The Long Term Investor

Never a bad thing to sell and take a profit......if you believe that is the right move. Even if the stock goes up after......I NEVER second guess a sell decision. It is done....and you just move on.

 

HERE is a nice little article that ties in with the DAILY commentary we see in the financial media and some BASIC questions that some might have.

From the Mailbag—June 2021 Edition
P/Es and lending and dot plots, oh my!

https://www.fisherinvestments.com/en-us/marketminder/from-the-mailbag-june-2021-edition

(BOLD is my opinion OR what I consider important content)

"With summer here and the news cycle a tad slow lately, we took a look into our mailbag for some possible common questions we could address. Among many we found three that seemed ripe: valuations, lending and the Fed’s supposedly “hawkish” turn in June. Without further ado, here they are.

Aren’t stocks overvalued and set to fall? Look at P/Es!

That question, or some variation of it, crops up frequently after stocks have been rising for a spell. This time is no different, as our mailbag is chock full of questions on whether high valuations imply trouble lurks ahead. But as we have written many times, this overrates price-to-earnings ratios’ (P/Es’) predictive power by a longshot. Here is a quick look at why.

To be clear, P/Es are lofty, almost no matter which flavor you pick. The most common ways would be comparing prices to either trailing or estimated forward 12-month earnings. Exhibit 1 shows the S&P 500’s trailing P/E. At 44.7, May 2021’s reading is the highest since September 2009. See? High!

Exhibit 1: S&P 500 Forward and Trailing P/Es


Source: Global Financial Data, Inc., as of 6/23/2021. S&P 500 12-month trailing P/E, January 1991 – May 2021 (latest data available).

But September 2009 was six months into history’s longest bull market. The astronomical P/E then told you exactly zero about markets’ direction. It said more about where earnings had been than anything else. You see, the parabolic spike in P/Es in 2009 stemmed from the fact 2007 – 2009’s financial crisis wreaked even more havoc on earnings than stock prices. As the denominator tumbled, P/Es soared—while the S&P slid in the deepest bear market in the postwar era. They came down later as earnings recovered … while stocks rose. Today, the denominator in trailing earnings includes last year’s lockdown-depressed results, inflating valuations.

Forward P/Es are little better. Since FactSet data start in 1995, the S&P 500’s average forward P/E is 16.2. At 21.2, it is presently well above that and hovering near levels seen in the late 1990s and early 2000s—around the dot-com bubble. But it first reached levels similar to today’s in late 1998—well before the S&P 500 peaked in March 2000. In between, stocks soared. Furthermore, forward P/Es use analysts’ estimates of profits over the next 12 months. Those estimates have proven way, way too low recently. In Q1 2021, 86% of S&P 500 firms beat estimates as earnings soared 52% y/y. Aggregate earnings were a whopping 22.5% above analysts’ consensus estimates. That suggests the P/E’s denominator may be too low, inflating the reading.

Regardless, the key reason why P/Es fail to predict market direction repeatedly is simple: They are core finance theory, taught to virtually anyone interested in investing. Pundits watch them religiously. The data? Accessible virtually anywhere. In our view, something this well understood and widely watched has likely lost any predictive power it may have once had. Pay attention to P/Es if you like, but don’t overrate the message they send.

Why is bank lending so slow? Shouldn’t it be poppin’ in light of that runaway housing market I keep hearing about?

So first of all, bank lending encompasses a lot more than residential real estate. Residential mortgages account for only 21.3% of all outstanding loans as of May’s end.[ii] That puts it behind commercial real estate loans (23.4%) and commercial & industrial loans (24.6%).[iii] Yet we think it is worth dispelling the broader myth that soaring home prices must mean the real estate market itself—and mortgage lending—is rocking. As it happens, mortgage lending finished May about $100 billion below its March 2020 peak—putting it down at levels last seen in December 2017.[iv] Perhaps not coincidentally, existing home sales have fallen four straight months through May and are down -13.8% annualized since last October. Seems to us high prices tied to a lack of supply are discouraging buyers, and new construction is struggling to fill the shortfall in the wake of this spring’s lumber shortage. Now, this isn’t a huge factor for the broader economy or markets—just a reminder that things are often more complex than many think.

But back to the main question, why is lending so weak? Well, the headline number was actually negative from May 2020 – March 2021 for a simple reason: Businesses quickly repaid a big chunk of last year’s pandemic assistance. Most of that assistance channeled from the Fed through commercial banks to small- and medium-sized businesses, so it showed up as a lending spike last March and April, followed by a swift decline. That distortion appears to have worked its way out of the data, and lending now appears in line with its longer-term trend. Exhibit 1 shows this—note the parallel spikes in total and commercial loans, which diverge from the other subcategories.

Exhibit 2: Bank Lending and Major Subcategories


Source: St. Louis Federal Reserve, as of 6/24/2021. Loans and Leases in Bank Credit and selected subcategories for all commercial banks, monthly, January 2010 – May 2021.

Putting that temporary disruption aside, we think slow lending stems from the same headwind that persisted for years before the pandemic and doesn’t appear to be fading soon: the rather flat yield curve. That, of course, is a graphical representation of interest rates ranging from short term to long. A steep curve means the gap between short and long rates is wide—key for banks, which get funding at short-term rates and lend at long-term rates. The difference between the two is a rough proxy for their profit margin on new loans. Those margins have been sad for a long while, which discourages risk-taking and motivates banks to lend to only very creditworthy borrowers, weighing on loan growth overall. That hasn’t been a huge economic headwind considering many iffier companies have easily tapped the bond market to get financing, but it probably does dampen growth to an extent. It probably also weighs on bank earnings from here, in our view, which we think is an underappreciated headwind against Financials stocks.

What about the Fed’s “hawkish” turn at the June meeting?

Another topic we have seen many pixels spilled on in commentary and our editorial inbox: the allegedly “hawkish” turn the Fed took in its June meeting, with many citing the dot plot of interest rate expectations as evidence. Sorry, but this seems like overthinking things, to us.

The dot plot depicts where the 18 current voting and non-voting members of the Federal Open Market Committee (FOMC) see short-term interest rates at the end of this year, the next two years and over the exceedingly nebulous “longer run” based on the information they presently have. Pundits often treat this as the Fed “forecasting” what it will do, or where it intends to take monetary policy over next few years.[v]

In June, no FOMC member foresaw short-term rates exceeding the current 0% – 0.25% by yearend 2021. But 7 saw rates a skosh higher by 2022’s close, up from 4 in March’s dot plot.[vi] By 2023’s end, 13 FOMC members expect rate hikes, with a majority of the committee expecting at least 2 hikes—up from 7 who expected any change in March. This increase led loads of pundits to say a marked change had occurred.

But we have our doubts. For one, the dot plot shouldn’t be taken this literally. Fed members’ opinions change frequently, based both on incoming data and reconsideration of prior statements. Given the volatility in economic data of late, we suspect even Fed members’ confidence in their detailed outlooks for late 2022 and beyond is low.[vii] But also, the voting members of the FOMC will change before 2022’s end. Even Fed head Jerome Powell could be out, if President Joe Biden doesn’t reappoint him. All the potential turnover means guidance today could be quite irrelevant to the people who set policy in 2022 or 2023. It cuts back to a basic point we have made many times: Fed policy can’t be forecast, either by members’ statements or projections. The good news? You don’t need to forecast it, as markets have no preset reaction to Fed moves. It is far more productive to assess actual policy decisions relative to economic conditions when they are made, not years beforehand.

MY COMMENT

YES......all the day to day discussion and "stuff" that you see and hear about is simply....opinion talk. AND.....I suspect if you evaluated most of it in hindsight....it was simply WRONG.

 

SO......here is what we are looking at this week. REALITY CHECK.....none of this is really going to matter. It is going to be another.......drifting, slow, summer market week. Same as the past couple of weeks. IGNORE the BS and NOISE.

Stock market news live updates: S&P 500 and Nasdaq eke out record highs as traders await week of key economic data

https://finance.yahoo.com/news/stock-market-news-live-updates-june-28-2021-112631559.html

(BOLD is my opinion OR what I consider important content)

"Stocks traded mixed Monday, with the S&P 500 and Nasdaq ticking up to notch fresh record levels, with traders looking ahead to more key economic data later this week.

The S&P 500 edged up to a record intraday high, adding to gains after the blue-chip index posted its best week since February. The Nasdaq also rose to a record intraday level, while the Dow was off slightly. Treasury yields traded lower across the long end of the curve, with the benchmark 10-year Treasury yield hovering below 1.5%. Major cryptocurrencies steadied after sliding last week, and and bitcoin (BTC-USD) and ethereum (ETH-USD), the two largest cryptocurrencies by market cap, each advanced.

Investors this week will be focused on a busy economic calendar headlined by the June jobs report on Friday. Consensus economists are looking for payroll gains to accelerate to 700,000 in June with an unemployment rate down slightly to 5.7%, with these metrics improving against May's payroll gains of 559,000 and jobless rate of 5.8%.

Stocks are coming into this week with the momentum of a record-setting run last week, with both the S&P 500 and Nasdaq setting fresh all-time highs. This in turn came as traders considered a new compromise deal reached on infrastructure in the Biden administration, and a Fed outlook that suggested central bank officials would move to stave off possibly longer-lasting inflation with interest hikes in the next two years.

"We finally have a few catalysts that are pushing this market forward," Jay Jacobs, senior vice president and head of research and strategy at Global X ETFs, told Yahoo Finance. "We had a pretty trend-less May and the beginning of June, but now we have the Fed recognizing inflation and pulling forward its interest rate increases, which should fight it. And now we have the infrastructure bill that Biden has agreed with with bipartisan senators. So that's two really positive catalysts that I think are going to continue to propel the markets into the summer."

And in the coming weeks, investors will also have the backdrop of what is setting up to be another strong batch of quarterly corporate earnings results, with a greater number of companies poised to have benefitted from the broadening vaccinations and economic reopenings taking place in the second quarter. As of Friday, 66 of 103 S&P 500 companies that issued earnings per share guidance for the second quarter offered a positive outlook that exceeded consensus estimates, according to FactSet data. This would mark the highest number of S&P 500 companies offering an estimates-topping outlook ever recorded in data going back to 2006.

9:36 a.m. ET: Stocks open mostly higher, S&P 500 and Nasdaq set fresh record highs
The three major indexes were mixed at the open Monday morning, with the Dow trading lower while the S&P 500 and Nasdaq moved up to reach all-time highs.

The information technology sector led gains in the S&P 500, while the cyclical industrials, financials and energy sectors lagged. The Nasdaq outperformed as tech stocks gained, with the index moving higher by 0.7%.

U.S. West Texas intermediate crude oil futures retreated but still hovered near a two-year high of over $73 per barrel. Gold prices ticked up, while the 10-year Treasury yield fell by 4.4 basis points to yield 1.492%."

MY COMMENT

Yea....another summer market week. The economic data.....who cares. the KEY to the whole summer.....EARNINGS. AND.....they are going to be good and probably set new records. As can be seen above the MAJORITY of companies.....that matter....are projecting earnings BEATS.

They did the best with what they had to work with....on the HEADLINE for this article....but....there is NOTHING going on this week that is going to matter at all. A typical NOTHING.....summer week.....for longer term investors to sit through.

 

With THREE WEEKS till the NVIDIA spit....I am in cheerleader mode. The stock today is UP by $31 or 4.19%. A KILLER open.

On another very popular stock with fanatical shareholders.....TESLA.....I was surprised to see the stock positive with another HUGE recall in china. At least....it is a soft recall.

https://www.cnbc.com/2021/06/28/tesla-shares-shrug-off-soft-recall-of-285000-cars-in-china.html

 

A couple of other stocks that I own.....MSFT hits another all time high today. NKE......experiences the TYPICAL......SLUMP.....today, after a single day of a BIG increase after the earnings report. Just what you would expect from recent history. Any earnings BEAT is rewarded with a couple of down days.

 

AMEN......BROTHER. Just ride the wave......the long term wave........which is often so minimal that you dont even realize it is a WAVE. BUT.....when you look back in 5 or more years......well wow.....you are UP very nicely.

I had to look early today and see how I was doing for the open. Seven holdings UP and three DOWN. the down items today......NKE, HON, and GOOG. It was a welcome sight to see four holdings up by OVER 1%.....so far....today.....AAPL, AMZN, NVDA, and MSFT. Of course I dont put any faith in these sorts of slow drifting summer market days. So NO idea or confidence that what we are seeing right now will be REALITY at the close of the day.

 

AMAZINGLY......the Ten Year Treasury Yield is at......drum roll please.......1.487%.

 

Hey....oldmanram.....sounds like a good plan to add some larger Real Property in the Seattle area......I assume. MONEY is CHEAP and you are in a PERPETUAL hot market. Although I remember at least 2-3 bad times for real estate when I lived up there.

NO......I dont use a brokerage phone app. Since I am NOT a trader......there is nothing I do that is so critical that I need to do it on my phone.