valuation risk - war room slides
TRANSCRIPT
HiddenLevers War Room
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Product UpdatesScenario Updates
Fed limits rate hike reach
Market Update
Euro = hot knife through butter
UK inflation = 0
sources: HiddenLevers,
1.05 support / Nov 1999 / Mar 2015
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3
2
Market UpdateOil bust = Oil jobs bust, but Non-Farm Payrolls up up up
sources: HiddenLevers, Federal Reserve Dallas, NY Times, Forbes, CNBC ,USA Today
4
300k jobs added in Feb
Valuation Risk 101: Three Methodologies
sources: HiddenLevers, Investopedia 1 2
CAPE
Cyclically Adjusted P/E Ratio (Shiller P/E)
Uses inflation-adjusted earnings over a decade for “E” in P/E ratio.
Corrects for issues with traditional P/E, which is affected by volatile quarterly earnings.
Long term average is 16x
Q Ratio
The total market cap in an economy divided by the asset replacement cost of all companies in that economy.
If ratio is below 1, then replacement cost exceeds market cap.
If ratio is above 1, then market cap exceeds replacement cost.
ECB
S&P Long-Term Trend
Creates a regression trend line to indicate the long-term average return.
S&P has spent decades above or below the trend line (below in the 1980s, above in the 2000s).
Assetbased
Technicalsbased
P/Ebased
Valuation Risk 101: Public Market Frothiness
source: Advisor Perspectives
1929Black Tuesday
2007 Pre Financial Crisis
2015 valuation multiples eclipsed 2007, now approaching 1929
2000Dot Com
Market Update – Ebola Pandemic
sources: HiddenLevers, CB Insights, VentureBeat, Fortune
Valuation Risk 101: Private Market Frothiness
Unicorns:- zeitgeist term for late stage VC funded tech startups- staying private for longer due to available backers- 100m+ funding rounds without SEC level scrutiny
2015IPO market < Late Stage Private
Mega-Financings ($100M+)
Unusual suspects for late stage private- mutual funds- hedge funds- sovereign wealth- corporates
Top 10 most active 100m+ round investors#1 T. Rowe Price#4 Kleiner Perkins#4 Andreesen Horowitz#7 Fidelity
201070
2014300
I do think you’ll see some dead unicorns this year – Bill Gurley, top startup Investor
Valuation Risk 101: Crash Comparison
source: HiddenLevers, RFS Advisors
Bear Market Period Duration(Months) % Decline
Sep 1929 - June 1932 33 86.7
July 1933 - Mar 1935 20 33.9
Mar 1937 - Mar 1938 12 54.5
Nov 1938 - Apr 1942 41 45.8
May 1946 - Mar 1948 22 28.1
Aug 1956 - Oct 1957 14 21.6
Dec 1961 - June 1962 6 28.0
Feb 1966 - Oct 1966 8 22.2
Nov 1968 - May 1970 18 36.1
Jan 1973 - Oct 1974 21 48.2
Nov 1980 - Aug 1982 21 27.1
Aug 1987 - Dec 1987 3 33.5
July 1990 - Oct 1990 3 19.9
July 1998 - Oct 1998 3 21.2
Mar 2000 - Oct 2002 31 49.1
Oct 2007 - Mar 2009 17 56.8
Average Drop: 38.3%
Average Duration:
18 Months
S&P Valuation: Correct Historical Analogue?
UGLY:• Drop to long
term average valuation• Slightly above
2009 levels
GOOD:• 1990s boom = outlier• 1920s a better comparison• 20% upside remaining
BAD:• A more typical correction• Drop to 2003 valuation level
GOOD: Roaring 1920s Multiples
source: HiddenLevers
tech boom + low rates lead S&P higher
new industrial revolution
deflation remains benign
low ratespermanent
inequality high
BAD: 2003 Recession Multiples
Unicornsimplode
standard correction, not 2008 financial crisis
source: HiddenLevers
commodities already
took the hit
volatility = directional
change
rate hike Fed keeps
its word
UGLY: Long Term Trend
jobs picture changes
source: HiddenLevers
return to USD inverse correlation
rate hike Fed eats its words
S&P reversion to mean = gravitational pull
commodities down
further
Scenario: S&P Valuation
S&P1300 -38%
S&P1600 -22%
S&P2500 +20%
key lever
Correction will come, but still room to run in this bull if mirrors 1920s.
Hard technical support at 2007 peak and a typical correction. Fed keeps rate hike intact. No recession.
Fed would roll back rate hike instantly. True recession that affects main street.
Good1920s Era
(32 PE)
Bad2003
Recession(21 PE)
UglyLong Term
Trend(16 PE)
S&P Valuation: Take-Aways
commodities have already corrected
permanently low rates means nowhere to go but equities
late 1990s P/E = outlierdon’t conflate because of Nasdaq 5k
S&P is 70% above long term P/E
Dude, who
needs a day
job?