Don't Fight the Fed

Stocks A to Z
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I keep nibbling at companies I find to be reasonably to cheaply priced, but I’ve been resisting the temptation to go big because of this old “don’t fight the fed” aphorism. The Fed laid out a pretty aggressive map of rate increases going forward into next year. Unless inflation suddenly evaporates, we may see the Fed continue to surprise on the high side with aggressive rate increases. Until the inflation tea leaves start to form a clear pattern I will remain cautious. It looks like the S&P 500 is about to test its June lows, and even there the S&P was only down 23% from its ATH. Most bear markets see a 40-60% drop before bottoming. I suspect we will see lows in the 2000-3000 range before this is over. Should that happen, there may be bargains aplenty. In order to avoid the inevitable failure to time the market bottom, I will continue to nibble around the edges as good deals become better ones.

PP

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Did somebody say... Bear?

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It looks like the S&P 500 is about to test its June lows, and even there the S&P was only down 23% from its ATH. Most bear markets see a 40-60% drop before bottoming.

Dollar cost average. Get rich slowly. Sleep well. Enjoy life.

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What time frame are you using to get an average decline of 40-60%? I have a lower mean and median.

Inflation adjusted, we’re shy but aren’t that far off from the average bear.

I like my medium term returns from here in my chosen equities. Currently very heavy in brk and Google.

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Why GOOGLE?

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Most bear markets see a 40-60% drop before bottoming.

Where are you getting this number? Unless you are looking at severe bear markets, most garden variety bear markets are not that severe. This is a bear-market induced, created, nurtured by the FED. We can get there, but at this time I don’t see anything that will take the SPY to $290 to $200.

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Most bear markets see a 40-60% drop before bottoming. I suspect we will see lows in the 2000-3000 range before this is over.

1.) I looked at that too a while ago and came to 35% for the most recent ones, 2000 and 2008 (I don’t count 2020), which would result in S&P of 3200.

(As personal consequence I will start buying supposed “bargains” at 3500, but won’t be surprised should we go even below said 3200 (Unfortunately I started buying them already earlier this year, but then stopped and sold most again))

2.) PP, if you suspect 2000-3000: Why then do you regularly mention various “bargains” on the Falling Knifes board? Do you expect them to be able to evade such slaughter?

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What time frame are you using to get an average decline of 40-60%? I have a lower mean and median.

Since 2000. The last three bear markets have been short and sharp with peak to trough declines of 49% 57% and 33%. The current bear has seen a 23% decline. Prior to the COVID crash, the last two bears in the 21st century lasted 31 and 17 months. We’re nine months into this decline. One other concern I have is that this asset bubble was different from all the others in that it hit every asset class, not just stocks. Bonds, real estate, art, NFTs, … everything was overvalued. I’m not sure you can unwind that kind of bubble in the gestation period of a human. While some prices are looking attractive – Google at under 20 times eps or BRK at 1.17 times book – nothing looks ridiculously cheap right now without also being covered in warts (I find BABA, FDX, INTC, PKG, META, TROW and some others to be very attractively priced right now, but … warts). At the depths of a bear you should be able to pick up values at mind boggling cheap prices like Google at $50 and BRKB at .9 bv. One of the biggest mistakes I made in 2020 was not picking up Google when it sold for just over $1000/sh (about 17 times eps). That was a stupid deal on sale. While Google looks as cheap today at 18 times eps, I don’t trust the margins and prefer to discount to 22.5% net margins, which would put the PE closer to 21 times earnings.

Bottom line, the Fed isn’t done raising and, I fear, the markets are not done falling. If the next inflation reading is hotter than expected, watch out below.

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PP, if you suspect 2000-3000: Why then do you regularly mention various “bargains” on the Falling Knifes board? Do you expect them to be able to evade such slaughter?

No, I expect to be wrong about calling the bottom and therefore left holding a bag of useless cash.

The companies I’m finding attractive, like FDX, INTC, BABA, and others, tend to be covered in warts and deeply disliked at the moment. I expect them to possibly fall further but feel that their 5-10 prospects look good. FedEx pooped the bed after I took a nibble at $200. I’m buying more in the $150-60 range. Does anyone really think they will be making LESS money in five to ten years time? Hell, if they are only averaging $15/sh in earnings in 2027 ($5 less than 2021 eps) it would only take a reversion to an average PE ratio for the investment to do well. They are currently trading at a PE of under 8. Come on, how much further can they fall? Of course I invested in Chicago Bridge and Iron, so I clearly don’t know what I’m talking about.

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FedEx pooped the bed

This is probably a lie

CEO making excuses for an EXPENSE problem

Comps not seeing it. SEE DB and Bernstein notes.

Friend is manager there. They are not seeing it YET

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FDX:

https://www.cnbc.com/2022/09/22/fedex-fdx-reports-q1-earning…

FedEx hikes package rates, details cost cutting as demand weakens globally

A person walks by a FedEx van in New York City, May 9, 2022.
FedEx on Thursday announced rate hikes and detailed its cost-cutting efforts after the shipping giant warned last week that its fiscal first quarter results were hit by weakening global demand.

Shares of FedEx were up 2%.

Last week, the company’s stock sank after it posted preliminary revenue and earnings that fell short of Wall Street expectations. CEO Raj Subramaniam cited a tough macroeconomic environment, and said he expects the economy to enter a “worldwide recession.” The company withdrew its guidance for the year and said it would slash costs.

In issuing its full first quarter results Thursday, the company said that its Express, Ground and Home Delivery rates will increase by an average of 6.9%. Its FedEx Freight rates will increase by an average of 6.9%-7.9%, the company said.

It also said it believes it will save between $1.5 billion and $1.7 billion by parking planes and reducing flights. The closure of certain locations, the suspension of some Sunday operations, and other expense actions will save FedEx Ground between $350 million and $500 million, according to the company.

FedEx said it will save an additional $350 million to $500 million by reducing vendor use, deferring projects and closing office locations.

For its fiscal 2023, the company expects total cost savings of $2.2 billion to $2.27 billion.

Despite its bleak warning last week, FedEx stood by its 2025 projections set out in June. The company is forecasting annual revenue growth of between 4% and 6% and earnings per share growth of between 14% and 19%.

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The companies I’m finding attractive, like FDX, INTC, BABA,

In my humble opinion these are the companies that one should avoid in a bear market. All 3 have issues that goes beyond the bear market.

Stick with secular growth companies that are profitable.

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If we’re using an n of 3, I don’t think we can really talk about trends or averages, or typical “bear markets”. Leaving aside the unusual severity of the Great Recession and the novelty of 2020.

Maybe we’ll see a 40-60% drawdown, and Brk will revisit a 0.9 book. Who knows.

But if we’re talking about trends and averages, I’d say we’re still about 10x more likely to see 1.5+ book before we see 0.9 book. Nothing magic happened when the market hit -20%.

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Most bear markets see a 40-60% drop before bottoming.

This is not true.

Ed Yardeni provides a useful set of stats that are worth browsing through.

Of those shown here.

14 are in the range -20% to -40%

6 are in the range -40% to -60%

1 is greater than -60%

I did not include the current bear market.

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I kind of wonder whether it is even worth being in the market right now. With the FED signaling more and more increases, the market is unlikely to rise. Might as well sit out and wait until there is a chance the increases have stopped.

If you are in your 20s/30s sure go ahead and buy or stay in the market but for those nearing or in retirement, I have my doubts. Clearly anyone ignoring the FED comments and staying in the bond market have taken large losses on something that some think are safer investments (BND is down 15% YTD).

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IMHO, it absolutely isn’t worth being in the market just now. But at 10-20% lower, it probably is worth it on balance. Depends what you mean by ‘the market’. SP500 tracker? No thanks. Cherry picked value? Why not.

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Sitting tight here as I have never danced in and out of markets and not smart enough to optimize timing. I imagine BRK price will likely climb before the trough of the recession so I will just ride it out and add a bit of BRK while it is on sale/good value. Appears WEB may also be buying recently as A volume has increased. I understand it may be a long few months as inflation is anything but transitory now.

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WEBspired:

Long run, it won’t make much difference I think. Especially if someone is holding BRK rather than the SP500. However, I’ve noticed BRK notoriously does not seem to ‘rally before the trough of recession’, in 2020 it took 1 year before it began its ascent, and in 2008, it took several years, even from an extreme discount. I know because I held it then til I ended up doubting myself… and sold :frowning:

From memory - I think Ben Felix [A] noted (with evidence) that small caps tend to rally hard first, then the broad market, then large cap value last of all, when coming out of a crash. Can’t recall which video it was though probably the one on small cap value.

[A] really interesting pro-value investing guy you can find on youtube - the only ‘fin-tube’ that’s worth watching really

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