
Sempra Energy
Eversource Energy
Duke Realty Corp
MGM Resorts International
Microchip Technology Inc
Equity Residential
Prologis Inc
TechnipFMC PLC

What is the extent of "debt" in this measurement? For instance, is the $20-30 billion that GE's pension is underfunded included as "debt" when comparing to their EBITDA?

I'd also add that while tax reform is not easily reversed, it's the primary reason these numbers now look fo favorable as compared to say, 2016-2017, and CAN be reversed pending the direction of upcoming presidencies and Congress.

I doubt Democrats win, and even if they do it'd be a tough battle, but a reversion in the tax rates would make these figures look a hellofalot worse and including non-debt liabilities like pension requirements probably do too.

Ultimately, I think the the tax-reform and coordinated Central Bank actions of 2018-2019 has deferred the recession - but I do believe the economy is quite a bit more fragile than many think and I do believe it's like that we'll see it sooner rather than later.

Not sure if corporate debt will be the catalyst, but spreads will be quite a bit wider when it happens and we'll be working off the debt hangover for a time, on average, even if individual companies Excel in that environment.

thepupil

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #28 on: January 13, 2020, 01:02:17 PM »
tax rates don't affect EBITDA, so I don't think tax reform really distorts net debt to EBITDA

https://www.investors.com/etfs-and-funds/sectors/sp500-ge-not-alone-25-companies-owe-trillion-pension-payments/

Largest 25 pension obligations collectively owe $1 trillion, and have a funding gap of $150 billion ($1 trillion of liabilities against $850 billion of assets)

Those 25 have a market cap of $3.5 trillion and $238 billion of EBIT, and $390 billion of EBITDA.

Most of these, their funding gap would add maybe half a turn or less to their leverage ratios. GE the data is wrong because they have negative EBITDA so it messes up the calculation.

For the companies that have the largest funding gaps as expressed in EBITDA, 4/4 of the top ones are defense contractors (Lockheed, Raytheon, Northrup, and Boeing). Many defense contractors utilize cost plus contracts that INCLUDE the cost of the pension benefits. The federal government is responsible for some portion of those folks pensions. Lockheed has the biggest funding gap, adding 1.3 turns to its leverage.

I recognize that the funding gap can really blow it if rates go down and stocks go down since that increases the liability and decreases the assets, but given the trend toward immunization, the very long term nature of funding a pension, and the low absolute numbers here as a percentage of these companies earnings power, I see very little risk in terms of corporate pensions.

Fear not the corporate pension "problem".

Let's say you think EBITDA is bullshit, so I'll use $240 billion of EBIT. I'll stress that down to $180 billion for fun. I'll increase the obligation by 20% and decrease the assets by 10%. then these collectively could get to 100% funded with just over 2 years of EBIT. And of course they don't have to do it like that.

Lockheed Martin                              -1.330194232
Raytheon                                     -1.161483702
Northrop Grumman                       -1.091703057
Boeing                                     -1.085029431
DuPont                                  -1.015721604
Delta Air Lines                       -0.745312682
United Parcel Service                -0.660816813
General Motors                          -0.634868058
Ford Motor                                  -0.538615238
Exelon                            -0.405309555
Exxon Mobil                     -0.328415521
Caterpillar                       -0.316484311
Pfizer                     -0.250183959
United Technologies      -0.227562352
3M                            -0.218516389
Johnson & Johnson      -0.181629476
Merck                         -0.117022936
AT&T                            -0.067857536
Verizon                     -0.04536176
Citigroup                    -0.03108909
Honeywell                   0.166219154
General Electric            1.852617649
International Business Machines   -0.521864315




« Last Edit: January 13, 2020, 01:18:05 PM by thepupil »

thepupil

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #29 on: January 13, 2020, 01:11:30 PM »
https://www.pionline.com/article/20190204/PRINT/190209967/fixed-income-still-prized-in-asset-mix-of-corporate-funds

here's an article re the trend toward immunization and increase in fixed income; basically pensions have been taking equity profits, front loading contributions, and de-risking for the past few years.

some more info
https://us.milliman.com/insight/2019-Corporate-Pension-Funding-Study
« Last Edit: January 13, 2020, 01:15:12 PM by thepupil »