Thoughts on the Markets

Charts and Narratives Explained

Everybody loves Charts!

Every so often, I’ll check in to show some items which have been floating around in Wall Street circles and blogs. Longer term trends and assumptions in the markets and economy. Plus some extra details on what I’ve been eyeing as either underappreciated or overhyped. Best of all, I’ll try to link to some well put together explainers on the concepts.

**Everything is as of 1/21/23

The 2008 Comparison Chart

All of 2022, you likely saw something like the below graph floating by on Financial Twitter or Reddit. This is fun to think about and looks quite ominous but it’s a complete chart crime.

Any two squiggly lines can be put on top of each other and called a match!

• The causes of the 2008 crash were totally different than the economic circumstances we’re in today.

• X Axis Red Flags: The 2008 crash shown appears to take place around Dec/Jan 2008 but the actual decline kicked off in late October 2008. No reference is made to a “slide" or “transpose” of data to align shape. A Lot of different triggers take place at different points in the year making seasonality important.

• Y Axis Red Flags: What are these scales? Linear? Log? Manually stretched in a Charting software to something magnified? You really want to use a Percentage Change scale when comparing two snippets like this

• No source. Everywhere I saw this, it was just a vague chart. No ownership watermark or signature by a Sell Side Research Dept. Not even a boutique, online or well known handle like SpotGamma or Live With Oscar

Overall Takeaway: While History can rhyme, it is rarely ever so neatly aligned to the present. This chart was scare mongering and rumor mills. As soon as the divergence became too hard to erase, this chart suddenly faded and a similar 2000-2002 crash comparison chart came around to take its place because it fits better now.

The S&P500 Forward EPS Vs P/E multiple Matrix

This has become my new compass for gauging trading levels and congestion in the S&P500. It’s so simple yet so effective in finding broad support and resistance levels or ranges. It’s amazing how often these levels align with technical charting levels.

Most fundamental traders think in terms of Multiples when buying or unloading single stocks but it works just as well with indices. The only caveat really is a lack of comparative P/E s in other single stocks.

P/E Multiples go up or down for a lot of reasons but a good rule of thumb is that the P/E value moves opposite of real bond yields. If you can get more return in bonds, they you’ll pay less for stocks.

Forward Earnings Per Share (FWD EPS) are forecast model outputs by Wall Street research dorks. They take the guidance company management gives + estimate future company financials to generate a projected value.

Trailing Earnings Per Share (TTM EPS) are known values provided during earnings announcements. They are cold hard quarterly results. Once announced, these values drop off of forecasting models and we find out who guessed right and who guessed wrong.

Right now, S&P500 is running around 20.6 P/E with most S&P500 Research notes forecasting between $200 - $210 EPS. This is down from $215-$225 3 months ago. and there is a lot of concern for coming declines in the EPS number in 2023.

Using the matrix, we can make sense of what a change in either input will do to S&P500 levels.

We’re hanging around 3900-4000 on the S&P500 as of this writing (20.6 * 200 ) .

Bonus Chart for S&P500 historical P/E Ratio This gives some idea of whether we’re high or low in value to start the year versus history

Overall Takeaway: This is a great tool for spit balling levels and scenarios.

1. What if P/E declines to 18 but earnings stay above $200?

   18*200 = 3600 S&P500 value

2. What if earnings also crash to $180 as Morgan Stanley projects?

   18*180=3240 S&P500 value

3. What if everything capitulates and we have a crash?

   15 * 180 = 2700 S&P500 value (ouch)

M2 Money Growth Vs Inflation

This is pretty cool and should be taught more mainstream.

• When Year over Year % Change in M2 Money growth increases (blue line), —>about 12 months later—> the inflation rate increases (red line).

• When Year over Year % Change in M2 Money growth declines(blue lines)—— >about 12 months later —- >the inflation rate declines (red line)

Same Data transposed by 12 months (Yellow) so they overlay on top of each other.

Overall Takeaway:

THIS IS WHY PEOPLE ARE SAYING INFLATION IS BEAT. They expect the blue line to chase downward over the next 6 months.

The people who say this is the end of inflation are thinking we may be in for deflation if the Federal Reserve does not restart M2 money growth soon. (Quantitative Easing).

I agree M2 Money growth declining is a big factor for inflation drying up.

I do NOT see this as sole factor for inflation though. I think of this bit as the frothy, foamy top of inflation drying up. Labor restrictions, commodity price hikes, tight lending standards and capital restrictions are all also contributing to inflation. This is not a smoking gun for the silver bullet killing inflation in 2023