My beliefs are fundamentally that the inversion of the yield curve either represents or causes or is caused by a shift in the economy. Companies that did well under the previous circumstances are likely to do poorly in the new circumstances. However these changes appear to follow the old saying of going slowly and then all at once, which makes timing difficult. Directly shorting for a long period (say several years) is costly, either you pay through the nose for time value in your puts, or have to have collateral ready should the market move against you, rolling over shorts has high transaction costs. Sitting out portions of the market where it appears as if the recent down leg has run its course has the unfortunate risk of missing out on one of those 'all at once' moves. My compromise is to take small positions in what I expect to be highly volatile stocks in such a situation. SQ fits the bill in several ways, its valuation is largely based on expectations of future earnings growth and is in a sector that has thrived under the previous regime, so any negative surprises should whack it pretty hard. The electronic payments industry is also one I currently am guessing will be next/near to next in line as the recession is made apparent.
Yes, I'm paying attention -- I find you often think a lot like me in the SSC comments.
I agree that SQ is dangerously highly priced and vulnerable, but then again I hesitate to say they're overpriced because I personally think they make a good product, which is not nothing. I assume you think electronic payments industry is next in line for recession b/c it, like healthcare, has outperformed most other industries since the last recession. When you first said that about healthcare I thought it was an oversimplification and that I couldn't buy it without more of a story specific to an industry, but I've thought about it since then I buy it a bit more.
Do you get data on the performance of the various sectors from somewhere specific?
"I assume you think electronic payments industry is next in line for recession b/c it, like healthcare, has outperformed most other industries since the last recession."
Well its another step beyond that, SQ's valuation is mostly a projection and projections are more susceptible to changes in the status quo.
"but then again I hesitate to say they're overpriced because I personally think they make a good product"
I am trying not to think of things in terms of over/under priced, but more 'their price reflects this reality, is that the reality going forward'. Its also not necessarily about the quality of the products, Amazon dropped from more than $90 a share to $50 in late 2007 to late 2008. It also surged from that point to over $130 by late 2009. Its long term quality didn't prevent it from being dumped along with everything else.
"Do you get data on the performance of the various sectors from somewhere specific?"
I'm mostly just following stock prices for sectors (ETFs and individual stocks) and looking at where the gains were large for cluster of them.
Why SQ? Doesn't seem to follow naturally from your beliefs
ReplyDeleteSomeone is paying attention? Wow!
DeleteMy beliefs are fundamentally that the inversion of the yield curve either represents or causes or is caused by a shift in the economy. Companies that did well under the previous circumstances are likely to do poorly in the new circumstances. However these changes appear to follow the old saying of going slowly and then all at once, which makes timing difficult. Directly shorting for a long period (say several years) is costly, either you pay through the nose for time value in your puts, or have to have collateral ready should the market move against you, rolling over shorts has high transaction costs. Sitting out portions of the market where it appears as if the recent down leg has run its course has the unfortunate risk of missing out on one of those 'all at once' moves. My compromise is to take small positions in what I expect to be highly volatile stocks in such a situation. SQ fits the bill in several ways, its valuation is largely based on expectations of future earnings growth and is in a sector that has thrived under the previous regime, so any negative surprises should whack it pretty hard. The electronic payments industry is also one I currently am guessing will be next/near to next in line as the recession is made apparent.
Yes, I'm paying attention -- I find you often think a lot like me in the SSC comments.
ReplyDeleteI agree that SQ is dangerously highly priced and vulnerable, but then again I hesitate to say they're overpriced because I personally think they make a good product, which is not nothing. I assume you think electronic payments industry is next in line for recession b/c it, like healthcare, has outperformed most other industries since the last recession. When you first said that about healthcare I thought it was an oversimplification and that I couldn't buy it without more of a story specific to an industry, but I've thought about it since then I buy it a bit more.
Do you get data on the performance of the various sectors from somewhere specific?
"I assume you think electronic payments industry is next in line for recession b/c it, like healthcare, has outperformed most other industries since the last recession."
DeleteWell its another step beyond that, SQ's valuation is mostly a projection and projections are more susceptible to changes in the status quo.
"but then again I hesitate to say they're overpriced because I personally think they make a good product"
I am trying not to think of things in terms of over/under priced, but more 'their price reflects this reality, is that the reality going forward'. Its also not necessarily about the quality of the products, Amazon dropped from more than $90 a share to $50 in late 2007 to late 2008. It also surged from that point to over $130 by late 2009. Its long term quality didn't prevent it from being dumped along with everything else.
"Do you get data on the performance of the various sectors from somewhere specific?"
I'm mostly just following stock prices for sectors (ETFs and individual stocks) and looking at where the gains were large for cluster of them.