[henrysd]

[quote=svelte]I read this article with great interest:

https://www.pcasd.com/content/stock-prices-values-and-return-forecasts-better-2009-some-cases

What is the theory on why Emerging Market and Developed International have been so undervalued since about 2012?

And what has changed such that they should return to fair value?[/quote]

The bond market in emerging countries tells a different story. In US dollar terms emerging market bond had heavy loss this year, and more losses are expected.
2 main issues for EM:

1) EM companies and sometimes government has a lot of debts in U.S. dollars, in a crisis situation like we are experiencing recently, EM countries will have difficulty servicing their dollar debt as lower local currency forces them pay more in local money for dollar debt.

2) EM economy lack leadership countries now. China used to be that role, but it already ran through its course of growth spurt. It is now stuck in middle income trap and slower growth which might not be enough to support its obligations from looming issue of serious population aging and shrinking workforce. The high level of private section debt load is another time bomb. The real estate bubble in China is 10 times the size of U.S. sub prime mortgage. A prolonged global recession could simply collapse the bubble. China is still leaking foreign currency reserve as rich Chinese will find out whatever way to move money overseas as China has no law to protect private properties/assets, and government can take over your assets at any time at will (communists in China got into power by that way, so they can do it again, rich people in China don’t feel confident put their money in China). Trade surplus used to bail out on that as surplus normally is more than the asset transfer. With trade war and developed countries in recession, they can no longer get foreign currency easily through trade surplus.

EM markets are highly correlated. Trouble in one country will quickly spread out to other countries.

EM stocks are good buy when market is chasing risky assets. In current situation I try to avoid.

[henrysd]

Future market now indicates another 50 basis point Fed rate cut in March 17-18 regular meeting. April Fed meeting another 25 bps cut. Feb fund rate will be 0.25% from April. We’ll see more drops in mortgage rate by then. Even though 10 year treasury dropped so much, but short term rate hasn’t caught with the decrease with long bond rate, a lot of banks are hesitant to drop mortgage rate the same amount of 10 yr treasury yield drop. Once short rate get slashed, banks will pay less to depositors, then they can reduce 30 or 15 yr fixed mortgage rate further more by reducing the risk premium.

[henrysd]

Professor Shiller, the creator of CAPE, is in bull camp for stock 2020:

https://www.cnbc.com/2019/12/22/robert-shiller-trump-effect-could-drive-record-rally-through-2020.html

[henrysd]

[quote=burghMan]
Thanks henry, that’s exactly the kind of insight I was looking for. Do you know if there’s any site that maintains the current value of the modified CAPE?[/quote]

Vanguard fair market CAPE is their proprietary tool and is used mostly inside their house. They don’t publish daily to outsiders.

[henrysd]

[quote=The-Shoveler][quote=henrysd] Wall street would love to propel the market higher when so much retail investor money has sidelined.[/quote]

LOL That’s my other theory, what happens if dumb money does not show up to bale out the smart money.[/quote]

Dumb money matters less now. Corporate stock buyback totaled $800b last year, probably will be the the similar number this year.

[henrysd]

[quote=burghMan]One thing Piggington has done for me is to convince me that most useful investment analysis comes down to fundamental valuation measures. Rich’s chart on the real estate bubble tells the story in one simple, clear picture. During the bubble real estate was realy, really expensive and it inevitable that it would come back down.

I believe the stock market follows the same rules, and for that reason I’ve always taken an interest in the market’s measure of valuation. I check this chart regularly:

https://www.multpl.com/shiller-pe

Based on the chart, I’ve been reluctant to go all-in on the stock market in the past ten years. I have about half of my longterm portfolio in equities, but just am just too wary about valuations to commit 100%.

My rough analysis is that the market is significantly overvalued:

– Historic mean is around 15
– It’s now above 30, double the mean
– We don’t really have any economic “revolution” like the late 1990s tech surge that would drive it even higher
– Interesting historic note: It was around 30 on black friday 1929

But there are possible arguments against overvaluation. It’s been above the historic mean since 1990, so maybe the longterm mean doesn’t mean much and the modern economy has changed some rules? Much of the late 1900s tech bubble was hype, but many of the innovations are now coming to practical fruition (e.g. self driving cars.) I’m reluctant to believe that “it is different this time”, but it has been different for a very long time.

So what I’m asking is a market timing question, which is something I know the “experts” say we should never try to do, but I cannot help but try and do it anyway. It seems to me like buying stocks today is much like buying real estate in 2002 or so. Not insanely expensive, but certainly expensive by historic data. Which means a big decline is a real possibility and upside is limited.

So what do you think? I am looking at the wrong chart or reading it wrong or missing something? How long can the bull market go on?[/quote]

CAPE is only one measurement of stock market valuation just like SAT test scores used in college admission. It has serious flaw – it fails to consider the interest rate. Early 80 CAPE can’t compared with current time CAPE due to 10% difference in interest rate. Vanguard uses a modified version of CAPE called fair-value CAPE and adjust for current interest rate. In Vanguard research, current U.S. stock market is still considered overvalued, but only slightly due to low interest rate. This is in sharp comparison with many other pure CAPE modelers:
https://vanguardblog.com/2019/03/13/what-fed-projections-may-mean-for-longer-term-stock-returns/

Contrarian view is negative stock marker sentiment is bullish for stocks. For the last half year the sentiment was mostly bearish with all the recession talk. Wall street would love to propel the market higher when so much retail investor money has sidelined.

[henrysd]

[quote=flu]How do you short a freshly minted IPO stock? There’s not that much float and there are so many regulatory hurdles for shorting right after an IPO, that most retail speculators would not have access to those limited shares in a meaningful quantity. How did you folks that said your shorted right after Snap went public did you manage to pull it off? What brokerage firm did you use that were allowing you to short right after an IPO?

And I don’t think you pay 18% interest just from shorting unless you the short position blew up, the stock price went up past your short price AND you don’t have enough money in your account to cover the paper loss. That difference between what you shorted at , and the current market price (which is higher) is like a margin loan.. At least that’s how my broker works. I never had to pay margin interest when I was on the right side of a short. And even when a short position had a loss, so long as I had enough cash in the account to cover that unrealized loss, there was no margin interest charges too.[/quote]

In IPO the underwriters sell to general public. The shares owned by underwrite have 30 days restriction to lend out for shorting. But for other public buyers like mutual funds or retail investors, their shares can lend out for shorting. If too many people want to borrow shares, then it become a difficulty.

From this article “Is there a time limit that must pass before short sales are accepted for IPOs?”:
https://www.investopedia.com/ask/answers/05/062905.asp

[quote]
To be able to short a stock, you usually need to borrow it from an institution such as your brokerage firm. For them to lend it to you, they need an inventory of this stock. Here’s where the difficulty can arise with IPOs and short selling. An IPO usually has a small amount of shares upon initial trading, which limits the amount of shares that can be borrowed for shorting purposes. On the day of the IPO, two main parties hold inventory of the stock: the underwriters, and institutional and retail investors.

As determined by the Securities and Exchange Commission, which is in charge of IPO regulation in the United States, the underwriters of the IPO are not allowed to lend out shares for short sale for 30 days. On the other hand, institutional and retail investors can lend out their shares to investors who want to short them.

However, only a limited amount of shares would probably be available on the market as the company would’ve just started trading publicly and the shares may not have been completely transferred. Furthermore, there might be a lack of willingness among investors to lend their shares out to be short sold.
[/quote]

[henrysd]

[quote=gzz]Woohoo, my short position in Snap is finally in the black. Still above my initial short, but I shorted more 15-17 so in the black overall.

My UBER short has been profitable from the get go.

Also opened shorts in LYFT and PTON and MGI in the past week.

To offset these shorts, I purchased some Vanguard ETFs so I am protected if my shorts go up as part of a broad bull market.

For each company and read the annual report and analyst opinions, as well as most recent 10-Q. All are scary unprofitable.[/quote]

Shorting weak IPO stocks is popular way to make some profit even though I don’t do it. Wall street brokerage houses try to get as much they can from IPO price, so generally speaking IPO price most of time are over-valued. Even you made a mistake shorting strong companies, you can still get bailed out when the 6 month insider lockup period expires – Wall street doesn’t want corporate insiders to make big money when they are able to sell.

The popularity of shorting IPO by retail investors has made wall street mad as they want their client stocks to keep floating high the first several months. So they started a campaign against short sellers by buying most of the floating shares of Beyond Meat to cause major short squeeze and made share borrowing over 130% annual interest rate. Now time is so close to end of lockup period, BYND stock is coming down. Wall street is so crooked, but I believe price manipulation post IPO in 6 month lockup period is allowed by law for underwriters.

[henrysd]

[quote=flu]This is what doing an auto deposit of $260/month into one vanguard account containing a basket of passive index funds for the past 10 years beyond the initial $20k seed deposit and maybe additional one time deposits totally $50k distributed along the 20 years looks like… Basically instead of two nice dinners each month…no frills, no guess work, no market timing. Not trying to get the highest returns each year.
You snooze, you lose[/quote]

Last 10 year happened to be one of best return period for stocks with S&P 500 return 14-15% compounded annually with dividend reinvested. But if you look at the market in the first decade of this century, it was negative for 10 year span. The annual compound return for S&P for this century from Jan 1 2000 (19.5 years) is just under 6%, lost even to junk bond by a decent margin.

I doubt we will see annual double digit return for the next 10 years.

[henrysd]

[quote=ltsdd]
That said, I did “short” some chips stocks at the open today by selling July 26 puts.[/quote]

Are you sure you are selling puts not selling calls? Put option selling is basically delayed long position by collecting option premium.

[henrysd]

[quote=flu]
My taxable income between 2018 versus 2017 is about the same, but the total federal taxes I’m paying this year is about $17k less than last year, and my effective tax rate dropped by 5%.[/quote]

You hinted your AGI around $340K. That is a real sweet spot with the new tax law. Assuming 24K standrad deduction, txable income is 316K. It used be 33% tax bracket for income above 233K in 2017, now income above 157.5K and below 315K are only taxed at 24%. That is 9% drop in tax rate. For AMT tax payers the marginal rate was 32.5% or 35% corresponding 26% or 28% AMT rate. Every extra dollar of income also reduces AMT exemption by 25 cents, so that is how 32.5% come from: 1.25 x 26% = 32.5%

Child credit $2k for every child under age of 17. 3 kids can get 6K credit. Old law phased out child credit starting at 110K, now full credit if AGI < $400K My AGI in 2018 is 8K less than 2017 due to the family leave time taken, but total tax is $9k less. Adjusted for income difference to assume AGI are the same for the 2 years, my tax would be 7K less. Main difference maker for me: Lower marginal rate of 24% from previous 32.5% AMT rate. No more AMT.

[henrysd]

The bar for treating rental income as QBI seems to be quite high for those with regular job not in real estate fields. I got this from TurboTax site:
https://ttlc.intuit.com/questions/4557531-can-i-get-the-qbi-deduction-on-rental-income

[quote]Generally, this means each rental real estate enterprise (a rental property or group of similar rental properties, including K-1 rental income) must satisfy these requirements:

1. Each enterprise has its own books and records to track income and expenses;
2. At least 250 hours of rental services are performed per year per enterprise; and
3. (Starting with tax year 2019) Contemporaneous records of services performed are kept which includes who performed the service, description of service, the date of the service, and how long it took (who, what, when, and how long).[/quote]

[henrysd]

I guess it is SDGE’s calculated plot to switch to time-of-use to underpay home owners with solar panels for sun shine hours, so they can generate more profits. Solar panels get very popular last a few years, so capitalists invent a scheme to charge high rate at hours you are not generating power.

[henrysd]

There are several elements of inverted curves before recession happened in the past, and they are still missing today:
1) The inversion is by larger amount like 40 base points
2) The inversion is for extended period of time. Last time it lasted a few years (2006 and 2007).
3) Overall credit condition is tight. Previously we had 6.5% (2000) or 5.25% (2006) fed fund rate, very tight condition. The current 2.4% fed fund rate and other short to medium rates are just a little above inflation, actually quite neutral.

The drop in 10 yield bond rate actually behaves like an automatic stabilizer and helps the economy and market. It also makes stock less expensive, S&P 500 has dividend yield of 2% with earning growth compared to 10 year treasury at 2.44%.

As for housing the 1991-1996 downturn was a result of recession, but only dropped 10% in 5 year time frame. There were massive layoff in San Diego, General Dynamics shut down locally, 40K people in GD alone lost jobs. Other defense contractors across Southern Cal reduced head count aggressively.

[henrysd]

[quote=flu]I guess it was a good thing that I got out of the Vanguard CA tax exempt municipal bond fund a few years ago that is stacked high with PG&E’s bond…

I wonder how that’s going to play out.[/quote]

Out of $415 m Vanguard owns, $413 m is insured, only $2 m subject to loss. Considered it is owned 3 funds with combined assets over 25b, the 2m possible loss is basically negligible. Even within 2 m possible loss, muni recovery rate is still high enough on get decent percentage out of the 2m back.

When Detroit went bankrupt, Vanguard also had large positions, but lost nothing in the end because the positions were insured.

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