A Bullish case for US Equities

Discussion in 'Index Futures' started by NominalSpeculator, Sep 3, 2017.

  1. Hello,
    I presented myself here before if any background is required https://www.elitetrader.com/et/threads/quest-for-financial-freedom.310955/
    So, Newbie around, i only have 1 month of experience in a sim and went live Tuesday with 2K
    i am at 3k atm and was at 4.2k friday but got screwed here https://www.elitetrader.com/et/thre...unemployment-news-candle.312804/#post-4510511

    I Would like to offer and discuss my case for US equities with a bias for the nasdaq and S&P over the Dow.

    I Will try to be as short and concise as possible, we already spend a lot of time reading crap and alas you still need to read it to get a feel of the underlying quality.

    By deriving through algebra what drives a valuation multiple (on a FORWARD LOOKING BASIS, TRAILING PEs are retarded) we can show that the most important drivers are Forward/Expected (nothing is trailing or backwards looking here)
    1. g: Growth of cash flow or after tax earnings [Demand]
    1.1. & 2. marginal tax rate [Demand]
    3. r: Discount rate or cost of capital which will decompose in risk premia + risk free yield

    Once we admit this we have to observe leading indicators of each of these 3
    I have managed to fix up an index which takes into account consumer and business sentiment, commodity prices and unemployment as a proxy of g. I Still need to test it against the implied growth priced in the us equity indexes but would need factset for that, it should be close though. This is what it looks like
    Of course, this isn't supposed to be a leading indicator OF THE STOCK Market because the stock market itself is a leading indicator but what we are looking for here are divergences. for example post 09 there was a strong recovery in the index and because of bad sentiment in the stock markets it took a little while before it surged too to reduce the divergence.
    * the index fell a lot around 2015 that has to due with oil and should be disregarded i think. otherwise the index is still at healthy levels thus it is suggesting that there is no recession in the way.
    1.1 & 2. the tax regime
    I believe that the whole so called "trump trade" is a probabilistic play on two variables: the chance that we actually do get it and then the % tax rate. You can't exactly back solve for two variables but you can try to conjure a reasonable combination. I Have listened to people with a public/gov tax background talk about this and the number that always comes up is close to 25-28% if that's the case then this market only expects that at 20-40% there is still plenty of room for PE expansion as this project is clarified. the debt ceiling crap is also holding back the stock market but not by much although i believe that it has manifested itself in gold & the 10/2 spread. [because inflation expectations and real yield(TIPS) keep falling making this a divergent move]
    3. Discount rate
    Risk free side
    I spend my time researching monetary policy and what the fed is about. I Wish these tricksters would just shut up and only give speeches on determined dates live while markets are open but so be it. TIPS or Gold (really nearly the same things) have been rising reflecting the opposite of what the FED says they want to do.
    Up till now i still struggle to understand what their real aim is. they are definitely not after inflation & unemployment because their actions are not aligned. on the ECB side it seems to me that they are mainly working on keeping the EUR weak.
    The market right now is expecting long run inflation of 2pc which would keep real yields below 50bps and is bullish for risky assets overall.
    It is likely that max fed funds we will get is 2 percent given recent data. if that is the case then the US is "going Japanese" and you'd better get in on stocks now.
    On the risk premia side, if you're doing risky stuff and growing then it goes down. this is very bullish for stocks and growth stocks in particular.
    the 2/10 has been compressing. no further comment on that.
    Positioning & US equities vs other asset classes
    High yield is at 5 or so percent, with a NTM PE of 17 for the S&P500 that would imply an EARNINGS YIELD of 1/17= 5.88 and this figure is way overstated because as an equity investor you don't keep all earnings you only keep the dividend.
    This paints a shitty picture across asset classes but especially for credit. This is what institutional investors mean when they say that they don't get compensated adequately for holding debt so might as well, go into stocks.
    The spread between HYG credit and stocks isn't enough to justify NOT being into stocks.
    There was a 100% monthly increase in S&P Value at the partial expense of S&P Growth. can't say much about it unless someone can get me historical open interest.
    let's see on the ETF side

    Well what we have here looks good on the short term but would require historical data to make sounder conclusions.

    One last thing i would like to check is retail participation. I will be listening to TD and Schwab's earnings call to get a feel for this but haven't done it.

    Overall this is why i will be long us equities for the foreseeable future. i'm not a buy and hold guy so i will be day trading around my position depending on the news feed but my bias is long and i won't be short us equities.

    I Would welcome any discussion, critics or if a big bear could come and decimate my arguments or show us things i have overlooked.
    thank you for reading me.
  2. Javier


    Thank you very much for your analysis . I liked a lot. About your expectations I would try to add some thoughs to your ideas relating to your "bullish". Taking into account that future is uncertain from my opinion. I would say tax cut was a key point encouraged and supported by exchanges in order to globalize US ecconomy expansion.
    Collaterally "hedging" helped a lot. The point is... how far are we? Is there any fuel remain? If your answer (your position) is wrong...
  3. These are the fund flow charts I was looking for
    not much happening in short ville
    Fund Name
    Net Flows*

    SPXU ProShares UltraPro Short S&P500 141.87
    SPXS Direxion Daily S&P 500 Bear 3X Shares 93.45
    SH ProShares Short S&P500 -649.54
    SDS ProShares UltraShort S&P500 -215.63
    Javier likes this.
  4. if by fuel you are talking about the prospects of tax cut EFFECTIVELY still taking us higher then yes, by observing price action and backsolving for the tax margin parameter it appears that only around 20-40pc chance of a 28% tax rate is priced in.
  5. Javier


    Thanks for your input, didnt know the daily fund flows. Very interesting.
  6. fhl