Well, the big news of the last week was not the re-test of the February lows but was Elon Musk buying Twitter. Seems that this is all the business media are talking about for at least the past three days. This will essentially take a public company private, which happens probably more than you think. Usually it’s because some activist sees potential value if he/she owns the whole company and can either break it up for the some of its parts, or they see a vertical integration which helps an existing business deliver more profit, or in this day and age protect the supply chain.
I think in this case, it’s just another rich dude buying a media company. They all do it. Let’s take a quick glimpse. Jeff Bezos owns the Washington Post, Rupert Murdoch owns Fox Media, Michael Bloomberg owns Bloomberg media, the Red Sox owner John Henry owns the Boston Globe and even Warren Buffett owns a bunch of regional newspapers. The reasons these guys buy media companies are varied and many, however one could assume its either to protect its current political views or to shape them. It’s definitely not for profit, as the news component of these companies mostly lose money. Diversity into sports or other licensing areas, can help plug the holes.
As we know, Elon is a rare individual and I believe his purchase is more about owning/controlling a digital media company. Time will tell how this plays out, but now with a platform where he is unable to be “blocked” …it should be entertaining.
Ok…back to what you care about. I’ve stated this many times, markets operate in the long term based on fundamentals (business plan, expertise of management, creating value for customers). In the short term they trade on technicals (meaning charts). Terms like, “support resistance”, “relative strength”, and “moving averages”, become more of what moves the market. This is a trader’s dream.
This is where they have the opportunity to shine, while the rest of us “investors” grit our teeth. It’s painful to watch account balances go down, but they do, and will always do so. What’s happening now is exactly what markets do, they correct, go through a consolidation period, and try to find new leadership. Hindsight makes this really easy. I’ve written for a while now that the first half of this year will be tough to make money. Rising rates, regional conflicts, and scary inflation numbers take the wind out of the sails. “So why didn’t we just sell and protect everything till the market tanked, and then put it back in when the market is good again?” “Why don’t we get rid of all the bad stocks and just own the good ones??” These are a couple of “great” questions I got this week…. (Not from any of you thankfully). First, I wish my crystal ball was that clear. Second, there are many sins in this business, but the one that sticks at the top of the mountain is this….”DON’T TRY TO TIME THE MARKET”. It’s a mugs game and one that comes with severe consequences. Even if you get it right and sold at the top on January 3rd, when do you buy back in? “Oh, that’s easy when everything settles down.” Ok, is that when the guys on TV tell you things are great, or is are you waiting for new highs again? Either way you screwed yourself with taxes if you’re in a non-retirement account, and I promise you you’re not that good at picking the time. No one is. That’s why any investor worth his/her weight in Bitcoin will tell you that they don’t do it.
Now today we are at (or about at) the lows of the year. A re-test of February’s lows. This is normal. If we are able to hold these lows, it will set the market up nicely and may provide a base, but obviously it could go lower from here. And if it does, it brings valuations back to cheap levels again. I suspect that if we do undercut these lows that it would be a steep drop, but it would also give us a great opportunity to buy.
There is a balancing act in the market right now, as it tries to weigh up the Pros and Cons of all the economic data. As I mentioned earlier, inflation is the risk to slow this growth cycle. However, earnings growth is still exceptionally strong, the consumer is in good shape, and supply/demand constraints are seeing significant improvement, which gives me a positive longer term outlook.
Digging deeper into some earnings that are coming through this past week, I was very interested in the home builders. Their earnings were great, their commentary was that inventories are extremely low, they are able to sell at prices that are creating very good margins. Despite rising rates that have the potential to slow the home buyer, they are not seeing it. These home builder stocks have been killed and now trade at what I think are generational lows, when comparing price to earnings. The market seems to think inflation pressures will kill these stocks at some point, so they’ve already exited the building, pun intended.
Summing up, this is a normal market consolidation. This may drag out longer than you are used to, and yes, we may go lower from here. YOU ARE INVESTED FOR THE LONG TERM. These are the times you look back and say I wish I would’ve bought then. Don’t worry, I’ll do it for you.
Updated Buy/Sell this week, with 2023 forecast. Here’s the battle in my noggin right now. Earnings are still strong, and I’m very comfortable with my earnings forecast of $230 this year and $245 for 2023. The struggle is how many times that you are willing to pay for it (the multiple or as you may know it the P/E ratio). The market multiples have been elevated since the government stuck a few Trillion into it. Those multiple will need to return to normalized historical means at some point. To me, it’s just a matter of how quick. So, I lowered my 2022 multiple to 20, and 2023 to 19, and I think this will set us up for a nice visual of market fair value for the next 18 months.
OK, that’s enough rambling, now go enjoy this beautiful weather!!
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