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Comment by mathattack | Hacker News Reader

Goldman's stock price is approximately 25% off it's 12 month high. [0] Morgan Stanley is approximately 35% off. [1] Seems like the market is properly taking in their bad news. Some parts of the market do fine, others get hit. And yes, some might be over-valued. When interest rates are low, the future cash flows of companies are discounted back at a lower rate. So if all things are equal (which they never really are, but humor me) low rates imply higher prices for both equities and bonds, and especially startups whose cash flows are mostly in the future.

[0] https://www.google.com/finance?cid=663137

[1] https://www.google.com/finance?cid=660479

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Both GS and MS (as well as other FIs) are off there highs because of all the volatility in the markets the past 6 months and worries about losses from bad energy loans. BAC, WF, Citi are all off their 12-month highs by a significant margin despite doing relatively well in Q1.

Also, this has nothing to do with discounting the cash flows, it's mostly stock buybacks that's driving all the action:

http://www.bloomberg.com/news/articles/2016-04-19/early-warn...

These go hand in hand. The debt issued to buy back the stock is cheap. :-)

I think you may have overlooked the recent DOL Proposal and it's potential impact on profit margins if it pushes forward. Good for consumers, but bad if you have to improve processes, hire people to handle them, etc.

http://blog.emoneyadvisor.com/industry-news/trending/complet...

When similar rules occurred in the UK profit margins went up. Matt Levine on Bloomberg View talks about it regularly.

> Both GS and MS (as well as other FIs) are off there highs because of all the volatility in the markets the past 6 months and worries about losses from bad energy loans.

No, they are off because they are making way less money (down 55% from a year ago!). In general volatility can be good for investment banks because it means higher trading volume. Revenue has been way down thanks to fewer deals (remember when tech companies had IPOs?) and reduced fixed income trading volume (GS revenue from fixed income trading is down 48% from a year ago).

It would be interesting if they could release metrics on trading or investing activity, the way some software companies release stats about active users.

Then you could calculate revenue per trade (or something more useful along those lines) to use as a signal in these cases.

They break out a lot of numbers, but I'm not sure how useful metrics on trading activity would be. Not all trades are equal, so something like revenue per trade is pretty meaningless.

http://www.goldmansachs.com/media-relations/press-releases/c...

The numbers are pretty brutal, especially in institutional client services.

You talk as if sophisticated investors can't read a balance sheet or don't understand buybacks.

>worries about losses from bad energy loans

GS has $11BB in oil sector exposure. MS is $4.8BB. BofA and Citi are around $20BB. JPM is around $15BB. These are fractions of total loans outstanding (MS is 5%, all the rest are much smaller). Each of these banks has more in reserves than oil loan exposure. Does that sound scary to you?

Again, relatively sophisticated investors understand these things. This is basic research. Where is your evidence?

How much exposure do they have to the financial sector ? As in 2008, we should be wary of cross-pollination.

The limits on the banks' exposures are dependent on counter party risk. GS's exposure is far more, but they insured most of it with other banks, and please allow me the simplifying assumption they insured all of it with BAC. Which means that (hypothetical scenario) if BAC goes bankrupt, suddenly GS exposure to oil goes up to, say $100BB. Suddenly the reserves are woefully insufficient. Then there's the sudden risk that GS goes belly-up, which would increase everyone else's exposure. One of them goes and ...

Additionally, oil fuels the economy. Oil is what builds the roads, what makes everything on the roads moving, what keeps planes in the air and boats going forward. Oil provides significant parts of our electricity supply, and so on and so forth. So you can look at the oil sector problem in 2 ways. Either you look at the supply side, which is producing somewhere around 2% more oil than the market is willing to buy (at any price). This is short-sighted. "If we'd all just put 2% more gas in our tanks, there wouldn't be a problem", which is not realistic.

The other oil to look at is demand-side oil. The market is simply not buying 2% of the oil, except to store it. Why not ? One explanation would be that there is a global recession and the oil price move is simply the result of that. The fact that the price crash happened with oil production/supply constant (even slightly declining) would seem to support this. For instance the baltic dry index plunged before oil started having problems, same with container shipping, and this explains quite a bit of the excess capacity in oil, and therefore, I say caused the price drop in oil. Oil crashed because manufacturing (the source of the demand for shipping) crashed a few months before the oil crash (and hasn't recovered).

In other words : you've identified the wrong problem. Oil is a symptom of the underlying situation, not a cause. You say banks are capable of withstanding one aspect of a greater problem ? Well, I'm not saying that's bad, but it's not reassuring at all (and may not be true due to financial engineering).

The GAAP P/E of the S&P is now at 24.28, that's near, if not, a record high. That's bad. It's very overvalued historically. Banking stocks are doing badly because interest rates are so low across the curve that they can't make money from the spread. But even at that, they are overvalued along with various momentum stocks like Tesla, Netflix (which we saw implode yesterday.)

no worries the FED will do SOMETHING and save us, SOMEHOW. no moral hazard to see here.

I started investing my retirement money recently. Thats about a good of a signal as any that its going to plummet.

Ah yes, the old maerF0x0 indicator. Beloved in some technical analysis circles

I've heard it many times in the back-rooms: "Wherever maerF0x0 goes, don't."

I hear the name even comes from the sound you make when you've just taken a mouthful of your breakfast toast, open the newspaper to the financial pages, and see what's happened to the value of your investments.

What a lovely mini thread! Thanks for the quick laugh :)

If you're investing for retirement into an index fond then where is the problem? Just wait until the recession is over (and perhaps buy more cheap stock). If you want to retire during a rececssion don't liquidate all your assets. Only as much as you actually need. If you believe that the market is never going to recover why invest in the first place?

it was partially a joke. But yes, dollar cost averaging across a recession will make the total portfolio look ok. I do wonder if we can always continue to make higher and higher "highs" in the market though, meaning any investments I make at the top will make $0 gain.

I do agree with you overall about indexing, however "Just wait until the recession is over" is market timing and I dont believe I (or others) can do this dependably well.

man, I do believe the market in general is over valued. but not from the PE ratio. that metric is almost in shape:

https://www.quandl.com/data/MULTPL/SP500_PE_RATIO_MONTH-S-P-...

check how high it was in the 2000 and 2008, we're aren't even close

Those gigantic spikes represent plunges in earnings, not spikes in share prices... If you look right before the spikes, you'll see PE ratios in the mid- to high-twenties.

If you'll look at your chart, those peaks in ~2002 & ~2009 were market bottoms, earnings had already dropped precipitously; and they were also black swan events. Historically from a F P/E and P/E ratio, the market is overvalued, even without a black swan. Also when you look at the debt market right now, it does not look healthy at all. That's usually a sign that something is brewing, usually a recession. However, stocks can continue higher, blow off tops are common place in the last phases of a bull market.

My fear is that the central banks are pumping so much liquidity into the market that they are driving up equities and pushing people out of safer assets into things like high yield bonds and momentum stocks. If we do have a recession, the pain could be worse than usual (for stocks) for the mere fact that the debt market could have liquidity problems when tons of funds begin to pull their money out at once from HY.

Not to mention all of the corporate buybacks that companies are doing by leveraging, because cash is too expensive to bring back overseas.

You can still invest in solid companies, but companies like Tesla, Netflix, anything with a super high P/E is going to be taken out back and shot (that doesn't mean the companies will go out of business, only that their stocks are much like Amazon in the 2000s.)

> companies like Tesla, Netflix, anything with a super high P/E is going to be taken out back and shot

Not that I disagree with you, but I believe a contrarian viewpoint would be something along the lines of "We are currently in the midst of an economic revolution as increasingly large swathes of activity are digitized and lingering mechanical/human processes are computerized. Companies likely to be successful in this new economy are unlikely to be the same ones which were successful in the old."

(To which the obvious rebuttal is probably "People are always saying things are about to be different, and they're usually wrong.")

2002 was a black swan event (because of 9/11); 2009 not so much, many institutions had been calling the housing bubble since 2004 and even Greenspan acknowledged it in 2007. A bubble that is acknowledged as such 2 years in advance by the central bank is not a black-swan event (defined as a surprise event that is impossible to predict).

The 2008 bubble was eminently predictable. The problem was that no one knew the exact trigger, and no one had a politically acceptable means to deflate the bubble until the domino effect started, and then hedge funds and then major banks started collapsing.

Until the knife started falling, no one had a financial incentive to stop. After all, subprime mortgages have crazy interest rates, and if you're BoA or JP Morgan Chase, the government will probably step in to stop your collapse...

What else would you expect to happen in a world with negative interest rates?

The high P/E is driven by interest rates being low.

One can argue the way to judge stocks value is not by P/E but by E/P relative to interest rates; that is whether their excess return relative to risk-free assets is justified by their risk.

Interest rates remain 5% below their long-term historical average, which can justify E/P going up significantly. Currently stocks offer a 3.5% return over some classes of t-bonds, well in line with historical norms.

This is very true. It's earning yield versus fixed income yield that matters most. If one is out of whack with the other, then there there is arbitrage. (All things equal, if there's a much better yield in equities, then people will move money from bonds to equities, or vice versa)

The current danger is that both will move down at the same time, and then where should one invest?

>The GAAP P/E of the S&P is now at 24.28, that's near, if not, a record high

Not even close to a record high. It's slightly high, but is it surprising that people are will to put a premium on earnings with negative interest rates?

Netflix at -12% is hardly an implosion. For a growth stock like Netflix, it's not too uncommon. Just look at their chart, it's had plenty of jumps in either direction when their quarterly report exceeded or failed to meet expectations.

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