Blog Archive

Monday, May 11, 2020

Inflation and the price of commodity futures

The Fed started unlimited QE and money printing sicne earily March to stimulate the economy due to COVID-19. The below graph is the balance sheet of the Fed since Feb 2020. Before March, the asset of the Fed was around 4.25 Trillon dollars and by now it is close to 6.75 Trillon dollars or a 58.8% increase.

The use of money and the creditbility of USD

US dollars are a major currency because of its credibility. However, once the Fed started to print money to buy junk bonds, the creditbility of USD is questionable. If you ever heard of the digital money initiative in China, you may understand why it is a good time for Chinese government to implement it now. This is not the first time that USD ruins its creditbility, in 1971, USD unlinked from Gold and basically became the same thing as your toilet paper (not even close, your hole will not like it). Today, the Fed is using its money to purchase junk bond. Now you understand why Chinese government is introducing digital money. Paper money is BS, and given that all the western coutries are under 0 or negative real interest rate. Digital money is just fine (no interest rate).

Inflation, pricing of assets and government deficits

Do you think that government deficit is a big problem? No, under inflation, debt is nothing. US can pay off its debt easily as debt is always nominal. When USD is worthless, the assets priced with USD will be assigned higher prices. Your 500K mortgage may only worth 2 gold bars. So what I am trying to say here is, volumn of debt is not a problem, the realy problem comes from the velocity of the debt. Or, the second derivate of the debts. Commodity market will be the opportunity for next half of 2020 and 2021 as we entering the era of inflation. 

About Myself:

Finance Mojo from MBA Finance Club.

Saturday, May 9, 2020

Is stock markets really recovering? A P/E PEG case study of SP500

Is stock markets really recovering or another bubble? A P/E PEG case study of SP500

COVID-19 is just like a needle which piereced the bubbles of US stocks markets. We all know that US stocks are over-priced, but we are so used to it and hence kind of ignoring it. Lets take a closer look at some of the interesting details about SP500.

The crash and PMI.

SP500 started to collapse in late February when investors realized that the impact of COVID and related government restrictions are "real". At that time, some of the companies were claiming that the Q2 forecast will be just fine as the demand will go up (basically). However, I can tell you these companies are LYING. Simply take a look at the US PMI. For those who have no idea about PMI, PMI is simply the confidence of the expectation from the demand/purchasing side.

US PMI chart


Whenever PMI is lower than 50, that means the purchasing managers are not considering buying. The above graph from Trading Economics forecasts that the PMI index will not recover to 50 level until Q4 2020, and Q2 2020 will be a real disaster at lower than 40. So, for these companies forecasting sales growth and revenue growth for Q2 2020, where the hell is that growth coming from? 

Recovering or creating another bubble? P/E, PEG approach

Below is a screenshot from Google of SP500 index. The index started to recover on the 23th of Mar and closed at 2929.8 8th of May. No matter if you believe in technical analysis or not, based on the shape of the chart, the SP500 index would probably “recover” further from the crisis. 

Source: Google Stock Search

However, we have to be able to see through these price changes and dig deeper. Two basic concepts here: P/E multiples and PEG ratio. P/E multiples is how much you are investing in companies “productivity” (I would not rather say Profits) and P/E multiples implies how long you can break even. I.e. if you invest 5 dollars to a 1 dollar productivity, you need 5 years to break even (simplicity). PEG makes the P/E concept more dynamic, given your expectation of g, the breakeven point can be sooners. 

Example: Assume trailing P/E

Stock A: P/E= 20   g=0.1 (10% growth) then PEG=20/10=2 (base case)

Stock B:P/E=20 g=0.5 (50% growth) then PEG=20/50=0.4 (best case)

Stock C: P/E=20 g=0 then PEG=20/…..?????? (WTF)

The bubbles

So now you have a sense about what is going on with the market. Lets recap again, 

  1. PMI indicates demand side collapse, excess supply will lead to supply clearing.

  2. Low PMI leads to negative or low growth rate, g.

  3. PEG ratio of SP500 companies will goooooooooo up.

  4. The productivity or earnings of the companies are overpriced. (even though the nominal prices are lower)

Finally, check this research out it is from Be careful about industrials, consumer staples. Are you still considering them recovering?


Finance Mojo. from MBA Finance Club