#168 -FTX Sells To Binance In Liquidity Crisis, Ban TikTok and Ottawa Senators Selling to Ryan Reynolds
Market Update and Fed Update
FTX sells to Binance
Early Returns on the Midterms
How Air BnB Makes Money
Sports topic - Senators Hunt For New Ownership
Frozen Housing Market Biggest Risk To The Economy
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The S&P 500 is slightly cheap to its 10-year average forward PE (16.1x vs. 17.1x). This is due to cyclical sectors getting cheaper. “Growthier” sectors are more expensive than their historical averages.
The MSCI Emerging Markets Index is in the middle of its longest rough patch since 2003. Chinese economic reopening would help end it, but uncertainty on this point remains.
The Cleveland Fed Inflation Nowcast is forecasting that this Thursday’s CPI report will come in hotter than consensus estimates, especially on a month over month basis.
US large caps are holding firm, even as rates go up and estimates come down. That tells us investor confidence in stable 2023 corporate earnings is growing, and there is a (narrow) pathway to that outcome.
US large cap Value has outperformed Growth by over 3 standard deviations over the last 50 days. Growth is almost half Big Tech, so any reversion to the mean needs their help.
The S&P 500 is currently trading slightly cheap to its 10-year average forward price-earnings ratio, at 16.1x versus 17.1x. One might think this multiple contraction was affecting all sectors to some degree, but that’s not the way things are working out.
The FactSet chart below shows current S&P and individual sector valuations as well as the 5- and 10-year averages in dark blue, light blue and green, respectively. Green signifies an increasing multiple, red a decreasing one, and black when there has been no change.
How would you value the S&P 500 if I told you I knew it would earn exactly $55/share every quarter for the next 4-6 quarters? That is basically what the index earned in Q3 ($55.59/share with 85 percent of companies already reported) and what analysts expect in Q4 ($55.44/share).
“That’s not going to happen … What about a recession?” you might rightly ask. Fair enough, but perhaps any economic slowdown we get comes so slowly that companies will be able to hold their current earnings power through targeted layoffs and other cost cutting measures.
Remember that every large decline in S&P earnings since the 1980s has come as the result of a systematic, unpredicted shock. By contrast, every corporate manager in America is planning for a Fed-induced recession in 2023. They should be ready to execute a gradual but purposeful plan to keep earnings at least close to current levels. An unexpected shock might make those plans obsolete but, barring such an event, managers should be able to manage through a period of widely anticipated economic weakness.
As for how to value stable earnings, two ideas:
First, the easiest answer is 17.4x:
That is where the S&P 500 trades as of today’s close at 3,828 and $220/share in earnings (4x our $55/share assumption).
While a 17x multiple may seem rich for a zero-growth earnings environment, it is broadly in line with the 2018 – 2019 period (ex the Q4 2018 meltdown) when S&P earnings were flat for 2 years ($162 - $163/share).
Second, the more nuanced answer is “higher” – maybe 19.0x earnings:
If the S&P can earn $220/share in our “everybody expects a recession” recession, then the next cycle should see even better results. Let’s assume investors will impute a 10 percent increase in earnings in 2024, to $242/share.
If markets give the same 17.4x multiple as mentioned above on that $242/share 2024 estimate, then the S&P would go to 4,210 sometime in 2023. That is still below the index’s all-time high in January 2022 of 4,797, but certainly better than where we are today.
An S&P at 4,210 would be a 19.1x multiple on current earnings power of $220/share.
Takeaway: all this may seem wildly optimistic, but the math in the first point shows it is not far from where market psychology is today. There is a reason the S&P is not breaking down as rates rise and analysts’ earnings estimates come down. It is the belief that 2023 earnings will not be far off 2022 levels. There is a pathway to that outcome, narrow as it might be.
What The Hell Happened To FTX?
SBF to Investors:
CZ to the Crypto Community:
Confirmation of non-binding LOI:
💸Reformed Millennials - Post of The Week
The housing-charged boom in Canadian net wealth is over...
Canadians amassed $3.9 trillion in net wealth during the pandemic, largely due to a real estate boom that drove home values 52% higher.
In a sharp reversal, roughly $900 billion of that has been lost as housing markets retrench under the weight of rising interest rates and weakening financial markets.
And the pain isn’t over. We expect losses to net wealth to total $1.6 trillion in quarters ahead, leaving Canadians feeling less wealthy and less confident about spending.
The bottom line: The dramatic decline in net wealth, combined with rising prices and higher interest rates, will cut roughly $15 billion from household spending in 2023. This is likely to send Canada into recession next year.
Maybe Oil and Gas isn't so bad...
FROM THE CENOVUS Q3 CALL: NOVEMBER 2ND 2022
"Oil and gas companies are expected to contribute about $50B in royalties and taxes to the Canadian fed and prov governments in 2022"
"Oil and gas sector is making capital investments of about $40b this year alone"
"Oil and gas sector is the largest spender on environmental services in Canada"
🎙Podcast & YouTube Recommendations🎙
Invest Like the Best Podcast - Macro Tour With Bob Elliot Formally of Bridgewater Associates
New favorite Podcast - Sharp Tech with Ben Thompson
🔮Best Links of The Week🔮
"A U.S. recession is “quite likely” next year as persistent inflationary pressures force the Federal Reserve to shift interest rates higher than expected, former Boston Federal Reserve President Eric Rosengren said Tuesday. Rosengren told CNBC that the U.S. central bank now looked likely to increase its terminal policy rate — the level at which it will stop raising interest rates — to more than the 5% forecast by investors, pushing the economy into a mild downturn in 2023." Source: CNBC - Link
"Despite an extended streak of strong profits, shale companies are slowing their oil-field activity, keeping U.S. oil production roughly flat and offering little relief for tight global markets. What was expected to be a banner year for U.S. oil production has failed to materialize as creeping inflation-related costs, supply-chain snarls and disappointing well performance for some companies have coalesced to limit domestic output, executives and analysts said." Source: WSJ - Link
"Berkshire Hathaway on Saturday posted a solid gain in operating profits during the third quarter despite rising recession fears, while Warren Buffett kept buying back his stock at a modest pace. The Omaha-based conglomerate’s operating earnings — which encompass profits made from the myriad of businesses owned by the conglomerate like insurance, railroads and utilities — totaled $7.761 billion in the third quarter, up 20% from year-earlier period." Source: CNBC - Link
"The most profitable tech company operating in China is not a homegrown internet giant such as Alibaba or Tencent, but California-based Apple. Its China business grew so quickly during the pandemic that it now generates more profit than the combined income of the country’s two biggest tech companies... Apple’s reliance on the country as its manufacturing base — with responsibility for 95 per cent of iPhone production... leaves the business vulnerable to supply chain shocks." Source: FT - Link
"Walt Disney’s streaming business added a robust 14.6mn subscribers in the fourth quarter but the growth came at a high cost, as substantial losses weighed on the company’s profits. The streaming service’s operating losses rose by $800mn to $1.5bn due in large part to rocketing content spending and marketing expenses. As a result, operating income at Disney’s media and entertainment group plunged 91 per cent to $83mn in the quarter." Source: FT - Link