Stocks Have "Considerably More Downside"
Submitted by QTR's Fringe Finance
Friend of Fringe Finance Mark B. Spiegel of Stanphyl Capital released his most recent investor letter last week, with his updated take on the market’s valuation and Tesla.
Mark is a recurring guest on my podcast (and will be coming back on again soon hopefully) and definitely one of Wall Street’s iconoclasts. I read every letter he publishes and only recently thought it would be a great idea to share them with my readers.
Like many of my friends/guests, he’s the type of voice that gets little coverage in the mainstream media, which, in my opinion, makes him someone worth listening to twice as closely.
Mark was kind enough to allow me to share his thoughts - and some of his portfolio - from his November 2022 investor letter.
Mark’s Thoughts On Macro
Despite the stock market’s recent rally (we were up a hell of a lot more this month before today!) we continue to carry a large SPY short position, as I believe the major indexes—although not all individual stocks—have considerably more downside to go, the inevitable hangover from the biggest asset bubble in U.S. history.
For far too long, the Fed printed $120 billion a month and held short-term rates at zero while the government concurrently ran a record fiscal deficit. Now, thanks to the massive inflationary hangover from those idiotic policies (November’s “not as bad as feared” data not withstanding), the Fed is reducing its balance sheet and raising interest rates, and although the current rate of high-7% year over-year inflation is unsustainable, the eventual end of China’s “zero-Covid policy” and its November reversal on bailing out its real estate industry combined with the end of Biden’s SPR drawdowns will give commodity prices a brand new tailwind in 2023.
Longer term, the war on fossil fuel, expensive “onshoring,” fewer available workers and perpetual government budget deficits make a new baseline of around 4% inflation (double the Fed’s 2% target) likely.
Even a 2023 Fed interest rate “pause” at 4.75% (and remember, a “pause” is not a “pivot”!) would, combined with $90 billion a month in ongoing QT, make current stock market valuations unsustainable, as stocks are still expensive.
[QTR’s note: This echos Kenny Polcari’s sentiments & my sentiments of recent.]
According to Standard & Poor’s, with 97% of companies having reported, Q3 S&P 500 GAAP earnings came in at around $44.79, which annualizes to $179.16. (And these were the sixth highest quarterly earnings in history; i.e., they were not “trough.”)
A 16x multiple on that—generous for a rising rate, recessionary (or even just slow-growth) environment—would bring the S&P 500 down to 2867 vs. November’s close of 4080.11. And remember, just as in bull markets, PE multiples usually overshoot to the upside, in bear markets they often overshoot to the downside. A bottom formed at a considerably lower multiple is not unfathomable.
Additionally, we can see from CurrentMarketValuation.com that the U.S. stock market’s valuation as a percentage of GDP (the so-called “Buffett Indicator”) is still very high, and thus valuations have a long way to go before reaching “normalcy”:
Regarding sentiment, we can see from Ed Yardeni that in the Investors Intelligence poll the highest the “bear percentage” got so far in the current market was only...(READ THIS FULL LETTER HERE).