Stocks and Trading Thread - Channeling your inner Mono

[Admiral Yi]

How much does it cost you to buy stocks directly? (on top of the actual price of the stock or course)

Everyone went zero commission not long after Robin Hood showed up.

How much do you pay?

[Admiral Yi]

Actual value has been destroyed.

The S&P 500 is a lot lower than it used to be, but it includes companies like Boeing, Airlines, hotel companies, Carnival Cruise Lines, retailers like Macy's, restaurant groups, oil companies...

Even for the companies not as directly harmed as those, their valuations must be different if we initially assumed a economy producing a 3.5% unemployment rate quickly transformed into an economy with double digit inflation.

Finally, the market value of the US stock market is really dominated by multinationals. Put aside that other countries have closed down much more than the US and the US stimulus plan hasn't been matched in comparable size in many other places. The dollar has strengthened significantly. This is a major blow to the earnings of multinationals, as the USD equivalent of their foreign earnings is now less.

What exactly is your point Fredo?

That the stock market has declined?  That the economy is contracting?  We know that.  What are you arguing against?

[MadImmortalMan]

The market was overvalued. In early February, the S&P's PE ratio was 25. Today it's about 21. It should be below fifteen. It might not actually be even that low after dinged up companies report their dinged up quarterly earnings reports. It's not unreasonable to say that the value that was destroyed was never really there to begin with.

[alfred russel]

What exactly is your point Fredo?

That the stock market has declined?  That the economy is contracting?  We know that.  What are you arguing against?

Maybe no one.

I was getting a sense that a part of the argument for buying now was that this is a better buying time because prices are lower than they were a few months ago. While they are lower, and all else being equal it is better to buy something at a lower price than a high price, the reality that has unfolded is one of the more negative scenarios that would have been projected (ahead of a major supervolcano eruption or unrestrained nuclear war, but behind most others).

[alfred russel]

The market was overvalued. In early February, the S&P's PE ratio was 25. Today it's about 21. It should be below fifteen. It might not actually be even that low after dinged up companies report their dinged up quarterly earnings reports. It's not unreasonable to say that the value that was destroyed was never really there to begin with.

I'm going to register my previously stated passionate hatred of PE ratios. 

[Admiral Yi]

The market was overvalued. In early February, the S&P's PE ratio was 25. Today it's about 21. It should be below fifteen. It might not actually be even that low after dinged up companies report their dinged up quarterly earnings reports. It's not unreasonable to say that the value that was destroyed was never really there to begin with.

Taking PE as a historical constant does not account for the opportunity cost, which is bond yields.  Not even Schiller has been pushing this thesis for a while now.  Even our own illustrious Joan has been silent on the subject.  As long as the Fed keeps pumping money and the bonds stay at 1.5-2%, higher stock PEs are justified. (Although I think most people agree that PEs were stretcheed even accepting this logic in early February.)

Now of course the Great Stock Bubble is imperiled (implodes?) when the Fed needs to tighten in response to inflation, but for some inexplicable reason inflation is not materializing.

[DGuller]

Now of course the Great Stock Bubble is imperiled (implodes?) when the Fed needs to tighten in response to inflation, but for some inexplicable reason inflation is not materializing.

I don't see why it's so inexplicable.  The money is going to the people who are buying Vanguard ETFs, not the people who are buying basic goods and services.

[alfred russel]

Taking PE as a historical constant does not account for the opportunity cost, which is bond yields.  Not even Schiller has been pushing this thesis for a while now.  Even our own illustrious Joan has been silent on the subject.  As long as the Fed keeps pumping money and the bonds stay at 1.5-2%, higher stock PEs are justified. (Although I think most people agree that PEs were stretcheed even accepting this logic in early February.)

Now of course the Great Stock Bubble is imperiled (implodes?) when the Fed needs to tighten in response to inflation, but for some inexplicable reason inflation is not materializing.

Taking PEs as a historical benchmark has the added problem that "E" is an accounting answer. The accounting rules that lead to that answer have changed dramatically over the years, and the rules lead to rather dramatic differences across industries (for example, you would generally expect a tech company to have a low PE versus an industrial company, even if they had the same projected growth).

[Admiral Yi]

I don't see why it's so inexplicable.  The money is going to the people who are buying Vanguard ETFs, not the people who are buying basic goods and services.

Are you maybe looking at an increased savings rate?  Increased liquidity is not an argument in that function.

Unless you're claiming there has been a decrease in business investment and consumer credit use in favor of leveraged stock purchase, liquidity doesn't have the effect you claim.

[Admiral Yi]

Taking PEs as a historical benchmark has the added problem that "E" is an accounting answer. The accounting rules that lead to that answer have changed dramatically over the years, and the rules lead to rather dramatic differences across industries (for example, you would generally expect a tech company to have a low PE versus an industrial company, even if they had the same projected growth).

Actuarities always gotta be boring up every thread. 

If you don't like earnings then look at free cash flow.

[MadImmortalMan]

All numbers like that are only useful in relative ways. Nothing is ever exact. GDP doesn't actually measure the real domestic product, CPI doesn't measure the real inflation, etc. They're still useful though.

[Admiral Yi]

Maybe no one.

I was getting a sense that a part of the argument for buying now was that this is a better buying time because prices are lower than they were a few months ago. While they are lower, and all else being equal it is better to buy something at a lower price than a high price, the reality that has unfolded is one of the more negative scenarios that would have been projected (ahead of a major supervolcano eruption or unrestrained nuclear war, but behind most others).

If I follow you correctly, you're arguing a straw man.  No one says earnings are not going to be impacted and that we're going to zip back up to the February highs in a straight line.

The guys I was listening to on CNBC were saying given the impact on earnings in the near and medium term, stocks are still underpriced.  One guy pointed out that the current year's earnings only account for 90% of a stock price's value.  You with your constant mantra of NPV of future earnings, of all people, should understand that.

Or at least stock were underpriced back in March.  Some of you Johnny Come Lately's might have missed out. 

[MadImmortalMan]

NPV of future earnings

The reason I don't like that method of valuation is future earnings haven't happened yet, and might never if the projections don't work out. If there's a scandal, terrorist attack, pandemic or something.

I prefer to pay a fair price for what a company's doing right now, not pay today a price that would be a good deal this time next year if the projections work out.

I know that means that next year, people will be paying two years from now's price, but hey.

[Admiral Yi]

The reason I don't like that method of valuation is future earnings haven't happened yet, and might never if the projections don't work out. If there's a scandal, terrorist attack, pandemic or something.

I prefer to pay a fair price for what a company's doing right now, not pay today a price that would be a good deal this time next year if the projections work out.

I know that means that next year, people will be paying two years from now's price, but hey.

This year's earnings haven't happened yet either.  Your valuation method makes every stock worth zero.

[Admiral Yi]

https://www.youtube.com/watch?v=aF2L_G49eIA

This guy says we're going to retest the low, so folks who are thinking about jumping in now might want to wait a bit.

A guy this ugly has to know what he's talking about.