Posted by DigiNomad on 7th of Feb 2023 at 06:06 pm
I've been through 3 or 4 full cycles now and researched back
even farther. PE multiple would have bottomed out at a record
level, if we already bottomed for this cycle. Market PE typically
bottoms somewhere between 12 - 15. If earnings come in at 235
this year, it would be an 18 multiple. Earnings will not be
235...maybe not even 200, so the multiple is actually going to be
much higher. *I'm paraphrasing an analysis done on Fast Money
tonight...the numbers maybe slightly off, but the general point is
intact.
Over time, the market will gravitate towards the best risk
reward. A 20 multiple is essentially a 5% yield. Why would market
participants not take the risk free 5% in treasuries vs the very
risky 5% in equities? Eventually, they will shift...it just
hasn't played out yet.
“Why would market participants not take the risk free 5% in
treasuries vs the very risky 5% in equities?”
Maybe because treasuries are not truly risk free. When interest
rates rise, the principal or present value of longer dated
treasuries can lose more than 5%. You may counter that this risk is
small for short duration treasuries, but so is the total
return since they are not held for much time. One may counter that
a longer dated treasury can return a coupon for years and be risk
free if you are ready to hold to maturity, but equities still
return more over the long run if your holding period is that long.
As for treasuries producing cap gains as rates fall, there is no
guarantee that rates will fall soon or that the “flight to safety”
characteristic will return – given the 40 year bond bull market
seemingly has ended, we may be facing a decades-long bond bear.
Nothing is really risk free IMO.
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I've been through 3 or
Short squeeze is now underway
Posted by DigiNomad on 7th of Feb 2023 at 06:06 pm
I've been through 3 or 4 full cycles now and researched back even farther. PE multiple would have bottomed out at a record level, if we already bottomed for this cycle. Market PE typically bottoms somewhere between 12 - 15. If earnings come in at 235 this year, it would be an 18 multiple. Earnings will not be 235...maybe not even 200, so the multiple is actually going to be much higher. *I'm paraphrasing an analysis done on Fast Money tonight...the numbers maybe slightly off, but the general point is intact.
Over time, the market will gravitate towards the best risk reward. A 20 multiple is essentially a 5% yield. Why would market participants not take the risk free 5% in treasuries vs the very risky 5% in equities? Eventually, they will shift...it just hasn't played out yet.
“Why would market participants not
Posted by sethbru on 7th of Feb 2023 at 08:05 pm
“Why would market participants not take the risk free 5% in treasuries vs the very risky 5% in equities?”
Maybe because treasuries are not truly risk free. When interest rates rise, the principal or present value of longer dated treasuries can lose more than 5%. You may counter that this risk is small for short duration treasuries, but so is the total return since they are not held for much time. One may counter that a longer dated treasury can return a coupon for years and be risk free if you are ready to hold to maturity, but equities still return more over the long run if your holding period is that long. As for treasuries producing cap gains as rates fall, there is no guarantee that rates will fall soon or that the “flight to safety” characteristic will return – given the 40 year bond bull market seemingly has ended, we may be facing a decades-long bond bear. Nothing is really risk free IMO.