Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

Month: July 2018

THE DAILY EDGE (31 July 2018):

PERSONAL INCOME AND OUTLAYS, JUNE 2018

Real disposable income growth has reaccelerated while core inflation has decelerated to +1.6% annualized in Q2.image

U.S. Pending Home Sales Rebound

The National Association of Realtors (NAR) reported that pending sales of existing homes increased 0.9% during June following two months of decline. Sales rose to an index level of 106.9 (2001=100) which remained down 2.5% y/y.  Sales were 5.4% below the peak in April of 2016. (…)

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Chinese Economy Starts to Feel Tariff Impact China’s business activities faltered in July in the first official data to reflect the impact of U.S. tariffs, adding to signs that trade tensions have started to pinch economic growth.

The official manufacturing purchasing managers’ index fell to a five-month low of 51.2 from June’s 51.5, data released by the National Bureau of Statistics showed Tuesday. July’s reading came in slightly lower than economists’ expectations.

The import subindex of the official PMI slipped to a 23-month low, while the export subindex held steady thanks to a weaker yuan, said Julian Evans-Pritchard, an economist at Capital Economics. (…)

A subindex measuring production dropped to 53.0 from 53.6, while the new orders index fell to 52.3 from 53.2. (…)

The new imports and exports orders are in contraction mode at 49.6 and 49.8 respectively.

The Non-manufacturing PMI dropped from 55.0 to 54.0. Domestic slowdown on top of declining exports.

This next item is worrisome:

The headline FTCR China Real Estate Index fell 8.8 points month on month to 46.2 in July. This was below the average 50.7 reading of the previous 12 months but above last July’s 45.5.

Dr. Copper has not felt strong lately, must be a China syndrome:

  • The copper price has been weak in spite of declining inventories:

  • China IP is slowing:China Industrial Production
  • So is Japan:
  • And the E.U.:

Euro Area Industrial Production

  • The U.S. is the sole solid grower:

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But for how long? Important question given the link with S&P 500 revenue growth as Ed Yardeni illustrates:

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This 9.4% growth is clearly unsustainable but where is the floor?

WLI Growth since 2000

Eurozone economy records slowest growth in two years GDP expanded just 0.3% in second quarter amid fears of a trade-related slowdown
Euro area annual inflation up to 2.1%

Euro area annual inflation is expected to be 2.1% in July 2018, up from 2.0% in June, according to a flash estimate from Eurostat. Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in July (9.4%, compared with 8.0% in June), followed by food, alcohol & tobacco (2.5%, compared with 2.7% in June), services (1.4%, compared with 1.3% in June) and non-energy industrial goods (0.5%, compared with 0.4% in June).

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THE MID-TERMS

Turning out to be pretty significant on many things.

The Trump administration is considering bypassing Congress to grant a $100 billion tax cut to wealthy Americans by allowing taxpayers to account for inflation while determining capital gains tax liabilities, the New York Times reported on Monday.

The newspaper, quoting from an interview with Treasury Secretary Steven Mnuchin, said the administration could change the definition of “cost” used to calculate capital gains, allowing taxpayers to adjust the value of an asset for inflation when it is sold.

Treasury officials were not immediately available to comment on the report, which said the administration has not concluded whether it has the authority to make such a change.

“If it can’t get done through a legislation process, we will look at what tools at Treasury we have to do it on our own and we’ll consider that,” the Times quoted Mnuchin as saying. “We are studying that internally, and we are also studying the economic costs and the impact on growth.”

EARNINGS WATCH

RBC says that so far,

65% of Small Caps and 76% of Mid Caps are beating consensus on EPS, with 70% and 65% beating consensus on sales. As is the case in Large Cap, EPS beats are hitting all time highs for the Russell 2000 while sales beats have stalled. Financials, Industrials, and Tech have dominated the Small/Mid Cap results so far.

In Europe, Thomson Reuters reports that

18Q2 earnings season is underway with 84 companies reporting last week ending July 27, 2018. Of the companies that reported this week, 44% beat EPS expectations and 37% missed EPS expectations.  In addition, 57% beat Revenue expectations and 40% missed Revenue expectations.

Meanwhile, in the USA:

The company now expects an adjusted per-share profit of $5.70 to $6, down from its prior forecast of $6.55 to $6.70. It said Monday that tariffs have hurt domestic and export prices on chicken and pork. Tyson also said domestic chicken demand has weakened because of an abundance of “relatively lower-priced” beef and pork.

“The combination of changing global trade policies here and abroad, and the uncertainty of any resolution, have created a challenging market environment of increased volatility, lower prices and oversupply of protein,” Chief Executive Tom Hayes said in prepared remarks. (…)

The maker of Jimmy Dean, Hillshire Farms and Ball Park products also warned that its sales in its current quarter have gotten off to a “slower than expected” start. (…)

Shares in Tyson fell 7.6% to $58.72, their sixth down day over the past seven trading sessions. Tyson’s stock price has fallen 28% this year.

Tyson’s announcement marks a change in direction from comments Mr. Hayes made in May, when he said the trade issues between the U.S. and China haven’t affected the company’s business. (…)

(…) Even so, shares in Caterpillar fell 2% to $139.75—a 5% swing from their pre-open level—as the company said it expects to pay more for materials as a result of tariffs this year. Caterpillar also flagged supply-chain constraints that occurred as it boosted production.

Caterpillar, based in Deerfield, Ill., said tariffs the Trump administration has imposed on some metal and component imports would increase its material costs by $100 million to $200 million over the rest of 2018. (…)

Caterpillar said that trade tensions haven’t affected its business in China.

Caterpillar said price increases that went into effect this month would help offset the higher costs. Other manufacturers have also said they are passing on higher costs by raising prices. (…)

In another sign of increased production levels, Caterpillar added 6,800 full-time workers in the second quarter [+7.2%!] compared with a year earlier, reaching a total of 101,600 employees at the end of June. (…)

SENTIMENT WATCH

The NYSE FANG+ Index—which comprises Facebook Inc., FB -2.19% Amazon.com Inc.,AMZN -2.09% Netflix Inc. and Google parent Alphabet Inc., GOOGL -1.82% as well as AppleInc., AAPL -0.56% Twitter Inc., TWTR -8.03% Tesla Inc., TSLA -2.36% Nvidia Corp.NVDA -3.13% and Chinese behemoths Alibaba Group Holding BABA -2.43% Ltd. and BaiduInc. BIDU -1.45% —slipped Monday as investors pulled back broadly from technology shares.

The index fell 2.8% Monday, slipping 10% below its June 20 record and entering correction territory for the second time this year—something that last happened three years ago, according to the WSJ Market Data Group. (…)

Goldman analysts, in a note, said that market breadth — a ratio that looks at how many stocks are rising compared with the number in a downtrend, as measured by the percentage below their 52-week high — wasn’t so narrow that investors should be concerned. While declines in breadth “have typically signaled large drawdowns” in the past, as investors lose confidence “in the increasingly expensive handful of crowded market leaders,” the current level isn’t at that kind of extreme. (…)

“Unlike past episodes of narrow market breadth, the earnings environment today appears healthy and broad-based.” (…)

While the top 10 S&P 500 companies have contributed 65% of the index’s year-to-date move, that same group only accounts for 20% of the index’s earnings. This is “roughly the same as in each of the last few years, and slightly below the 30-year average of 21%,” Goldman wrote. (…)

“Elevated valuations discourage investors in many sectors. However, the momentum and strong secular growth profiles of the largest market leaders have continued to attract investor assets,” they said. “While government policy remains a key risk, the pricing power of many tech firms should help insulate them from the margin risks posed by escalating trade conflict.”

Now, these next 2 items could make you sweat a little more:

According to the Stock Trader’s Almanac, August ranks as one of the weakest months of the year for major indexes, with steeper losses in midterm years, as the current one is.

(…) of the past 67 years, 36 have featured a positive August for the S&P 500. (…) Over the past 45 years, the Nasdaq has seen 25 positive Augusts and 21 negative ones. (…)

According to LPL Financial, August is the worst month of the year for the S&P 500 when one looks at the years when it is negative. If the index is negative for the month, it falls an average of 4.5%, the steepest drop of any month. In positive Augusts, it rises 3.2%, a gain that is roughly in the middle of the pack. (…)

MarketWatch also has this neat chart on “sell in May and Go Away”:

(…) “We must admit, the market sent some misleading signals over the last few weeks by limiting the damage to the broad indices when Netflix and Facebook missed. We believe this simply led to an even greater false sense of security in the market,” wrote the team of Morgan Stanley analysts, led by Michael Wilson, the firm’s chief U.S. equity strategist. Both Facebook and Netflix’s shares fell into bear-market territory on Monday, defined as a drop of at least 20% from a recent peak. (…)

Another interesting chart comes from John Hussman’s latest Market Comment, Extrapolating Growth:

(…) Investors should, but rarely do, anticipate the enormous growth deceleration that occurs once tiny companies in emerging industries become behemoths in mature industries. You can’t just look backward and extrapolate. In the coming years, investors should expect the revenue growth of the FAANG group to deteriorate toward a nominal growth rate of less than 10%, and gradually toward 4%.

The chart below shows the general process at work, reflecting the relationship between market saturation and subsequent revenue growth. Here, the points are plotted based on revenue at each date as a percentage of 2018 trailing 12-month revenues. The vertical axis shows annual revenue growth over the subsequent 2-year period. Clearly, Apple is the furthest along in terms of saturation.

Remember that the latest point on this chart for each company is two years ago. For all of these companies, current revenues represent the far right of the graph, and the corresponding value for subsequent growth will be available 2 years from now. Again, my expectation is that most of those growth rates will slow toward 10%, and gradually toward about 4% (which reflects the structural growth rate that can be expected for U.S. nominal GDP when one assumes a moderate pickup in productivity, inflation slightly over 2%, baked-in-the-cake demographics like population growth, and limited scope for a further cyclical decline in the rate of unemployment).

FAANG saturation and subsequent revenue growth

(…) growth rates are always a declining function of market penetration. Most strikingly, the growth rates begin to come down hard even at the point that a company hits 20-30% market penetration. Network effects accelerate the early growth, but also cause growth to hit the wall more abruptly. Replacement helps to accelerate the early growth rates too, but ultimately has much more effect on the sustainable level of sales than it has on long-term growth. In fact, if the replacement rate (the percentage of existing users that replace their product each year) is less than the adoption rate (the percentage of untapped prospects that are converted to new users), it’s very hard to keep the growth rate of sales from falling below the rate of economic growth. (…)

Several years ago, I observed “We’ve seen very rapid adoption rates, very high replacement, and very strong network effects in Apple’s products. All of this is an extraordinary achievement that reflects Steve Jobs’ genius. I suspect, however, that investors observe the rapid adoption and very high recent replacement rate of three very popular but semi-durable products, and don’t recognize how improbable it is to maintain these dynamics indefinitely. Despite great near-term prospects, within a small number of years, Apple will have to maintain an extraordinarily high rate of new adoption if replacement rates wane, simply to avoid becoming a no-growth company. That’s not a criticism of Apple, it’s just a standard feature of growth companies as their market share expands. It’s something that Cisco and Microsoft and every growth juggernaut encounters. Apple is now valued at 4% of U.S. GDP, but then, Cisco and Microsoft were each valued at 6% of GDP at the 2000 bubble peak. Not that things worked out well for investors who paid those valuations.”

Presently, Apple is valued at 5.1% of GDP, Amazon at 4.8%, Alphabet (Google) at 4.6%, Facebook at 3.3%, and Netflix at 0.8% of GDP. That’s a total market capitalization of nearly 20% of GDP across 5 stocks. It’s worth remembering that historically, the pre-bubble norm for market capitalization to GDP, adding up every nonfinancial company in the stock market, was only about 60%. At secular lows like 1974 and 1982, the ratio fell to 30% of GDP – for the entire market. (…)

FYI
  • The Model 3 social media sentiment has soured (The Daily Shot)

Source: Goldman Sachs, @bySamRo

THE DAILY EDGE (30 July 2018): Odds of Trade Wars decline

Message From Flawed GDP Report: Growth Will Be Just Fine The economy did fine in the second quarter. The question for investors is how it will do for the rest of the year. Even though it might not be off to the races, it is growing solidly and set to retain that momentum throughout 2018.

(…) Stripping out trade and inventory effects, final sales to domestic purchasers grew at a 3.9% annual rate, driven by a 4% increase in consumer spending. But these measures of underlying demand also might be slightly misleading as they reflect a catch-up from the first quarter. Final demand grew by 1.9% and consumer spending grew at an annual rate of just 0.5% in the first quarter, in part due to issues like harsh winter weather.

For now, the best thing to do is to look at the underlying trend in final demand. It is up 2.9% from a year earlier, which is better than the 2.4% this time last year, as well as the 2.3% rate it has averaged since the recession ended in 2009. (…)

Hmmm…let’s not get carried away too much on underlying trends. With a huge tax cut and a big budget boost, the U.S. GDP managed to show a 2.8% YoY rate of growth in Q2, which includes an unsustainable jump in exports.

The reality is that employment growth is a slow 1.5% when the unemployment rate is at 4%, near a 50-year low. So unless productivity picks up miraculously, the U.S. economy seems destined for 2.0-2.5% growth, its average since 2012.

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There is a more ominous trends in need of careful watch:

U.S. Companies Target Wages, Efficiency Hacks as Hiring Toughens

(…) many corporations describe labor tightness and wage pressures as manageable in their conference calls on earnings.

Some are paying more but passing on costs to customers, while many are making up for wage hikes with efficiency improvements. Others report that they’re having no trouble at all with hiring. Only a handful say that things have gotten so tight that they’re struggling to boost their labor pool and missing out on business as a result. It paints a picture of a job market that’s warm but not boiling, one where employers largely still have the power to find talent when they need it. (…)

We are seeing more and more of these costs pass-through. Amid all the fuss about the Q2 GDP numbers, there has been little coverage of these inflation trends:

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  • The GDP deflator reached +2.5% YoY in Q2 (+3.0% annual rate) from +2.0% in Q1 and +1.7% in Q217.
  • The PCE deflator also inflated quite a bit reaching +2.2% in Q2 from +1.9% in Q1 and +1.6% in Q217.
  • Core inflation was +1.9% in Q2, up from +1.7% in Q1 and +1.6% in Q217.

These are not friendly trends and the FOMC will surely notice.

Nominal Personal Disposable Income was up 5.0% YoY in Q2 but its annualized rate of growth slipped to +4.4%. Real spending power is increasingly limited by accelerating inflation. From the consumer standpoint, the U.S. economy is not showing any acceleration from its +2.5% cruising rate since 2016.

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The Fed has succeeded on its inflation target but is now faced with an economy boosted by tax cuts and government spending right when resource utilization is very stretched. Layer import tariffs on top of that and you may well be getting a runaway train before you even see it.

  • Coca-Cola on Wednesday announced that it would raise prices on carbonated drinks, and CEO James Quincey has placed part of the blame on President Donald Trump’s trade war. (…) Quincey blamed “broad-based” cost increases for an impending price hike. (…) “That’s the freight, that’s the metals, the steel, the aluminum going up, the labor going up. So there is cost pressure, we’re having to pass that through into the marketplace.”
  • (…) shoppers in the market for the Chevrolet Silverado and GMC Sierra — coming online in August — may see higher prices, the company [GM] said.
  • “Material and freight costs have exceeded our forecast for the year, due largely to inflation in U.S. steel prices and a tight market for logistics,” said [Deere] chief financial officer Raj Kalathur. In response to those increases, the Moline, Ill.-based company said it was carrying out structural cost cuts and price increases.
  • “We’ve had to go to the market a bit more frequently and a bit more aggressively with some price increases as of late,” said Michael Happe, chief executive of recreational-vehicle manufacturer Winnebago Industries Inc.
  • Polaris Industries Inc. is raising prices on its boats, motorcycles, snowmobiles and other recreational vehicles to cover $15 million of the $40 million in tariff-related costs the Minnesota-based manufacturer expects to pay for foreign-made steel, aluminum and components from China this year. (…) Chief Executive Scott Wine said Polaris would accelerate plans to move production of motorcycles that is sells in Europe to Poland from Iowa to avoid rising European Union tariffs on U.S. motorcycles.
  • Executives at Sam Adams brewer Boston Beer Co. also said they would raise prices up to 2% in the second half of the year. “At some point, increased commodity costs have to be passed through to some extent,” Chief Executive Jim Koch said in an earnings call Thursday.
  • Lennox International Inc., has raised prices to cover higher costs and plans a second round to cover the additional $50 million the Richardson, Texas, company expects to spend on steel this year. Lennox said it also expects to pay $20 million more for freight and $5 million for tariffs on components such as motors from China this year. “We haven’t seen any pushback on the price,” Lennox CEO Todd Bluedorn said on an investor call last week. “We’ve seen all our competitors announce similar price increases.”
  • Office furniture maker Steelcase Inc. also raised prices in June for the second time in four months as steel prices climbed. “It’s been a long time, if ever, that we’ve done two price increases back to back as quickly as we did,” Chief Executive James P. Keane said.
Trump suggests economy could grow at 8 or 9 percent if he cuts the trade deficit

President Donald Trump told talk show host Sean Hannity that he could imagine the economy growing at eight or nine percent on Friday (…) The president said that the gains could come from cutting the nation’s trade deficit “in half.”

Nerd smile There is a reasonably short but enlightening piece on the relationship between trade deficits and GDP growth that President Trump and others should read. Dan Griswold’s testimony to the U.S. Congress’ Subcommittee on International Economic Policy and Trade, Committee on International Relations dates from 20 years ago but it is still very contemporary:

FAKE DEAL

President Trump claimed victory after making “a deal” with EU President Juncker last week. But

  1. The EU President has virtually no authority on individual countries.
  2. None whatsoever on private companies which could be interested in soybeans, now, or in LNG years from now.
  3. Details were few and vague.
  4. They agreed to begin discussions…
  5. No set schedule.

Pointing up However, what could turn out to be very significant is that, according to several media accounts,

the U.S. and the EU, as part of their agreement, agreed to try to use the World Trade Organization to deal with issues of intellectual-property theft, government pressure on companies to transfer technology to local partners, and excess capacity in many industries—the heart of the U.S. concerns about China. That would be a big change in tactics for the U.S., which has relied mainly on unilateral actions—including tariffs on $34 billion in Chinese goods—to get Beijing to change course.

If the U.S. agreed with the EU to use the WTO, it will be difficult to justify not using it with China. In which case, import tariffs are not justified.

Fingers crossed In all, it seems to me that Trump is backing off, just in time for the mid-terms, and odds of all out tariff wars have suddenly diminished.

The Chinese government’s top diplomat, State Councillor Wang Yi, had this to say last this weekend:

“The responsibility for the trade imbalance between China and the United States lies not with China,” Wang said, citing the global role of the U.S. dollar, low U.S. savings rates, huge levels of U.S. consumption and U.S. restrictions on high tech exports as amongst the reasons.

The United States has benefited a great deal from trade with China, getting lots of cheap goods, which is good for U.S. consumers, and U.S. companies benefit hugely in China too, he added. (…)

Wang said the current tensions were initiated by the United States, and the two should resolve their issues under the World Trade Organisation framework, rather than in accordance with U.S. law.

“China does not want to fight a trade war, but in the face of this aggressive attitude from the United States and violation of rights, we cannot but and must take countermeasures,” he said

China and the United States have had talks and had reached a consensus, but the United States did not meet China half way, he noted.

“China’s door to dialogue and negotiations is always open, but dialogue needs to be based on equality and mutual respect and on rules,” Wang said. “Any unilateral threats and pressure will only have the opposite effect.

This is the GOP’s message to Trump these days:

The Bottom Line in Republicans’ 42 Open Seats

With 102 days to go, Democrats remain substantial favorites for House control. A big reason: Republicans are defending 42 open or vacant seats, a record since at least 1930. The retirements of Speaker Paul Ryan (WI-01), as well as powerful committee chairs like Reps. Ed Royce (CA-39) and Rodney Frelinghuysen (NJ-11) and popular moderates like Reps. Ileana Ros-Lehtinen (FL-27) and Frank LoBiondo (NJ-02), have given Democrats stellar pickup opportunities.

Of Republicans’ 42 incumbent-less seats, eight are in districts that voted for Hillary Clinton in 2016, and an additional 13 are in districts where President Trump received less than 55 percent. History is working against the GOP in many of those seats: we found that since 1992, in situations when a president’s party was stuck defending an open seat two years after the president failed to carry it, that party has batted zero for 23 keeping it in their column. (…)

The most immediate open seat test is the August 7 special election in Ohio’s 12th CD, north of Columbus (read our full analysis from last Friday). It’s in the Toss Up column, and if Democrat Danny O’Connor defeats Republican Troy Balderson in a seat Trump carried by 11 points in 2016 (R+7 PVI), it would be another piece of evidence that Democrats are pushing the House battleground deeper into Trump territory. (…)

EARNINGS WATCH

More than half way with 265 companies having reported. Based on Thomson Reuters data:

  • 82.3% reported earnings above analyst expectations and 12.5% below. In a typical quarter (since 1994), 64% of companies beat estimates and 21% miss estimates.
    Over the past four quarters, 75% of companies beat the estimates and 18% missed estimates.
  • The earnings surprise is +5.0%, which is above the 3.2% long-term (since 1994) average surprise factor, and below the 5.3% surprise factor recorded over the past
    four quarters.
  • 72.3% reported revenues above analyst expectations and 27.7% reported revenues below and the surprise factor is +1.1%.
  • The estimated earnings growth rate for the S&P 500 for Q2 2017 is 22.6%. If the energy sector is excluded, the growth rate declines to 19.5%.
  • Revenues: +8.7%, +7.5% Ex-Energy.
  • The estimated earnings growth rate for the S&P 500 for Q3 2018 is 22.9%. If the energy sector is excluded, the growth rate declines to 19.8%.

Corporate officers are not sweating too much on tariffs so far according to Factset’s compilations:

Overall, 43 of the 70 companies (61%) that have discussed tariffs on their earnings calls saw little to no impact on their earnings in the second quarter or anticipated little to no impact in future quarters from tariffs. On the other hand, 19 companies discussed at least a “modest” negative impact (or potential negative impact in future quarters) from tariffs on their businesses. In addition, 17 companies also discussed the uncertainty of the implementation or impact of future tariffs.

As well, Factset continues

At this point in time, 43 companies in the index have issued EPS guidance for Q3 2018. Of these 43 companies, 29 have issued negative EPS guidance and 14 has issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 67% (29 out of 43), which is below the 5-year average of 72%.

Interestingly, fewer companies are issuing guidance this year. At the same time last year, 54 companies had issued guidance for Q3’17, 28 negative and 26 positive. Is there something to read from that?

Sell-side analysts remain upbeat but that’s part of their required character. Earnings revisions are very important given the challenging environment: so far, so good:

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I did the math for you: All non-S&P 500 companies: 58% Up Revisions last week from 50% the previous week.

By sector, only Consumer Staples and Energy got less than 50% Up Revisions last week:

Maybe it is taking time for revisions on some of the recent big misses like FB and TWTT to filter through. To be monitored…

Trailing EPS are now $147.64 which I estimate would be $152.00 pro forma the tax reform. This would rise to $158.50 after Q3 and $161.44 after Q4 if current estimates are met.

The Rule of 20 P/E is now 20.9 on pro forma trailing EPS.

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U.S. Exporters Drive Earnings Growth Despite Trade Worries

Firms with large overseas businesses have reported 12% growth in revenue so far for the second quarter, according to Credit Suisse. That’s roughly double the rate of growth for domestic-focused firms.

Exporters’ profit growth for the second quarter is also beating Wall Street expectations. Earnings have jumped 25% from a year earlier, above 19% growth for domestic firms. (…)

TECHNICALS WATCH

Lowry’s Research has remained unequivocally bullish this year. It still is but unequivocally no more: it noticed a first, though small crack in small cap stats last week. “To be significant, this weakness should be part of a progression into mid caps and finally into large cap stocks – a progression that has not yet begun.”

The iShares Russell 2000 Index ETF (IWM) is up 9.0% so far this year while the S&P 500 is up 6.6% and the equal weighted S&P 500 Index is up 4.6%.

(The Blog of HORAN Capital Advisors)

Meanwhile, the S&P 500 is diverging from the ECRI WLI, something that rarely happens and often (not always, e.g. 2017) carries consequences.

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In spite of an apparently strong economy, forecasters are not satisfied:

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SENTIMENT WATCH

Jesse Felder:

Why It Might Be A Good Time To Revisit Ray Dalio’s 1937 Analog

As I have suggested in the past, price analogs are not very valuable on their own but when the fundamentals also parallel closely they become far more interesting.

I will add these fundamentals to Dalio’s:

  • In March 1937, equities were up 115% from their March 1935 low but 280% from their June 1932 low.
  • The trailing P/E was 16.3 (now 18.5) but the Rule of 20 P/E was exactly 20.0 (20.9). (BTW, the Shiller P/E was 20.1).
  • Profits were up 41% YoY, and rose another 10% during the following 6 months.
  • Inflation was accelerating, from negative in the spring 1936 to 3.7% in March 1937 on its way to 4.3% in October.
  • 10Y Treasury yielded 2.7% in March 1937, negative 1% in real terms.

One year later, the S&P 500 had lost 45%.