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We started the year with significant uncertainty about whether the surge in inflation seen in 2022 would persist as well as about whether the economy was headed into a recession. The Markets in the Third Quarter Coming off a year of rising rates in 2022, interest rates have continued to command center stage in 2023.
By the end of 2021, it was clear that this bout of inflation was not as transient a phenomenon as some had made it out to be, and the big question leading in 2022, for investors and markets, is how inflation will play out during the year, and beyond, and the consequences for stocks, bonds and currencies.
If 2022 was an unsettling year for equities, as I noted in my second data post, it was an even more tumultuous year for the bond market. The rise in rates transmitted to corporate bond marketrates, with a concurrent rise in default spreads exacerbating the damage to investors.
It is the nature of stocks that you have good years and bad ones, and much as we like to forget about the latter during market booms, they recur at regular intervals, if for no other reason than to remind us that risk is not an abstraction, and that stocks don't always win, even in the long term. at the start of that year.
But before delving into the best candidates for these roles, typical trades, careers, and more, let’s start with the basic definitions: What is a Convertible Arbitrage Hedge Fund? But with convertible arbitrage and other relative value strategies, the overall market’s results do not matter (to the same degree).
In the first few weeks of 2022, we have had repeated reminders from the market that risk never goes away for good, even in the most buoyant markets, and that when it returns, investors still seem to be surprised that it is there. In closing, I will talk about some of the more dangerous delusions that undercut good risk taking.
The big story on Wednesday, September 18, was that the Federal Reserve’s open market committee finally got around to “cutting rates”, and doing so by more than expected. The market seemed to initially be disappointed in the action, dropping after the Fed’s announcement on Wednesday, but it did climb on Thursday.
If you have been reading my posts, you know that I have an obsession with equity risk premiums, which I believe lie at the center of almost every substantive debate in markets and investing. The risk premium that you demand has different names in different markets.
The nature of markets is that they are never quite settled, as investors recalibrate expectations constantly and reset prices. In most time periods, those recalibrations and resets tend to be small and in both directions, resulting in the ups and downs that pass for normal volatility.
The market clearly had a very different view, as the stock premiered at ? I argued then that notwithstanding the potential growth in the market, and Zomato's advantageous positioning, it was being over priced for its IPO, at ? On July 21, 2021, I valued Zomato just ahead of its initial public offering at about ? 41 per share.
By the same token, a country that is viewed as "first world" can lose that status, if people start perceiving the system as unfair, legal systems filled with delay and waster and a government that becomes capricious in its actions, or worse.
Investors are constantly in search of a single metric that will tell them whether a market is under or over valued, and consequently whether they should buying or selling holdings in that market. Note that nothing that I have said so far is premised on modern portfolio theory, or any academic view of risk premiums.
Thus, almost everything I know and practice, when valuing young and start-up companies, I learned in the process of valuing Amazon in the 1990s. My last valuation of Tesla was in November 2021, towards its market peak, and given its steep fall from grace, in conjunction with Elon Musk's Twitter experiment, it is time for a revisit.
I have been writing about, and valuing, Tesla for most of its lifetime in public markets, and while it remains a company that draws strong reactions, it is also one that I truly enjoy valuing. Put simply, the company has been able to scale up more quickly, while reinvesting less in capacity, than any other automobile company.
The first quarter of 2021 has been, for the most part, a good time for equity markets, but there have been surprises. The first has been the steep rise in treasury rates in the last twelve weeks, as investors reassess expected economic growth over the rest of the year and worry about inflation. for 2021 and inflation of 2.2%
As we start 2024, the interest rate prognosticators who misread the bond markets so badly in 2023 are back to making their 2024 forecasts, and they show no evidence of having learned any lessons from the last year. In fact, treasury bill rates consistently rise ahead of the Fed's actions over the two years.
The first of the is as companies scale up, there will be a point where they will hit a growth wall, and their growth will converge on the growth rate for the economy. Firms with large revenues find it difficult to maintain high growth, as they scale up. On both fronts, I am more cautious.
I also start thinking about my passion, which is teaching, the spring semester to come, and the classes that I will be teaching, repeating a process that I have gone through every year since 1984, my first year as a teacher. Face up to uncertainty, rather than avoid or deny it : Uncertainty is a feature of investing/ business, not a bug.
When I started offering financial modeling training , I never expected to get questions about a methodology like the Dividend Discount Model (DDM). It can be useful for certain companies, such as power and utility firms and midstream (pipeline) operators in oil & gas … …but it’s also much harder to set up and use than a standard DCF.
and different teams specialize in different instruments (investment-grade, high-yield, distressed, structured, sovereign, emerging markets, etc. – The fixed income market dwarfs equities in terms of market value and trading volume, but that does not necessarily translate into “more jobs.” Treasury yield at?
To set the stage, I will start by laying out the differences measure of earnings that reported on an income statement: At the top of the profit ladder is gross income , the earnings left over after a company has covered the direct cost of producing whatever it sells.
In fact, the standard practice that most analysts and investors follow to estimate the riskfreerate is to use the government bond rate, with the only variants being whether they use a short term or a long term rate. where I looked at the possibility that we live in a world where nothing is truly riskfree.
In a post at the start of 2021 , I argued that while stocks entered the year at elevated levels, especially on historic metrics (such as PE ratios), they were priced to deliver reasonable returns, relative to very low riskfreerates (with the treasury bond rate at 0.93% at the start of 2021).
It has been my practice for the last two decades to take a detailed look at how risk varies across countries, once at the start of the year and once mid-year. Country Risk: Default Risk and Ratings For investors, the most direct measures of country risk come from measures of their capacity to default on their borrowings.
In this post, I will start by looking at the role that hurdle rates play in running a business, with the consequences of setting them too high or too low, and then look at the fundamentals that should cause hurdle rates to vary across companies.
In my last three posts, I looked at the macro (equity risk premiums, default spreads, riskfreerates) and micro (company risk measures) that feed into the expected returns we demand on investments, and argued that these expected returns become hurdle rates for businesses, in the form of costs of equity and capital.
As we approach the mid point of 2021, financial markets, for the most part, have had a good year so far. For those who are older or grew up in countries with high inflation, inflation is far more than a number, wreaking havoc on savings and exposing fault lines in economies and societies.
Domestic market still not fully penetrated yet. The share price is up 35% YTD. Gazprom’s major export market is Europe, which committed to an ambitious transition to green energy. Western countries fear that Russia starts to gain control over Ukraine again. Domestic market still not fully penetrated yet.
To start the year, I returned to a ritual that I have practiced for thirty years, and that is to take a look at not just market changes over the last year, but also to get measures of the financial standing and practices of companies around the world. Happy New Year, and I hope that 2022 brings you good tidings!
Thus, looking at only the companies in the S&P 500 may give you more reliable data, with fewer missing observations, but your results will reflect what large market cap companies in any sector or industry do, rather than what is typical for that industry.
In my last data updates for this year, I looked first at how equity markets rebounded in 2023 , driven by a stronger-than-expected economy and inflation coming down, and then at how interest rates mirrored this rebound. Analysts often try to bring company-specific components, i.e,
In my last post , I noted that the US has extended its dominance of global equities in recent years, increasing its share of market capitalization from 42% in at the start of 2023 to 44% at the start of 2024 to 49% at the start of 2025.
The other is pragmatic , since it is almost impossible to value a company or business, without a clear sense of how risk exposure varies across the world, since for many companies, either the inputs to or their production processes are in foreign markets or the output is outside domestic markets.
It was an interesting year for interest rates in the United States, one in which we got more evidence on the limited power that central banks have to alter the trajectory of market interest rates. We started 2024 with the consensus wisdom that rates would drop during the year, driven by expectations of rate cuts from the Fed.
The Indian and Chinese markets cooled off in 2024, posting single digit gains in price appreciation. First, they are indices and reflect a subset of stocks in each market, with different criteria determining how each index is constructed, and varying numbers of constituents. There are three problems with comparing returns in indices.
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