When bullishness in the stock market is unanimous and there aren’t any contrary stories it’s sometimes a warning signal. Especially when the index growth is driven by only a few companies and the market is clearly overvalued.
Or maybe this time is different.
Can the Stock Market Keep Going Up? Market Watchers Think So.
The bullishness on Wall Street is largely based on confidence that the Federal Reserve will tame inflation, the economy will remain solid and corporate earnings will continue to grow.
By Joe Rennison, The New York Times, Oct. 15, 2024
Stocks have climbed since the Federal Reserve lowered interest rates a month ago, with investors betting that it marked the beginning of a series of cuts that will offer a tailwind to the market.
And the economy continues to hum, with reports this month showing robust hiring and milder inflation, bolstering the rally…
Despite the bumper gains for major stock indexes, beneath the surface many companies and even entire sectors have recorded far less heady gains this year, with much of the rally being driven by the giant tech companies on the forefront of artificial intelligence. Investors hope that if the economy can remain resilient, the gradual decline of interest rates will lift more unloved areas of the market, offering a new driving force for the rally — and the economy in general… [end quote]
We currently have the strongest economy we have had in decades. Even stronger than under TFG, who has always incorrectly claimed his economy was the best ever. (of course he does). We had the strongest post-COVID recovery of the developed world. Our economy is propping up most of the world economy. I’m struggling to see the problem with the way things are.
Wars are the clouds on our prosperous horizons. Big wars can be quite destructive. But, if they stay away from our shores, USA could show additional big market values.
It still comes down to will there be a recession or not. Earnings reports continue to show consumer spending is slowing. Unemployment is still low. Will rate cuts reinvigorate the slowing economy or not?
Tech stocks continue to do well. Indexes including them continue to do well. Those heavy in consumer businesses see something different. Slowing consumer business does factor into other businesses too but not likely to hit AI spending in the short term.
Does inverted yield curve still indicate recession coming? Seems ready to uninvert as feds push down shorter rates?
Uncertainty causes some to be cautious and should hold back the full boom.
Those who see Nvidia as just another cyclical semiconductor stock to me are unsophisticated at best and don’t have much credibility. Some talking heads are better than others.
What I discovered in 2001 was to avoid technology stocks of companies with low probability of survival, i.e. technologies that have not crossed the chasm. Another safeguard is to have sufficient liquid assets and no debt to outlast the storm.
At sea one learns that the most valuable asset is a sturdy ship.
What is the common theme of these three crashes? Excessive debt.
In 1929 it was margin debt. Laws were passed to limit margin.
in 2008 it was housing that buyers could not afford. See below, Book review: The Greatest Trade Ever
2001 was more complicated. There was a paper by a respected institution that said that the source of cash was not important, venture capital was as good as free cashflow. That fueled the dot.com boom. Venture capital is not debt but certainly more fragile than free cashflow from thriving businesses. Unfortunately the paper has disappeared from the Internet, at least, I cannot find it.
One reason I have faith in Tesla is because they fund their new ventures from free cashflow. Of course they go to market when conditions are propitious but avoid debt as much as possible. At the end of the day cashflow might be the most important investing criterion. You can’t go broke as long as you can pay your bills!
The Captain
2008 - Book review: The Greatest Trade Ever
The plot is as follows: The government wants more people to own their homes. Interest rates and credit standards are lowered making it possible for more people to buy homes they could not normally afford. Securitizing allows banks and other lenders to package the mortgages into bonds that are sold to fixed income investors all over the world. The conventional wisdom is that houses never lose their value, always appreciate and that securitizing, by spreading the risk reduces it. A few smart people believe the conventional wisdom is wrong and search for ways to “short” the mortgage backed bonds. John Paulson succeeds beyond his wildest dreams while others do less well. Banks and their customers suffer heavy losses many going bankrupt.
Book Review: Manias, Panics, and Crashes
Book Review: The Bear Book: Survive and Profit in Ferocious Markets
My great grandmother was alive in the days when most gathering places for “gentlemen” had spitoons. She told me that in her young adult days she would still see spitoons with the image of President of the Confederare States Jefferson Davis on the interior bottom.
That is not how it shakes out. The cap ex spending has been tech buying tech. AI is not ubiquitous enough in B2B. It is getting there and Bloomberg analysts think there is little return.
There may be new AI technologies but much of the time AI has the lowest IRR of any technology wave.
It is, and always will be, the most important criterion for stability. That’s because cashflow can’t be faked like EBITDA, earnings, pro-forma whatever, etc can be.
Many have dreams of AI hitting it big. Its too soon to know which will succeed.
Nvidia has a history of reinventing itsself as markets change. You might imagine they get hundreds of requests for better chips to do whatever. That gives them many opportunities to find the next big thing and play a leading role.
Not without risk but noone does it better than they do.
The folks in the trenches no doubt have lots of ideas.
Its up to their bosses and investors to decide which ones to pursue. A risky business as always. But often possible to test an idea without major investments.
As always home runs are wonderful but singles and doubles win more games. And some do strike out.
