There's this weird accusation that I'm all about "theory" but it's important to understand the relative positions of people:

candybar: to understand the impact of the recession on S&P 500, just analyze the specific businesses S&P 500 and how they will be affected.

tooth/wittgen: don't you understand how the entire economy is interconnected and interdependent, not gonna be elaborate but if the economy is bad, all kinds of companies in S&P 500 will be on the verge of failure, it doesn't matter what their business model is like, this is just something that has to happen because macro, unemployment, recession, gdp drop, something something.

Just because I'm correctly using economic concepts and tooth and wittgen aren't able to and I'm using them to poke holes in their theory doesn't change the fact that fundamentally, I'm saying, don't worry about macro and theory and just focus on the specifics, while tooth and wittgen are trying to make some grand market predictions based on their homebrew macro theory.

My feeling is that unless you're an actual macro person - this is hard even for actual macroeconomists because there's so much to think through and interdisciplinary complications - you shouldn't trade on your macro feelings and just stick to business-specific analysis.

I would love to see this! I went through the top 20 or so and did a back of the envelope once, but nothing too rigorous (prolly spent less than 30 sec per name).

You are literally backwards about almost everything you write. It's bizarre.

This, for example, has to be one of the dumbest things ever said on this forum. Carrying debt is not a blanket bad thing. It depends on the company you're running. Also, there are only 15 debt free companies on the S&P 500. The reason is a company can't grow internally as fast as it can with external financing; debt is leverage. If you don't have debt, you've stopped growing. One of the only exceptions is the digital space, where real infrastructure isn't as needed. If you had ever run a business or even been involved in managing one tangentially, you would know this.

Yes, it is showing a strong correlation. The reason is because GDP is the thing that companies are responsible for creating. It's called the Buffett indicator for a reason.

No, neither one of us give a **** about your pages and pages of mostly backwards macro theory. No one really does, because it's hubjub. Your analysis of business is also mostly backwards. Finance, when used properly, can sustainably grow a business faster than no finance, but I can come up with 7 different great financial plans on a paper--->I still have to have a strong company to make them work and even then it's just a plan. Stuff happens, like coronavirus. Finance and stimulus can never replace real GDP being created and real cash coming in. If it were true, we could just print an economy like they did in the Soviet Union. I mean you literally to this day have dozens of apologist economists claiming that communism works on paper. Of course it does. Anyone who's ever done anything in business beyond read about it knows better.

When the cash coming into a company stops or slows considerably, businesses are now over-leveraged because their growth rate is slower than forecasted and they have to devalue themselves to stay afloat. That's precisely what the problem is, and the S&P isn't protected from reality any more than anyone else. The real effects there are just delayed, and indirect.

Do you understand what the biggest means? In case you were wondering, these are the biggest companies in S&P 500 by market cap:

Microsoft
Apple
Amazon
Alphabet
Facebook

I believe now these are also the five biggest companies in the world by market cap, as the smallest of these is still bigger than Tencent/Alibaba. I stand by my statement that "the biggest companies in the world" barely have any debt.

You're confusing macro with micro and this is why people used to do dumb things like: hey the economy is bad and the tax receipts are down, let's trim down government to match this. Keep in mind, you're the one making grandiose statements about how magically all these companies are going to struggle financially. Great companies can and have succeeded against all kinds of macro backdrops. Productivity gains don't go away just because people aren't spending money on frivolous consumption.

Also, why not actually state what you mean? What kind of drop in corporate earnings are you expecting? 100%? 200%?

Microsoft - 28B in debt
Apple -226B in debt
Amazon - 75B in debt
Alphabet -7B in debt
Facebook -0 debt

Do you understand what no debt means? It's still an idiotic statement. Sound financial policy is dependent on a lot of things. Microsoft is a totally different business from Amazon. Comparing the debt structure of the two is moronic.


Even though the statement is irrelevant to anything, it's still provably false.



The thing you aren't getting is that massive drops in revenues is struggling financially. It's definitional. It's just like losing your job, and your net worth has to be devalued in order for you to pay your debts. Even if you have no debt you have to shrink to lower expenses-->layoffs.

No one is claiming they can't. But companies with debt must devalue to stay afloat in the face of lowered revenue. This is a fact that you can't get around with pages of backwards macro theory. Big caps with low debt won't have to, that goes without saying, but most companies have a lot of debt.

In the short run, yes they do, unless you want to run your company into the ground producing a bunch of inventory that doesn't sell or services that no one is buying. Seriously, stop.

114 out of 500 are up for the year. Top 20 are up 38%+

Whatever but the point is that the market is a lot more than 20 big caps and a lot of the market is significantly down ytd and thus the economic impact of the shutdowns are reflected in valuations.

Some of these numbers are just wrong (Apple) but you do realize these are trivial amounts of long-term debt that mostly matches their cash holdings? Compared to the cash flow they generate, this is a complete non-factor.

Do you understand that "barely have any" does not mean "no"? I barely have any credit card debt. But I suspect my balance is not actually 0 at the moment.

I didn't compare the debt structure of the two. And while every company is unique, Microsoft is Amazon's biggest competitor.

We went over this - so what massive drops in revenues are you expecting and who's going to have to recapitalize to survive?

Which companies are you talking about here?

You're confusing productivity gains with production. Whether you keep the factory running or not doesn't have much bearing on future productivity gains. Again, this has been explained to you earlier - economic growth doesn't come from meeting consumer demands in the present.

https://en.wikipedia.org/wiki/Econom...ita_GDP_growth

The thing is that if you're so sure a bunch of companies are going to be on the verge of failure and will need recapitalization, you should be able to name several that are at least decent candidates. You're being vague because you haven't done the homework - you just like to be able to talk doom and gloom without being held accountable. Name names. Which companies are going to do poorly? All of them?

Total liabilities for Apple in 2019 were actually 248.03B

Amazon is 156B



Like I said, it's irrelevant.

Microsoft is a software company and Amazon is a clearing house. Copy that.

Surely you mean AWS vs. Microsoft



1) Every company that has serviceable debt and loss in revenues will have to restructure. That's basic, 2nd year finance. 1st quarter revenues have already dropped significantly for most companies, 2nd quarter will be just as bad, if not worse. Not every company, but more than not.


2) Every company that very low debt that has expenses will have to cut expenses-->layoffs and production



I'm not being vague, I'm not making specific quantitative predictions because we only have the numbers for a half a month of the crisis. I'm coupling the restructuring that is taking place as we speak with YTD gains that are positive in the face of massive drops in revenue. The only conclusion is that equities are even more overvalued than they were before the crisis.

You mentioned that there was a 5% GDP reduction for Q1. What are your predictions for Q2?

Here are some other predictions:

Deutsche: -40%
JPow: -30%
JPMorgan: -14% to -40%
CBO: -12%

This isn't how you look at debt. Looks like they have roughly 98B in short/long-term debt, 100B in cash/equivalents and receiables/payables roughly offset. They do have an additional 40B in misc current liabilities. That's pretty much it. No one cares about deferred taxes for example. Keep in mind Apple generates like 70B of cash flow in a year. There's nothing to see here.

I'm not even gonna look but I suspect the story is similar.

At this point, both are cloud services companies. Amazon retail is increasingly just a marketplace service with a flagship store and just one of many services they provide. Likewise, Windows is transitioning into a service model, Office already has and the rest of the company is transitioning there as well.

AWS vs Azure, but to your point it's AWS vs Microsoft's entire developer offerings, as they transition into cloud offerings and or compliments to create a lock-in effect.

https://www.factset.com/hubfs/Resour...ght_051520.pdf

"The blended revenue growth rate for the first quarter is 0.7%"

"Six sectors are reporting (or have reported) year-over-year growth in revenues, led by the Health Care sector. Five sectors are reporting (or have reported) a yearover-year decline in revenues, led by the Materials and Energy sectors."

So in aggregate, no the revenues have not dropped in the first quarter for S&P 500.

I mean seriously? It's obviously going to be much worse. Not even remotely close.

"For Q2 2020, analysts are projecting an earnings decline of -41.9% and a revenue decline of -11.3%."

"For CY 2020, analysts are projecting an earnings decline of -19.7% and a revenue decline of -3.4%."

Why? This depends on the long-term projections. And how is this bad for valuation?

Numbers matter - if the combined corporate earnings drop by 25% for the calendar year (that would've been roughly my estimate, though I haven't done the homework and having seen the analyst estimates after writing this, makes me wonder if they are too optimistic or I'm too pessimistic), that's a very different scenario than dropping by 100%, which in turn is very different from dropping by 150%. Operating vs one-time matters too. By implying the likelihood of certain doomsday scenarios, you're already making implicit quantitative predictions - the question is, do you know what those imply?

US GDP dropped by 4.8% annualized for Q1. That's roughly a 1.2% Q/Q decline.

I suspect some of these are annualized and some of these aren't. 40% annualized is roughly 12% Q/Q. 30% annualized is roughly 8.5% Q/Q. 14% annualized is 3.7% - that can't be right. 12% annualized, well that can't be right either.

40% annualized / 12% Q/Q seems reasonable to me.

If there was nothing to see, why in the hell did you bring up low debt examples on the S&P to back up your horrible macro claims? All you're doing is just looking at what you want to look at to back up your bullshit claims, instead of looking at what's there and coming to a conclusion afterward, and then backtracking when your data is proven false/misconceived.

There are a ton of things you can look at on financial statements, from short term solvency to long term solvency to debt ratio to profitability to asset management. All you're doing is backing up a macro claim with cherry picked data, that you got wrong, from a handful of digitized, low impacted companies. That's not how analysis is done.

There is no question that Amazon has a competitive advantage over other retail companies wrt the crisis, but that didn't stop them from losing 30% in revenues, did it? They will restructure to compensate, because they're a well run company. They'll probably do better than most companies wrt the crisis. None of that undermines the thesis that huge revenue drops result in short term solvency issues that can only be solved by restructuring and cutting expenses, which eventually leads to more realistic market valuations of equity.




And what is your argument for equity valuations not adjusting to compensate, again?



Long-term projections of growth are 100% useless if the company is going to go broke in 2 years. As I said before, forecasts are in chaos right now. Companies don't even know how they need to restructure at this point, because their revenue projections are completely ****ed.

Why? Because that is how companies operate. When your revenues drop, your net income drops. When your net income drops, you have to restructure and/or cut expenses (usually both) to sustainably shrink, or you will go broke. Conversely, a company can grow so fast that it 'grows broke.' That is why sustainable growth and external financing is needed, with optimum amounts dependent on your business model and strategy. Like I said, if you had an actual education instead of a thrown together slew of misconceptions, you would know this.

You can't just look at a monthly balance sheet on a handful of low-impact, low-debt companies on the S&P, focus on two out of 25 numbers, wave your hands about interactions with cash flows in the broader economy, use no benchmark, and then make claims about the short or long term sustainability of a company or the index as a whole. Those interactions and forecasted income statements and how that affects the balance sheet 1, 2, 3, and 6 months down the line really matter. These aren't static things, they're dynamic. They affect each other, and they're because of real-world happenings.



A lot of companies will show negative earnings for the quarter--net loss. What does that do to your projections and required response?

What are you talking about? These companies barely have any debt. I was completely right. "There's nothing to see here" meant there's no significant amount of debt here for you to see. The small amount of fake debt here exists mostly as an accounting strategem for them to avoid paying taxes. Did you not understand my breakdown?

What are you talking about? They didn't lose 30% in revenues. If you're taking about earnings, that has never been what they were trying to optimize for. Once again, they chose to sacrifice their short-term earnings for the greater long-term gains. That's what they do.

They have clearly adjusted. Despite the drop in forward earnings, the risk premium is *higher* today. The investors are getting paid *more* to hold stock today than before.

Who's going broke in 2 years?

Again, who's going broke? Lots of companies will cut expenses, not to survive, but to maximize profits. #s matter - if your revenue drops by a small percentage, what you do with your expenses is almost certainly optional and depends on whether they think the ROI on that expense is worthwhile. The biggest companies in the world aren't run on a 1 year horizon and aren't small businesses with low margin fighting for survival. This is not how they go broke - they go broke when they lose wars. The economy was great in 97, but that's when Apple almost went broke.

What on earth are you babbling about and how is this relevant for anything?

Again, what are you babbling about here? What does this have to do with anything?

So what's a lot? In terms of market cap basis, what % of S&P on a market cap basis will show negative earnings in Q2? Also, are you talking negative earnings including one-time expenses (layoffs, writedowns, etc) or negative operating earnings?

You haven't said anything meaningful.

Again, cherry picking a handful of low-impacted exceptions is irrelevant, but that's precisely what you did. You picked 5 low directly-impacted companies with low debt (though not as low as you claimed) out of 500 because you thought it was a good argument, when it's just a composition fallacy.



Misspoke--earnings.



It's not at all surprising you believe the biggest and fastest market drop in history was the market accurately re-evaluating itself in light of totally unpredictable medium term effects of a novel pandemic. No one can be this stupid, can they?



There is a macro reason that happened, which you reference, but there are very, very real financial reasons why the macro reason even matters, which you ignore to your detriment. Winning a competition war does not entail success, growth, or long term sustainability. You also need sound financial management.

Also, stop conflating a tiny drop in revenues with the entire economy going lights out for 3 months.




No idea, and the market doesn't know either, so the overall market valuation is bad.

Did you already forget how this came about? I said "the biggest companies in the world" have barely any debt and you said that was one of the dumbest things ever said. These aren't cherry-picked at all - these are the 5 biggest companies in the world. And they make up more than 20% of S&P 500.

What on earth are you talking about? Do you not understand what risk premium is?

https://www.yardeni.com/pub/stockmktequityrisk.pdf

Assuming analyst estimates aren't way out of line, the risk premium is higher today. What does that have to do with the market accurately re-evaluating itself? Do you not understand what I mean by the investors getting paid more to hold the stock?

Sure there' a macro reason but what do you think the net impact of this is for the entire future of Amazon? You have to know a billion here and a billion here don't really matter for a trillion dollar company right? Investors don't care about Amazon's earnings, except to the extent it helps explain the extent of their pricing power and operational excellence and their long-term future ability to generate money. A bunch of one-time expenses caused by macro issues that don't materially worsen their situation relative to their competition, sure that's something, but that's not what their valuation rests on.

I mean, we know in hindsight, the market will turn out to be wrong. The market is ok at predicting the future, but nowhere near as good as hindsight. The question, why do you think the market will be wrong in the direction you claim? Maybe they are wrong in the opposite direction.

It is, for 3 reasons, which I already explained

1) Debt isn't 'bad'
2) The companies you mentioned carry far more debt than 'barely any'
and
3) What is true of part is not true of the whole




Everything you mentioned matters in the valuation of Amazon. Long term sales forecasts are the primary thing investors look at when valuing a stock, but those could be shaken up pretty badly by anti-competition inquiries which are almost certainly going to happen. It took Microsoft stock 17 years to recover from theirs. Like I said, these things are dynamic. Short-term forecasts are important, because huge drops (not small ones, like you keep conflating) affect short-term solvency for the companies that do carry significant amounts of debt, which is almost all of them. Even companies that don't carry debt have to change policy. That is a financial reality that you can't step just around when you make predictions.


I've already explained this multiple times.

It's quite unbelievable to me how you can't keep the conversation straight. Let's consider the context:

Who said it was?

Look we just went over this. The company with the most debt out of the 5 turns out to have 100B in cash and 98B in debt. Not only is the entire amount of debt outstanding less than the total amount of cash/equivalents in hand, it's a tiny amount compared their valuation. Apple is a 1.4T company. That's barely any debt. And consider the context - the claim was that "big businesses are different from small businesses in being able to load up on debt" - do you not realize this example refutes the claim? Apple doesn't have to load up on debt, that's just a minor financial optimization, they could've just done a bit less buyback or paid a bit more in taxes. It has no bearing on their operational strength.

You have to know this proves my point, right? If small businesses are more indebted, that supports my point that being able to load up on debt isn't some unique distinguishing feature of big businesses.

Sure but what does this have to do with the COVID-19 recession? It was a factor before it's a factor now.

So now it's just a small drop and that's not what you're talking about? I didn't pick this example, you did:

It seems like you just answered yourself? We didn't see huge drops of the kind that would affect short-term solvency, so the long-term concerns dominate.

Debt in itself isn't bad, the point is that companies need to service their debt, and huge drops in revenue prevent this from happening.



This whole paragraph makes no sense at all, because you have no idea what you're talking about. You're literally looking at one balance sheet and drawing conclusions about a companies valuation with no benchmark, no interactive analysis with the economy as a whole, no consideration of quarterly operating expenses, no consideration of the company's business model, no consideration of its growth strategy, no consideration of the effects of the crisis the company finds itself in and the subsequent drops (or increases) in revenues in the next quarter, and so on and so on and so on. The information you're pointing to is useless on its own. A short term liquidity ratio of 1.11 is pretty much industry standard but is completely inadequate if revenues fall by 50% in a quarter, which leads to the need for more liquidity on the next balance sheet. Understand I am not claiming Apple will suffer a 50% loss in revenue, but many companies across the S&P and the economy as a whole will.

The only way to raise liquidity is to sell assets or acquire more debt, which companies all across the S&P have done in spades in the past month. They have done so precisely because their liquidity ratios are projected to fall on their next balance sheet, and they need to pay their creditors. Now, if the S&P is insulated more than other indexes, then how much debt do you think the rest of the economy is taking on? What do high amounts of debt do to long-term return on equity (protip: it drops it), and what do long term drops in return on equity do to market valuation? How do these interactions affect businesses on the S&P, in the medium term?

You have no idea, because you don't have a fundamental awareness of how simple mechanisms like balance sheets, income statements, and forecast trends work in reality, or how just because a few businesses benefited in revenues in an instant because other companies suffered, or because a handful of businesses are highly digitized monopolies, that mass unemployment and loss of revenues across the economy writ large will affect even insulated businesses like some of those on the S&P in the medium term.

Regardless, I'm done wasting my time with you. If you want to make a bet on an S&P low for this fiscal year, maybe we can settle it that way.

Again, what on earth are you talking about? The point was that being able to load up on debt is not some unique advantage of big businesses. Your point is a complete non-sequitur given the context. Are you not able to follow why it was pointed out that the biggest companies in the world don't have much debt?

Apple doesn't have a liquidity issue aand the liquidity ratio (it's not 1.11 where you're getting this?) is entirely meaningless, it doesn't matter, that's not what anyone was talking about. How are you not getting this after it was pointed out to you? The total amount of debt Apple has is miniscule and has absolutely no bearing on anything. Apple is generating like 70B+ free cash flow a year, which they are spending on buybacks. Apple has no need for any debt whatsoever and what small amount they have is entirely about finanncial engineering and tax avoidance. Again the context was:

Are you not able to read what chytry said? Who said it was a bad thing? What are you even talking about? The point is that big business = being able to load up on debt, small business = not being able to load up on debt, that's not the right way to think about the divide and this is easily illustrated by the complete lack of reliance on debt shown by the biggest companies in the world,

Did you write this entire thing in response to some imaginary thing in your head? This is entirely non-responsive and doesn't make any sense in this context. I mean, you lecturing me about accounting is kind of hilarious and as usual with almost everything you write, it contains numerous errors, but it's a complete non-sequitur either way. It's like you completely lost the connection to reality.

How many times are you going to make these kinds of proclamations? I'm just offering free education, you can take it or not.

How are you speculating or investing in the current environment?

ie. how does your macro perspective inform your strategy?

I don't have time to actively trade or do serious analysis - my career is quite demanding as is and that's likely where my highest ROI is in terms of effort. I have to do a fair amount of business analysis along these lines for my work anyway, so I'm just spending very small amounts of time poking holes in obviously flawed analysis. It's mostly just shocking to me how bad some of the analysis is here - I'm used to reading research produced by professionals, though I haven't really tried to get access to those recently - such that I can spot errors with no effort at all. I mean I'm fairly rusty with pure finance stuff (my work is more "business" than "finance") and certainly with economics, so it's even more shocking to me that elementary errors are popping up everywhere. I sort of have to do this professionally too (review and poke holes in business analysis, proposals, etc) but if my analysts produced this kind of garbage, they'd get fired.

In terms of passive investments, I'm quite defensively positioned mostly because my career is high-beta and I have huge amounts of debt, so while severe deflation is a relatively unlikely event, it's something I need to hedge against. But as with almost everyone I know, my personal cashflow situation has become completely insane with all the canceled vacations and nearly zero discretionary spending in recent months (and also somewhat reduced for the rest of the year), so it's likely that I'll almost have to invest.

I'll be a net buyer of stocks every year until my retirement, so the goal is to maximize the amount of stock I'll be able to buy until then. Hence, despite my career being high-beta, part of me is always rooting for a crash and the price increase being front-loaded is a serious risk. On top of this bias, I'm also overcompensating for the perceived bias here because I get the sense that internet forums like this attract slightly anti-social types who are unhappy at the rising tide lifting all boats and want things to fall apart and I think this introduces a bearish bias too.

What rubbish. I don't believe for a second that you work in any meaningful way in business.

The bet is on the table. You have tons of 'discretionary spending' (lol) to do so take a chance.

My favorite thing in this thread from candybar (and there are many howlers from this guy), is his defense of why 99% of analysts - who he claims do amazing analysis - failed to see coming the biggest economic shock in 100 years. Just have a read of this:
So these intelligent, talented experts missed the biggest event of the century - which this forum correctly predicted with impeccable reasoning - because they're so incompetent and groupthinking they're just watching what everyone else is doing and not scanning properly for future outcomes? That's some hilarious commentary from you right there.

So you're admitting that these people are so stupid they just follow orthodox lines of reasoning, and fail to see highly probable events that can make them a lot of money, because they're "busy" - but not in your case too busy to write walls of texts here. Got it.

Yet even this is totally contradicted by the actual facts. The analysts you love and claim we should listen to looked at this in depth and ****ed it up badly. Those are the facts. What you post above are either pure disingenuous or total comical ignorance of the world of investment bank/hedge fund analysis (which is why I think you're a fraud).

Numerous of the people you claim are experts and love put their mind to this analysis. These are the findings of their in-depth, highly competent, superior research. While this forum was predicting the course of this virus and its market and economic impacts very accurately, here are the experts you claim do superior analysis:

January 31, Goldman Sachs:
January 31, Me:
Goldman Sachs analysts: not even remotely in the ballpark of likely outcomes.
Me: Spot on.

Candybar's take: No analysts had time to look at it, and if they did, they would have crushed you because they're far smarter.
Candybar's status: Proven liar/clueless/idiot.

Economist survey, February 9-20th, market all time highs:

Me, February 23rd:
Candybar's take: No analysts had time to look at it, and if they did, they would have crushed you because they're far smarter.

Candybar's status: Proven liar/clueless/idiot.

I could post 20 of these from major investment banks over time, with this forum crushing it and them completely screwing it up.
Actually we were analyzing the data and logic impeccably, leading to very high probabilities of exactly the outcome that happened - which we perfectly predicted. You are so circular in your clownish expert loving beliefs that nothing will penetrate the dense idiocy you're in. These are your own manifest cognitive flaws and lack of real world experience, sir - as if that wasn't evident from your posting.
This is all great except that your take is entirely fact-free and simply completely made up what you want to be true. If someone is paying you for analysis they should fire you, you're one of the biggest idiots I've ever read. You actually sound like that guy in OOT who claimed he worked in the modeling world before being found out as a fraud. Same tone and same cluelessness.

The fact is that the "smartest people in finance" were analyzing this frequently and got it completely wrong. I was laughing almost daily as new output from these "smartest people in finance" wrote note after note as time went on, putting the impact a little lower to 0.9% growth in Q2, then 0.8%, then 0.7%, long past the time it was >99% that Q2 GDP was going very negative. It was the most ridiculous thing ever. Very very few analyzed this easy-to-analyze situation correctly, proving their utter incompetence in novel situations, and lack of first principles thinking.

We have hard evidence that the experts are not only not very competent, but actually comically incompetent in novel situations that break the norm. The economic impact of corona is one of those, and you're a perfect poster boy for the dense stupidity of the orthodoxy. You can't even grasp how the impact to small businesses is going to affect flow on to corporate profits, because you don't at a basic level understand how economies work.

By the way, fund managers don't agree with you at this point. A survey by the Bank of America yesterday showed that 68% of fund managers - with access to all this "great analysis from the smartest guys in finance" - think this is a bear market rally, meaning they think we're going below 2200 again in the S&P 500 before this is done. So you're even at odds with the guys who you say do analysis well.

You're just an utter clown, man.

FB, Google and Amazon are not going bankrupt. That such a possibility is even mentioned and analysed is interesting though.
But when it comes to the stock market, these companies are priced as growth companies. So even just a significant growth slowdown will be quite impactful on their valuation (as long as the main/Wall Street gap doesn't keep increasing).