Of course they're not going bankrupt. Bankruptcy wasn't on the table for Microsoft either (a growing company with a huge moat) in 2001 or 2008. Yet it lost over 50% each time from its previous peak each time,and took years to recover.

Microsoft is the biggest company in the S&P 500 at $1.4 trillion. The last time Microsoft's P/E and P/S spiked as high as it is now, it contracted for 10 straight years (from 60 to 6) in a growing economy, all the while growing revenue and profit. Right now, Microsoft is at pre corona all time highs.

To act like the market is pricing them correctly is very silly. There's plenty of downside to be had if small businesses turn out as bad as we're expecting.

No one ever made this claim, and it's my fault if I led anyone into thinking that was my case.

Of course you're right that massive slowdowns or lights-out affect everyone, because everything is connected.

Candy is the one defending their balance sheets as if they were in significant danger.

Great discussion. Candy winning so far with a very simple observation that quality/growth stocks are simply driven by cost of capital going down and that's not irrational (in fact this trend could have much further to run). Wittgenstein good poster but he argues aggressively while not understanding basic concepts like net debt vs gross debt and that Amazon will not be trading on next quarter earnings.

Do you have any idea who does what in finance? Also, isn't that kind of the whole point - it would've been strange for an economist who has to look at everything to be specifically focusing all their energy on coronavirus in mid-Feb, right? We're talking about an individual whose job is to forecast the entire economy - you don't have this job, they do. There are lots of things the economy is typically far more sensitive to than pandemics. Also, not everyone they are polling work in finance and those that do aren't close to trading at all, they mostly write stuff for their customers, so that the customers can feel like the company knows what they are doing.

Also, this is a recurring poll and this part:

is an editorialized reading of the survey provided by the journalist. If you only knew how to read, the actual survey results are there:

1) Growth is expected to pick up to 1.8% in the second quarter of this year vs 1.9% forecast in January.
2) 30% of economoists saying risks to their U.S. growth views were more to the upside, vs 56% in January.
3) The likelihood of a U.S. recession in the coming year only edged up to a median 23% from 20% in January.
4) 40% of economists polled expect at least one rate cut.
5) inflation as measured by the core PCE price index, the Fed’s preferred gauge, would range between 1.8% and 1.9% until the second quarter of next year and touch the central bank’s 2% target in the second half of 2021.
6) the chance of non-compliance by Beijing with the terms of the initial trade agreement had increased significantly since the coronavirus outbreak, nearly two-thirds of economists, 30 of 48, said yes.

This is it. That's what the survey said. The only coronavirus-related question as far as I can see that was asked was on how this would affect the trade agreement. On top of this, literally the one person they could find that had the most to say about COVID-19 said:

Does this sound like someone who's analyized the impact? Or someone who's brushing it off because these kinds of things typically don't matter.

The article literally proves the exact opposite of what you're trying to claim, again not at all surprising.

I wasn't defending their balance sheet - I was defending the claim that "the biggest companies in the world have barely any debt at all" - which we now have established as true. While Wittgeny was going on about the liquidity ratio (which appears to have been miscalculated) and so on, which had nothing to do with the claim.

candybar,
Moderately fair criticism of the economist survey, I put that in as a lowball for you to self own and prove you're a clown, and you took the bait perfectly. Well done son.

I love how you completely ignored the comical Goldman Sachs analysis, and 20+ other investment bank notes, IMF predictions, etc, etc that deeply analyzed and were still completely wrong about corona. You're either a disingenuous troll or you actually didn't know that they researched this and ****ed it up badly.

I believe it's the latter. You're so insulated from the actual trading and business world that you have no clue at all what kind of analysis and information was put out because you never have anything on the line where you need to make decisions about it, and hence read the commentary. You're a theoretician, not plugged into either trading or business reality at all. Hence why you thought Amazon went up because of long term models rather than being short term covid safe haven. I'll still laughing about that one.

Since you do not concede the points that:

a) you are clownishly wrong that the "very smart" investment bank/hedge fund experts didn't analyze this, and

b) that the analysts you love and think are "very smart" did actually analyze this in depth and completely ****ed it up over and over (even while the logic, data and probabilities were very clear)

I'll keep posting comically wrong analysis on corona from investment bank geniuses - juxtaposed with mine - until you concede the points. There are dozens to choose from. I read them daily as they came out.

Once we're penetrated this particular clueless silliness you have from your lack of real world experience (that the expert analysts are "very smart" and can't be topped on their analysis of what the economy and market will do), we'll move on to individual stocks such as Microsoft and the impact on their revenue, profits and multiples of a small business implosion.

This has literally been my exact point the entire time and I'm glad you've come around. To recap this was the gist of the argument:

candybar: large drops in the index are about changes in valuation more than changes in long-term business prospects or short-term earnings. they are driven by investors finding equity overvalued relative to other asset classes and rushing to another asset class (whether bonds, cash or commodities), often in response to a macro change in the availability of liquidity.

tooth/wittgeny: large drops in the index are about companies losing earnings in recessions, because of all these interconnected dependencies in the economy mean almost all companies do badly, with their future prospects uncertain with many requiring recapitalization.

Happy to talk about valuation, but the changes in valuation for Microsoft in the past had nothing to do with small businesses failing and what not, they are about investors having a better place to put money (bonds in 2001, cash for most or cheap distressed assets for some in 2008). That's my entire point - valuation is a financial thing and isn't about how bad the economy is.

And what is that attractive asset class that would cause investors to flock to that would cause the equity valuation to collapse? Is there deflation in the horizon that makes cash look extremely attractive? Are there high-yielding risk free assets that would do well? Or is the valuation so high that everything else looks better?

In terms of the overall valuation at the moment, the risk premium is high (but not that high - you could easily make an argument it should be higher given the uncertainty we face) and nowhere near the dot-com boom low.

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

The biggest S&P 500 stocks - the ones candy is citing as holding this up while small businesses implode - aren't exposed to situations where cost of capital matters. In fact, given that they have great balance sheets and are net very profitable pre covid, you could argue low return on capital actually hurts their business.

I also don't agree that there aren't better places to park money than in highly inflated P/S ratios and P/E ratios, even with zero rates. candy is taking that as a given and it's far from it; it's basic noob analysis that's failed many times before. This is like 2000: People parked money there because of momentum and greed, not because it was a great place to park money. Then it all shook out pretty badly when the real economy took a hit and exposed the lie.

The one spot where the cost of capital matters is perhaps in stimulating buybacks. But do you think companies like Boeing are going to keep buying back? They borrowed everything they could to buy back, soaring their stock price 300% from an artifiical bid. That's not happening going forward. Maybe Apple will keep it going even as their revenue drops, but for many companies it's going to tighten up significantly as revenue and profits drop, in a way that decreases the bid on stocks that have kept them climbing.

Do you know how many people work at Goldman? Any research available to you is not something they use for trading - it's stuff they give to all clients as a baseline. If you picked that up in the press, it may not even be that. Sell-side research isn't always bad, but it's just a basic summary of consensus - no one trades on this because everyone else has it. The "analysts" likely didn't do any independent analysis of the situation, beyond aggregating existing projections.

I think you're talking about this:

https://www.cnbc.com/2020/01/31/gold...s-quarter.html

This research was probably written as:

If coronavirus ends up being roughly X (where X = some rough consensus as derived from various implied projections from mostly government sources), the economic impact will be Y. They were sharing their thoughts on the relationship between X and Y, not their prediction of X. This was also before people lost trust in the US government - remember that during past administrations, the information coming from the government on these matters was relative trustworthy and more inclined to overstate rather than understate the dangers - so no one felt they needed to re-examine everything from first principles.

And they definitely warned things could be worse:

"Goldman analysts warned that the risks of their net 0.05 percentage point drag on full-year economic growth were “skewed towards a larger hit.”

That’s because “a change in the news flow could lead to increased domestic risk aversion behavior or a sustained tightening in financial conditions.”

“A larger outbreak of the virus in the U.S. or the fear thereof could lead to a decline in domestic travel, commuting and shopping,” they added."

This was a clearly a bearish note, intended to warn their customers of danger. Sell-side researchers when they are bearish about something, they could either bet their career on it with a sensationalist note or hedge their bets like this. Neither means much - the note, for people that know what they are doing, is more about communicating the relationship between factors and what to think about if this becomes bigger, the only people that care about final estimates are non-professionals.

Yeah man, I feel properly warned of the potential 0.05% to US GDP.

So analysts are only good for groupthink predictions of the prevailing wisdom?
That's a whole of words to cover the fact that Goldman predicted a 0.05% hit to GDP at a time when any sane analysis by any halfway competent analyst had it at >30% of a global pandemic withmassive economic damage - and that being a conservative number at that. It was basic rational analysis on solid logic. Also I love your quotes:

I'm dying man. 100% worse than their average case is a 0.1% hit. This is after Wuhan and China locked down, sufficient by itself - with no further spread which was highly likely - to hit GDP 0.05%.

O RLY?

I see zero mention of lockdowns or large economic effects. They had no ****ing idea what was likely coming, because they're morons who can't think outside the box.

Anyway, I appreciate you try to take a crack at defending, it just makes the 20+ other comically clueless analyst, IMF etc notes that I'll post all the more sweeter. I'll keep going until you concede that

a) Analysts did in fact look at this in depth repeatedly (contrary to your claim they didn't), and that that analysis was absolutely awful and

b) your defense of expert analysts in completely screwing this up is absurd and speaks to your ill-founded trust and bias in these expert analysts - something which you're relying on repeatedly right now to say that the market knows better and we should trust the market and the analysts because we're nowhere near as insightful or smart.

Weird hill to choose to die on.

This is mostly true as I only had other people's money on the line. But wait, weren't you saying retail is dumb money and institutional is smart money? Retail = their own money on the line. Institution = other people's money on the line. I mean, I had a bit of success trading way back personally too, but we're talking about small amounts of money so that doesn't really count.

You don't seem to understand who does what in finance at all. Do you know why sell-side research gets written and published and who writes these things?

Oh I definitely know they put out one note for themselves and one note for their clients. Hell, Goldman was selling MBS they knew were toxic to their clients while touting them. I believe criminal charges were brought for that. I have no illusions about how dirty that world is.

Still, I'm not relying just on analyst notes. there's a huge range of evidence:

- The market stayed at all time highs and VIX low. Given the power of even a handful of firms to send it down, clearly little to none of big money saw this coming long after it was obvious.

- The very few who nailed it - Ackman claimed to have gotten a 100 bagger on $20 million of corporate bond insurance - had geniuses at nvestment bank as counterparties sell the hundred baggers to them.

I know they didn't see it coming for the same reasons I know they didn't see the subprime crash coming - they were left holding the bag like chumps when there was heaps of time to get out or insure for huge profit.

The takeaways from all this:

- The market is terrible at pricing non-standard events properly.
- Analysts are terrible at modeling and predcting the results of non-standard events. They're fine for status quo most of the time. Even if they're not terrible we don't know if they're lying.
- We are currently in a very non-standard event

Tooth, you seem to have forgotten your thesis - we already know they were wrong, the question was whether they analyzed the situation from first principles or lazily aggregated projections from elsewhere. I'm sure the latter is what happened - that's how most things work, they don't have time to analyze everything from first principles, that's completely ridiculous.

Also, when you're talking about statements from January, it's important to understand that COVID-19 wasn't destined to be this bad this early. That it was this bad came from the complete lack of international coordination and leadership. With Ebola for instance, the Obama administration worked very closely with WHO and all involved countries and no one was caught off-guard by how bad it was, because we were on the ground working with locals in affected regions to provide support. With COVID-19, in part due to the relationship with China (which has never been great and has deteriorated significantly) and the Trump administration simply being uninterested in any kind of international leadership, there was a vacuum and the response was entirely botched. The US government has historically been fairly competent in areas like this so the US not taking this seriously sent a fairly strong signal that this isn't expected to have huge impact.

Cost of capital not for CFO's of companies (now that is a purely theoretical textbook idea) but in the sense of a discount rate for equity investors in practice. Given that FAMAG are not very impacted (relative to other asset classes such as bonds, cash, value stocks) by corona, deflation risks, inflation risks, etc, investors are happy to bid up valuations to the point where they can expect a long term IRR of say 6% on conservative estimates while pre corona and pre FED action they were probably aiming for >8%.

Note that on 25x earnings you only need about 3% earnings growth to make that 6% return. Most of the stocks you call expensive have grown underlying earnings at 10-20% for years.

How would you allocate your capital if you lived off of it?

If you want to see what the market is pricing in for the economy as a whole just look at bank stocks.

How quickly you seem to forget context...

I pointed out to you why little debt on the Big 5 means nothing because most other companies carry lots of debt, and how loss of revenues throws short term solvency out of whack, none of which you ever addressed. All you did was wave your hands and pretend to be incredulous, despite the fact we've been back and forth for over a week on exactly these issues.

There are lots of liquidity ratios. I calculated the 100B vs. 90B in my head without looking at the sheet; a mistake. The actual current ratio for Apple is close to 2 (160ish v 90ish in CL). That isn't by any means high, between 1 and 2 is standard, and 90B in debt is not "barely any"

The point is that, using Apple as a benchmark for other S&P companies with higher amounts of debt, and forecasts of severe drops in revenues leads these companies to devalue themselves to stay short term solvent. It's happening all across the S&P as we speak, with 200+B added in debt in the last month.

That's not how it works either. The best way to think about this is that a large firm is often a collection of smaller firms operating in many different areas and that they operate under the same umbrella obscures the fact that they are often acting effectively independently of one another. Goldman isn't a one-person shop. Much of sell-side research (especially things like macro) is consumed internally as well externally because a large number of people that work at Goldman are client-facing people who sell the appearance of expertise. But the main point here is that research has layers - if we're talking about high-quality research (lots of garbage also gets produced, sell-side macro research is I think usually garbage, though they aren't bad at short-term prognostication) and people whose decisions matter, what they are looking for is models, implicit or explicit and relationships between things. They are not looking at conclusions because they get outdated almost instantly as the world changes and everyone has them. But knowing that changing this assumption by X changes the conclusion by Y, that's the important part. And that's what good analysts are paid to produce.

I would agree with this. But the main reason is that non-standard events are not being looked at.

You are an analyst - are you also terrible at this? Again, the real difference here was that you were looking at things people weren't looking at - most market folks weren't approaching it as a multidisciplinary problem where they have to go all the way from basic epidemiology to IFR and what not because there was implicit trust that if things were that bad, the government would be taking it more seriously. But that trust is completely gone, the virus has ravaged through multiple countries and its future course is demonstrably important for macro projections. And they can calculate things like damage and GDP loss and so on somewhat accurately as a function of how bad the virus is. I don't think you can. Your edge earlier was entirely about getting the inputs correctly and there's a lot of effort going into that right now so I don't see why you'd still have a real edge. Do you think the Goldman Sachs analyst's primary error was in miscalculating the economic damage in case the virus becomes a pandemic and we have lockdowns everywhere or simply not assigning much weight to that possibility? Well that possibility is a reality - what future non-standard event are you foreseeing? Calculating things like, this is what's happening to personal income, unemployment rates, small businesses, etc - what does this to do to the GDP, what does this to this sector's earnings and so on - this is the kind of thing that they do collectively pretty well. Again, think in terms of models vs inputs.

Again, just because this particularly statement reminded you of some other conversation we had, doesn't mean it's addressing those instead of the actual thing it was in response to, which was chytry's point about big vs small business. I wasn't using Apple as a benchmark for other S&P companies - I was distinguishing Apple (and fellow biggest companies in the world) from other companies. I also don't know why you continue this semantic nittery - 90B in debt is barely any for a 1.4T company generating 70B of FCF and have 100B+ in cash and whatever semantic quibbles you may have about whether it's "barely any" or just a small amount, it doesn't really matter and it perfectly supports the point I was trying to make. Apple doesn't need any debt at all and would be roughly the same company without any debt even if it didn't maximize shareholder value.

If you want to have a conversation about the overall balance sheet situation for S&P 500, that's a separate conversation but I did look at a bunch (going down this list - https://www.slickcharts.com/sp500 - not super carefully though) and it's pretty hard to imagine any of the ones I looked at (up to Home Depot) having any sort of issues even assuming a larger shock than is currently foreseen. With the exception of JP Morgan Chase, I suppose, it's virtually impossible to gauge the balance sheet of a financial with a cursory glance. I know the communications sector is somewhat more indebted and those are next on that list, but then again, I'd think Verizon/AT&T types aren't as sensitive on the revenue side and I suspect they can just cut dividends in the worst scenario.

Chytry made a comment tangential to our conversation; it wasn't the catalyst of a new one. Anyone that wants to prove that can bounce back to what really started the whole thing, which was Shuffle telling you int the stock trading thread, correctly, that this is a solvency crisis despite your half-measured macro goggles telling you otherwise.

Anyway, I'm not getting dragged into this nowhere again; I just came to quickly defend myself against your blatant misrepresentation. And i call it that because i know you're there enough to follow at least some of what we've been talking about for the last week.

I was clearly responding to chytry on that specific point. You can go look at the exact post - I quoted him talking about big/small business divide and brought up a point that contradicts his assumption. That you felt it was tangential doesn't mean I didn't write that in response to him. I don't know why you feel the need to keep defending yourself. You made a small error that ended up being more embarrassing than it had to be because you tried to insult me at the same time. You can admit it and move on or be like Tooth and not admit it and move on.

I'm allowed to have different conversations with different people. This entire post was in response to chytry:

https://forumserver.twoplustwo.com/s...4&postcount=24

It doesn't matter what conversation you think we've been having. You misunderstood it to be much broader in its implications than I intended because you were confused about the context. I get it, making a small mistake in the first place is fine, this isn't your job, I'm just some clown in your mind. I don't know why you're having a multi-post freakout over this.

You responded to his comment which partly referenced our conversation. Anyone can track that if they want to. You're so disingenuous at this point I am leaning towards you simply being a troll.

Right anybody could look this up:

I'm talking about how the big/small business divide isn't about debt/no-debt (well at least not in the direction he's hinting at), but lots of other things. Are you saying chytry is correct that being able able to load up on debt is the primary distinguishing feature of big businesses?

Also, even if we totally accept your context confusion and say this was my double-entendre trying to talk about the balance sheet situation of the larger cap components of S&P 500 more generally, guess what - it's still correct! It's only semi-questionable if you literally put words in my mouth and extrapolate to include companies I did not intend include, while not relaxing the rest of the statement. "Companies in S&P 500 barely have any debt" would be wrong. "Companies in S&P 500, on a market-cap weighted basis, generally have stronger balance sheets than other businesses" would be roughly correct. In no world does it make sense for this to be "one of the dumbest things ever said on this forum."

Also:

It's like you can't decide how you want to defend this.

Yes, he's absolutely correct, in the context of this pandemic, which is where this entire conversation resides. Small businesses failing during crises because they can't generate liquidity as fast as big businesses is huge. Way bigger than cyclicality, which in reference to the current crisis is almost a non-sequitur. It's like pages and pages of you having a conversation with yourself by reciting things from memory without it having any relevance at all to what's actually happening.

Everyone: "revenues are hugely down causing a solvency crisis and need for debt which will lead to mass business failures!"
Candy: "cyclicality and bargaining power!"

Totally bizarre. I and others see right through it as the posturing it is.

This is also wrong. If the big businesses were all autos, airlines, full-service restaurants and oil and gas exploration and small businesses were smaller versions of Microsoft and Amazon (they weren't always big), no the big businesses would be hit harder. It's also important to note that big/small here isn't a "big company" vs "small business" in the typical sense but NASDAQ 100 vs Russell 2000. The weighted average market capitalization for a Russell 2000 component was around $2.48 billion as of EOY 2019 (probably lower now). These companies have plenty of access to the debt market. Context: