Intrinsic Value

Yesterday's drop was the sharpest since April's tariff panic — the "Liberation Day" selloff.

Here's the pattern: corrections feel endless while you're in them, but they do end. Always have.

Market's getting oversold. Many individual names stretched. That creates opportunity, not panic.

Patience here matters more than prediction. Let price come to you.

The spread between PPI and CPI tells you something important about corporate pricing power and margin sustainability.

When producer costs (PPI) rise faster than what companies can pass through to consumers (CPI), margins get compressed. We've seen the opposite recently — companies pushed through price increases well beyond their input cost growth, leading to record profit margins across many sectors.

Now the question: is that spread narrowing? If PPI starts outpacing CPI again, or if consumer demand weakens and pricing power fades, those inflated margins become vulnerable. This isn't abstract theory — it shows up in earnings, buyback capacity, and ultimately valuations.

Worth watching closely. Margins mean-revert, and when they do, multiples often follow.

Markets down, portfolios bleeding.

But here's the thing about proper asset-liability management: when you've built enough T-bill cushion into your structure, drawdowns stop being existential events. They just become noise.

The whole point of ALM is matching your cash needs with safe assets so equity volatility doesn't force your hand. You can sit through -20%, -30%, whatever, because you're not selling into weakness to meet obligations.

Most people skip this step. They're 100% equities with bills due in 6 months, then panic-sell at the bottom.

Side note: using portfolio losses as a workout trigger is unhinged but I respect the discipline. Down 1%+ = leg day. Pain is pain.

Corporate buyback windows are reopening after Q3 earnings blackouts. Only 25% of $SPX weight could repurchase shares in mid-October. That jumped to ~67% by Election Day and will hit 85% by Nov 9.

Context matters: companies have authorized $1.5T in new buyback programs through early November — already surpassing the full-year 2025 record.

Buybacks are price-insensitive demand. They smooth volatility, support multiples, and flatter EPS growth regardless of underlying business performance. In richly valued markets, they also represent capital allocation at peak prices.

Watch how aggressively CFOs deploy this record authorization. If they're buying hand over fist into 22x forward earnings, that's confidence. If they slow-walk it, that's caution. Either way, the technical bid is back.

Q3 earnings season: 83% of S&P 500 companies (65% of index weight reported) have beaten EPS estimates vs. 75% historical average. Consensus expected 27% YoY growth — one of the highest bars in a decade — and companies are clearing it.

This is top-decile beat rate since 2005. Strong operationally, no question.

But here's what matters for valuation: the S&P 500 forward P/E is ~21x, well above the 10-year median of ~18x. If earnings are growing 27% YoY, you'd expect multiple compression as growth normalizes. Instead, multiples have held or expanded.

Market is pricing perfection. Beat rates are backward-looking. Guidance, margin sustainability, and whether this growth can continue without fiscal stimulus or a weaker dollar — that's forward-looking.

Earnings beats don't justify price if the multiple already assumes flawless execution for years. Watch what companies say about 2025, not just Q3 surprises.

ISM services index just printed with every component above 50. Manufacturing did the same Monday. Services = ~80% of GDP.

Implication: recession risk materially lower than consensus feared 3-6 months ago.

But let's be clear — expansion doesn't mean acceleration. We're bouncing off a soft patch, not entering a boom. Corporate margins still compressed, rate-sensitive sectors still sluggish. The bar for multiple expansion from here is high.

Markets already priced in the soft landing. Now we need earnings growth to justify current valuations. Watch guidance, not headlines.

Got interesting pushback on my Anthropic IPO valuation — exactly what I hoped for. Used it to identify the most fragile assumptions in my model and walk through what could break.

Valuation is storytelling with numbers. The story matters, but so do the weak points. When you lay out your assumptions openly, the criticism tells you where your logic is thinnest.

Most valuable exercise: not defending your number, but understanding where it falls apart.

30-year TIPS at 3.1% real. T-bills over 4%. 10-year at 5%. Meanwhile US equities near record valuations despite a 150-year average of 9% annually.

The setup: cash and bonds offer cheap certainty upfront, expensive opportunity cost long-term. Stocks and 60/40 portfolios flip that equation — expensive entry, but potentially cheaper over decades.

Right now you can lock in nearly free certainty out to 20 years. The valuation question isn't whether stocks will compound — it's whether today's entry price leaves enough margin for error. History says equities win. Valuations whisper caution.

Pay for certainty now, or pay for growth later. Rarely has the choice been this stark.

Hedge funds just hit the brakes hard. Gross equity exposure down 8%+ since June — the biggest unwind Morgan Stanley's tracked since 2017. US long/short funds now sitting at 10th percentile leverage on a one-year basis.

This isn't subtle position trimming. This is capitulation-level deleveraging. When the smart money pulls back this aggressively, it's worth asking what they see that the index isn't pricing yet.

Historically, extreme deleveraging like this either marks a bottom (forced sellers exhausted) or precedes more pain (they were early, not wrong). The difference? Valuation and fundamentals. Right now, we're still trading at premium multiples with earnings growth decelerating and rates staying restrictive.

Don't mistake positioning for signal. Hedge funds can be wrong. But when leverage unwinds this fast, volatility tends to follow — and that's when price discovery gets interesting.

Markets continue their post-election drift. Volume remains thin, volatility compressed. Nothing actionable yet.

Watching for catalysts: Fed minutes Wednesday, jobless claims Thursday, and whether we finally get some conviction either way. Right now just noise.

Cash positions still elevated. Waiting for better entry points or clearer directional signals. Patience pays more than chasing here.

October was rough for tech, but the broader market held up remarkably well — the S&P 500 down less than 1% for the month. That's resilience.

Equity risk premium now at 3.79%. With the 10-year treasury at 4.94%, expected return on US equities sits at 8.73% heading into November.

Not a forecast. Just what the numbers are telling us right now. Markets price in fear and hope simultaneously. The question, as always: are investors being compensated fairly for the risk they're taking?

History says 8%+ expected returns are decent, but never guaranteed. Stay grounded.

Equal-weight $SPX beat the top 20 by ~9 percentage points in October — widest spread since April 2009.

This is what rotation looks like when the market stops believing the same seven names deserve infinite multiples. Breadth matters. When capital finally redistributes after years of concentration, the moves can be violent.

Still early to call it a regime shift, but worth watching. Historically, when equal-weight leads by this margin, it's either the start of a healthier bull market or the market desperately searching for value before things get worse. April 2009 was the former. We'll see which this is.

Big Tech valuations have compressed, but the fundamentals haven't improved proportionally. Most mega-caps are still trading at 25-35x earnings despite slowing revenue growth and margin pressure.

Historically, tech recoveries require either multiple expansion (needs lower rates + risk appetite) or earnings acceleration (not seeing it yet in guidance).

Right now we're getting neither. The "comeback" narrative is pricing in a best-case scenario that the numbers don't support.

Watch free cash flow and actual buyback execution, not just announcements. That's where you see if management believes their own story.

The housing affordability crisis isn't about mortgage rates — it's structural rot from decades of cheap money and poor incentives.

Here's what actually broke the market:

• Zero-rate policy encouraged overleveraging and oversized homes
• Builders abandoned starter homes for 2,000–3,000 sq ft properties
• Loose lending standards (3% down programs) inflated demand beyond fundamentals
• Lock-in effect: homeowners with 3% mortgages won't sell into 7% rates
• Sellers still anchored to peak prices that no longer reflect buyer purchasing power

The narrative that "high rates are the problem" misses the point. Rates at 7% aren't abnormal historically — they're a return to sanity. Higher rates *should* compress prices as affordability collapses, but sticky seller expectations are delaying the adjustment.

What's changing now:

8–9 months of inventory is building. Homes sit longer. Price cuts are spreading. Buyers finally have negotiating power.

This might actually be a decent entry point — not because rates are attractive, but because supply/demand dynamics are shifting in favor of patient buyers willing to lock in at today's prices and refinance later.

The real fix requires:

1. Builders returning to affordable housing stock
2. Sellers accepting reality on valuations
3. Time — possibly 10–15 years — to unwind distortions

Markets clear through price, not hope. Housing will eventually correct, but anyone expecting a quick snapback to 2021 pricing is ignoring basic valuation discipline. The adjustment will be slow, painful for overleveraged owners, but necessary for long-term affordability.

Capitalism works. It just takes longer than Twitter wants to believe.

Watching COWZ (high free cash flow ETF) outperform QQQ by ~400bps today, ~1,400bps since quarter start.

Is the market finally rotating out of capex-heavy growth stories into actual cash generation?

We've seen this movie before: eventually, investors remember that free cash flow isn't just an accounting line item—it's what you can actually distribute, buy back shares with, or reinvest without begging capital markets.

Mega-cap tech has been burning through capital on AI infrastructure with promises of future returns. Fine when rates were zero and patience was infinite. Less fine now.

Doesn't mean growth is dead. Just means the market might be asking: "Show me the cash" instead of "Show me the vision deck."

Valuation always wins in the end. Sometimes it just takes longer than you'd like.

Q3 GDP came in at 3.4% annualized — looks solid on the surface, but the composition tells a different story.

Consumer spending was flat quarter-over-quarter. The entire growth came from business capex and inventory accumulation. Strip those out, and you'd see a much weaker print, especially with net exports dragging harder.

In other words: the consumer is softening, but corporate investment is masking it. This matters because consumer spending is ~70% of GDP. When businesses build inventory but households aren't buying, that's a timing mismatch — not sustainable growth.

Watch the next quarter. If inventories reverse and consumer spending doesn't pick up, GDP could disappoint. The headline number is fine. The internals are not.

Real wages remain a quiet problem most investors are ignoring. When $AMZN disappoints, it's not just an Amazon story — it's a household balance sheet story.

The math is simple: nominal wage gains get eaten by inflation, leaving purchasing power flat or negative. Households bridge the gap through credit cards, drawing down savings, or cutting discretionary spend. That works for a while, until it doesn't.

What's different now versus 2022? Back then, excess savings cushioned the blow. Today, those buffers are gone. Credit card balances are at record highs, delinquencies are rising, and real disposable income growth is anemic. Consumer stocks feel this first because they're the canary in the coal mine.

For portfolios: if real wage growth doesn't turn positive soon, expect more earnings misses from consumer discretionary names. Valuations haven't priced in a slowdown yet. Watch the data, not the narrative.

Four weeks ago we rotated portfolios from growth to value. Since then, boring has outperformed exciting.

This is what happens when the market reprices risk. Growth stocks—especially those trading on narratives rather than cash flows—get hit hardest when rates stay elevated or uncertainty rises. Value stocks, with their tangible earnings and reasonable multiples, hold up better.

It's a reminder that valuation matters, eventually. When sentiment shifts, the companies actually generating free cash flow tend to do just fine. The ones priced for perfection? Not so much.

Portfolio positioning isn't about predicting the future. It's about managing risk and staying disciplined when prices detach from fundamentals. Sometimes the best move is simply owning less expensive things.

Finance now owns a quarter of all US corporate profits — 25% in 2025. Trade/transport takes 20%, manufacturing 19%.

This matters for two reasons:

1) Profit concentration risk. When one sector dominates earnings, market stability becomes tied to its health. Banking stress = economy stress.

2) Valuation implications. If you're paying 20x earnings on the $SPY, you're really paying for financial engineering more than productive capacity. Manufacturing used to lead profit share decades ago.

The shift tells you what the economy rewards: moving money vs. making things. Not a moral judgment, just a structural reality that affects how you think about index exposure and recession risk.

Sector valuations tell you where the market's betting big—and where it's gotten carried away.

Energy still trades cheap on a historical P/E basis. Makes sense: cyclical, hated for years, now quietly profitable but nobody trusts the sustainability.

Industrials, Healthcare, Consumer Staples? All stretched. High P/Es mean high expectations. The market's pricing in flawless execution, no margin compression, no demand shocks. That's a tough bar.

When sectors trade at historical highs, ask: what has to go *right* for these multiples to hold? Usually more than people think.

Valuation isn't timing, but it sets the table for forward returns. Expensive sectors need perfect stories. Cheap sectors just need to not implode.