David Sylvain

Posts Tagged 'dollz boutique'

Stock Market Analysis: 03/28/10

If the treasury bond rate already includes a default spread, the day of the downgrade will be ugly for the bond market, with high volatility and big losses for impulsive traders, but I would not be surprised to see treasury bond rates return to pre-downgrade levels within a few weeks. At 5.55%, I am at the high end of the range, not the low end, and that backs up the case that given treasury rates, earnings and cash flows today, trendy boutique prices are not unduly high. Unlike PE ratios that focus just on stock prices or treasury bond rates that focus just on the alternative to stocks, the implied equity risk premium is a composite number that is a function of how stocks are priced, given cash flows and expected growth in earnings, as well as treasury bond rates. There are two uses for this number. One of two things will happen: you will either get your requested number of shares or you will not, and ironically, it is the former that should worry you.


Proponents then complete the story using one of two follow up arguments. If you are convinced by one of the arguments above that stocks are over priced and choose to sell, you face a question of where to invest that cash. 4. Buybacks cut across sectors, size classes and growth categories, but the biggest cash returners are larger, more mature companies. Conspiracy theories are always difficult to confront, but at the heart of this one is the belief that central banks set interest rates, not just influence them at the margin. In the graph below, I graph the PE ratio for the S&P 500 going back to 1969, in conjunction with two alternative estimates, one of which divides the index level by the average earnings over the prior ten years (to normalize earnings across cycles) and the other of which divides the index level by the inflation-adjusted earnings over the prior ten years. In short, it accepts the argument that stocks should increase as earnings go up, and that looking at the multiple of earnings that stocks trade at is a better indicator of market timing. In a version of the glass half-empty argument, there are some who argue that while US stock market indices have been up strongly over the last decade, the gains have not been evenly spread.


Yes, but when and by how much is not just debatable, but the answers could have a very large impact on anyone who decides to cash out prematurely. To those who would look to real estate, a reality check is that securitization of real estate has made its behavior much closer to financial markets than has been historically true, as can be seen when you graph capitalization rates (a measure of required return for real estate equity) against equity and bond rates. To answer that question, I will fall back on a simple measure of what I call an intrinsic risk free rate, constructed by adding the inflation rate to the real growth rate, drawing on the belief that interest rates should reflect expected inflation (rising with inflation) and real interest rates (related directly to real growth). The end game in this story is that central banks eventually will be forced to face reality, interest rates will rise to normal levels and stock prices will collapse.


As you can see, the last decade has seen a phenomenal surge in the market capitalizations of the FAANG stocks, with the $3.15 trillion increase in their market capitalizations alone explaining more than one-sixth of the increase in market capitalization of the S&P 500. In the eyes of pessimists, that gives rise to two concerns, one relating to the past and one to the future. The stock market futures cannot go any lower in pre market, but it can at the open. The real fireworks will happen if you can get a close over $116.40 and $120. It is this trend that has drawn the attention of regulators and governments, and it is possible, maybe even likely, that we will see anti-trust laws rewritten to restrain these companies from growing more or even breaking them up. Each of the companies in the FAANG has disrupted existing businesses and grabbed market share from long-standing players in these businesses, and the nature of their offerings has given them networking benefits, i.e., the capacity to use their rising market share to grow even faster, rather than slower.