so our misalignment is not that great.
Then we want to know what the heck the market is willing to pay for both sides of that coin.
With one important distinction: in the future, rather than now. There is no uncertainty in what the market is willing to pay at the moment a trade executes. What is uncertain is the value at which the reciprocal trade will occur.
Particularly for those shares where profit or loss rests entirely on some future-person buying them for more than we paid.
We can discuss TALC until we are blue in the face, but somewhere along the lines we must also contemplate the primary criteria for entering an investment: profit. And our share of the expected value. Or quite precisely, what some future other person will perceive as their share of expected value.
So gorilla or king or chimp or pebble, before purchase it is imperative to look at the environment in which expectations are being set.
JS: >>Even if I believed that the market was predictive, a more important question back to you would be: what makes today's market a better predictor than it was in January 2000?
BB: How about "third time's the charm"? ;-)
January was false. The spring was false. This could be false as well, but a lot of other indicators are in line this time around that were not in line during the previous two. Regardless, the market will eventually get it right and discount the turn in the economy.
Let us bring some objective facts onto the table to support our speculative but opposing hypotheses. Yes, I am guilty of cherry picking a source that supports my conclusion. Feel free to do the same. But we should joust with facts in so far as it is possible to do so.
There are many sources I could pick. This, for example, is a very telling recent illustration yardeni.com
It illustrates the price of expected future earnings. Or what it costs to buy a near-term future dollar.
In this case, "E" consists of forward 12 month consensus earnings estimates, which presumably include a slice of the expected recovery.
In view of this chart, the cost of money argument fails miserably to explain priciness of tech earnings. Forget that the ten year treasury yield is not substantially changed since Greenspan drove short term real rates into negative territory. If cost of money was the driving force, then both tech and non tech should trend together, not in opposition as we see. Furthermore we should see a profound inflection towards the end of '00 when the direction of the fed's bias in monetary policy shifted, which is not immediately suggested by the non-tech data.
No, there must be some other reason driving up the price of tech that is not operating in tech.
Most notable is the divergence between tech and non tech, obvious since 1999. Whatever our mysterious cause, it is driving non-tech well above but slowly back towards historical levels, while driving tech through the roof.
There is a theory that boomer driven excess investment is flowing into the market, which would account for an upwards bias across the investment spectrum. Furthermore, it is reasonable for these tech-literate and well read boomers to be following best-seller investment literature and chasing the expectation of outsized returns in tech. Which would be an entirely rational expectation given past performance. Moore (along with other luminaries of his genre) published such an observation in 1999. Back when the price of tech earnings tracked non-tech earnings quite closely.
But that was then and this is now. Today, if the price of a dollar of forward tech earnings is twice as expensive as that for non tech earnings, which is itself twice the long-term historical average (loosely speaking), then surely the conclusion changes to some degree? For if disproportionate returns stem from proportionate costs, then surely we should expect this effect to diminish as costs become similarly disproportionate.
The market is constantly reiterating the mantra of tech superiority of profit potential. But silent on the cost per dollar of profit. And yet investment returns depend upon the cross product of the two.
Thus (and for a host of other reasons), whilst it might be true, I am having a very difficult time swallowing the a lot of other indicators are in line assertion. Which sounds more like the buzz being churned out by the wall street marketing machine. Seductively believable because we want it to be true. I mean, if the buzz of recovery is true, then any tech equities we hold are due to go more up. Vindicating those who held through what could then be brushed off as "the blip and the dip". Wouldn't that be sweet?
Therein I think lies the siren song of the market's marketing machine.
So maybe the market is indeed factoring in a whopping big recovery just over the horizon. Or maybe not. Causality in complex systems and prospective future truths are difficult to discern. And we must place our bets anticipating both.
We have entered a zone where conventional wisdom does not apply. Its foundations having been violated. We are following a template based on analysis of data no more current than 1999. And yet responding to an environment where the premise has obviously shifted to an appreciable extent.
But what we can conclude is that there is only one recent historical precedent for the current price of next year's expected profit from the tech sector. And that was close to the peak of the biggest bubble of all times. Even September's "lows" were historically comparable only to top of the '98 relief rally that fed into the full force of what hindsight has revealed to be a bubble.
Perhaps right now may be the biggest buying opportunity of this century. But this picture shows that it is comparable in upside opportunity to December '99. Which I found quite profitable. But only by the luck of great timing.
I honestly can't tell the difference and doubt my ability to be so lucky again.
Something doesn't smell right to me. Of course, it may be cheese curds, or wind blown urine ;) It's hard to tell for sure, eh? But I suspect macro factors at work.
There is a growing appreciation that TALC alone, independent of share price (and more importantly, future valuation considerations), is a dangerous basis for an investment decision. And as was opined recently on this thread, it is the macro environment that dominates valuation considerations.
Based on my sense of the macro environment, I believe that we will see prices that make September's lows look expensive. Within the window where TALC alone would suggest optimum profitability.
John. |
