100% agree with US wages. What about foreign wages? I’d imagine that those will stay subdued as companies simply switch to countries with the cheapest available wages. There’s other factors too, such as the increasing shift to bringing manufacturing closer to home. Many automakers are opening plants just across the border in Mexico due to cheaper labor and energy costs, and being closer cuts down on transportation costs as well. Also increased automation will continue to reduce the reliance on labor.
My guess would be that overall wages go up as you say, but maybe that rate is relatively subdued.
OK, so your argument is that we are in a New Economy, or New Normal. That’s not necessarily an unreasonable thing to think, but it’s also not obviously the only possibility. The idea of “how could anyone else possibly not agree that we’re in a New Economy that justifies high stock prices because earinings will just keep growing fast enough to justify them,” seems very daft to me. You may agree with your own arguments, but it’s definitely possible that other intelligent people see things differently and it is at least concievable that those arguments may be right.
All of this needs to be balanced against the fact that banks and brokers are always looking for justifications to sell more product, which means that arguments on why to buy tend to face less genuine critical analysis than arguments about why not to buy.
There are some things that are new about this economy, or at least are cyclical enough to be durable features for a long time. Consumers are indebted and trying to delever. As rawraw pointed out, wage growth is slow to-nonexistent, suggesting that the ability to delever is also extremely precarious. There is profit growth being driven by government stimulus (which going into wages only minimally, so what’s left is going into profits). There may be profits from abroad, due to emerging middle classes, but it’s yet to be seen as to whether that revenue can replace lost revenue from the US middle classes, particularly since the wealthy classes who have benefitted from concentration of wealth are unlikely to be able to consume enough to replace that lost purchasing power.
bchad, relax. You get very defensive when anyone has the opinion that stocks aren’t overvalued and thats why I asked for your side of the argument. I’m not trying to sell your grandma a call option on the SPY.
I don’t remember saying that my opinion of sustained increased margins was the only possibility. As I noted, they may rise or fall and I’m curious to watch this evolve. My opinion, which I backed by siting the fact that profits are rising due to falling coporate tax rates, may not be right but is a credible argument. To say I am daft for having an opinion, stating why, and asking for the counterargument is just false.
If I’m reading your comment correctly, you believe that corporate margins are at unsustainable levels due to monetary stimulis. Do you see any areas specifically that are being hurt by the fed’s withdrawal?
I would think that since margins are already high, boosted from foreign profits, then wouldn’t the question be ‘can emerging middle classes sustain their current share of S&P revenue’? They’ve already proven that they can have a material effect on S&P earnings, so any futher growth would increase those higher margin profits as a % of S&P profits. I have no idea what the number is, but lets say 20% of S&P revenue is driven from overseas. If that 20% of revenue continues to produce higher margins, then total S&P profit margins should remain stable. If foreign revenue increases to 30%, all else being equal, then we would actually expect S&P profit margins to rise. Obviously this is just one piece to the puzzle, but the counterargument to this piece is that foreign profits are unsustainably high and will have to mean revert back to where they were 10 years ago. I don’t understand that argument. Are foreign tax rates going to rise? Are revenues from these countries unsustainable?
Marc Faber argues assets are overpriced and due for correction of 20 to 30%. Asset prices hyped by the stimulus by central banks, boosting inflation but not real wages. So he argues, that we see slower growth in MCD because the general public can’t afford to keep it growing. But the wealthy, real estate, and just people that long a ton of assets are enjoying it and spending them away at high end places etc.
So when this correction come, what industries or asset class would benefit? Any good ideas?
Agree with rawraw on MLP’s, I’m very optimistic on US energy.
Normally I wouldn’t agree with someone like Faber, since he’s always a bear, but I do think he’s got a good point. I just read the article below from businessweek the other day that I think is very timely. They’re asking if we’ve reached ‘peak burger’. Basically arguing that consumer tastes have changed, firms like MCD have been unsucessful in adding new product lines and a lack of wage growth in the lower middle class is restricting sales growth.
So that makes me wonder, is McDonalds sales growth stalling because people prefer other choices, because they can’t afford it, or both? It does appear that McDonalds has had to raise the price of a Big Mac at much higher rates than the CPI, see the analysis in the article below. If inflation is rising at a disproportionaltely larger rate for those with lower incomes, then this will certainly have an effect on the economy, with companies affected by discretionary spending hurt the most. Some ideas off the top of my head: Bullish for dollar stores and bullish for grocery items such as campbell soup, as people will choose to cook more often. This is bearish for luxury items that the lower middle income familes enjoy which is a tougher call. Many luxury items do not rely on lower middle class customers, so this wont necessarily affect all luxury brands such as Mercedes or Coach. Maybe something like movie theaters could be bet against, since that is an easy “luxury” to cut out. Tickets are like $10 these days, i wouldn’t blame anyone for waiting for it to show up on netflix. Maybe thats bullish for Netflix…so many possibilities.
I’m not freaking out. I’m just responding to the following thing you said:
“Can someone (bchad) lay out the case for why they believe US equities are so incredibly overvalued?”
It sounded there like you couldn’t imagine an argument that suggests a major (15%+) decline is possible. It’s just buy the dips and keep going.
I was saying that there are arguments one can trot out for why margins maybe should be high for a long time, but none of these arguments are slam-dunk-how-could-anyone-intellgent-possibly-think-otherwise kinds of arguments.
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Remember that "fairly priced’ means "fairly priced in terms of the risk/return.’ Stocks have traditionally delivered about 8-10%. So being “fairly priced” means you believe that current prices can support 8-10% total returns on average into the future. Or you can say “we’re living in a new economy where returns are going to be more like 3%.” If you’re willing to accept 3% on average for taking on stock risk, it’s a lot easier to say that stocks are fairly priced, or even underpriced.
So if you say fairly priced, but you don’t specify a return expectation and a risk expectation, we actually have no idea what you are actually saying, except that if you say it confidently, people think you know what you’re doing.
“It sounded there like you couldn’t imagine an argument that suggests a major (15%+) decline is possible”
Actually, my very next sentance suggested that a correction may be due. My question specifically asked if there was a reason based on fundamentals for the overvalued argument.
Trust me, if the market is overvalued I want to know it, I want to be the first one out before the next 50% drop in the S&P. If the market is fundamentally overvalued then I’d like to hear why. If we’re just due for a correction, I don’t really care. I’m not sure who’s famous for saying it, but a lot more money has been lost by being out of the market anticipating a correction, than has actually been lost riding it out.
When I say fairly priced, I mean that I expect equities to achieve their long term average rate of return going forward, as you say, 8-10%.
So, getting back to what I was asking you, why do you believe corporate margins will fall? Do you believe foreign tax rates will rise? Do you believe that revenue from abroad, which has increased margins, will fall? If margins are going to mean-revert, there has to be a reason, right?
I believe you were making the point that corporate margins are being artificially boosted by fed stimulis, can you explain why? Are you seeing these margins decline as the fed withdraws from bond purchases?
Marc Faber is nuts and dangerous. Nuts because he makes pessimistic calls, like in 2009, he predicted the Dow at 2,000. Dangerous because he’s so smart people think anything he says is gold.
^ wrt MCD, I think their issue is that people don’t see it as a good value anymore. I can pay $6-7 for a Big mac meal or quarter pounder, but I can pay the same amount at Chick fil a or Whataburger and get what is almost certainly a better quality fast food meal in a nicer place with better staff. The only time I set foot into MCD is generally when I’m driving long distances and its the only thing on the highway. I’m glad I sold my MCD a couple years back.
My portfolio got pounded today. Doesn’t help when nearly 10% of it is in an illiquid sub 50M microcap that went down about 10%, and all the large positions in AMZN, GNCMA and RHT got slammed.
Here is the breakdown of foreign sales revenue: Mega cap at 40%, LArge Cap at 35%, Mid cap at 20%, small cap at 16%, and micro cap at 10%. A lotta research i’ve read attributed small cap performance due to their US focus.
I also did some work about MCD. Since they are saturated, they are dependent on organic growth or SSS which is in decline. They’ve gone nowhere for the past 3 years because of this. But mcd has faced these problems before in 2004 and in 2009. MCD always bounced back. In any case, its not juss their business model. They have a ton of real estate even when netted to their debt and is a considerable amount. Ackman tried to get them to spin off the real estate awhile back since reits have higher multiples than company operated stores. In any case, they havent discussed reiting options but they are thinking of imitating the BK ppl by switching to the 100% franchise model and returning cash to shareholders from the sale of the businesses. very unclear though on what caused BK’s upside, it could be due to the higher franchise multiple, or through revenue growth since BK grew organically by upgrading restaurants, and internationally through master lease agreements.
Btw on the new normal comment on margins. i’ve seen the data, trends are pretty sticky, but they are range bound, and its been in the upper end since 2010. so the risk is to the downside. Also lotta ppl talking about consumer cash flow to rise due to higher incomes, and lower gas/food prices. Which is bad for margins, but good for revenues. Its like the trading brokerage of the 80’s when commisions were high, but volume was low vs now where commisions are low, but volume is exponentially high. IMO we still got room to grow, unemployment is still purely cyclical, with a correction most likely, but like huskies says it dont matter, but “juss dont be too fricking long” -david tepper
McD’s and Coca-cola are the next Philip Morris. Its a very long term play, so I’m not calling a short. But the days of fat and sugar pumping the waistlines of the masses will end. It has to. No country can afford the impacts. One day, maybe 50 years from now, drinking a Coke will be like smoking a cigarette, socially shunned. The only market for these guys will be addicts and poor people in 3rd world countries that lack education. Much like the market for smokes today. That’s my McD’s summary.
Nery, thanks for those numbers. On the margin issue, do you have any visibility as to what the lower end of the range will be? I’m curious to see if this will be around 8 or 9%, as opposed to to the middle/lower single digits that we’ve seen over the past 50 years.
That last post seems on the mark to me. I liked the insight on “What’s NOT driving the market,” which makes the stuff that is driving the market seem more reasonable (as an explanation for recent behavior, albeit not necessarily as a justification for current valuations)
The combination of these factors is something that keeps me up at night. Parents keep telling their kids to go get their degree if they want to make something of themselves, but more and more college graduates are finding fewer opportunities. In the meantime, college tuition keeps going up, so young people are incurring ever increasing debt with fewer employment opportunities. And this is one of the few types of debt that can’t get wiped away through bankruptcy, so they’ll be choking on this for a loooong time.