President Trump: The NEW one and only politics thread

Take my thoughts for what they're worth. I am way more trader than investor, anyhow. But are you really getting Disney at a discount to November?

This is the problem with stocks having been turned into prices that are disconnected from anything fundamental except how much money a central bank is pumping into the capital markets. Stock prices are no longer discounting mechanisms related to expected future earnings, which is the way a free market would value them.

In November, Disney was trading at something like 25 times earnings on a P/E basis, I think. That is incredibly expensive by any historical standard. If there is euphoria, and people suddenly bid up a gallon of milk to $100, are you getting a bargain if the milk comes back down to say $25?

That P/E ratio ran up throughout 2019, as Disney gorged itself on severely mispriced debt and used it to buy back close to $4 billion of its stock and paid out close to $3 billion in dividends. That is the real story of Disney's stock price. It started last year with about $21 billion in long-term debt and ended the year with more than $50 billion of long-term debt. The multiple expansion was all credit fueled. So to believe in that stock price, you had to believe we could permanently stay on a path of trillions of dollars of escalating debt creation going on forever, and that Disney can keep benefiting from it.

When that kind of euphoric price action is happening in the stock market, and this isn't just a Disney thing, people look for "this time is different" narratives to justify it. In the case of Disney, it was Disney+, streaming, etc. etc. Something that is not going to be profitable for years and is currently eating up cash. The real story of Disney has been stock buybacks and dividends, a lot of debt accumulation, and a generalized stock market bubble peaking and lifting a lot of things higher.

Disney is a great company, with a lot of very real businesses, unlike many of the zombie companies that have spent years burning through borrowed cash.
But if it is so cheap, and its balance sheet justifies a very expensive valuation, why did it reach back in and borrow yet another $6 billion a month ago before the spiggots were going to dry up?

I'm not telling you whether or not to buy Disney stock, but saying that Disney is trading at a discount right now doesn't look at it the right way in my opinion. ... unless stock prices are now permanently divorced for anything fundamental. Disney has furloughed more than 100,000 people and has maybe 100 people on the payroll at the moment. Most of its businesses are at a standstill. Movie theaters are shut down, theme parks closed, hotels shuttered, ESPN is showing old cornhole competitions, etc. That 25 times P/E in November was discounting a future that turned out to not come true. I have no idea what Disney's earnings are going to look like for the second quarter and beyond, but on an honest GAAP basis (which they will do their best to obscure), those earnings are obviously going to fall off a cliff at least for a quarter of two, if not longer. If the stock price came down a lot during the shutdown, but the earnings drop even more in relation to the stock price, conceivably the stock is more expensive today than it was in November. In fact, that is likely the case.

If you are going to buy individual stocks right now, or even the indexes which are really driven by a handful of stocks that are still propping everything up, I don't see how you do it based on valuation, even with the pullback we have seen. The only reason to be playing around with them is that you think that central banks are going to be able to keep pumping liquidity into markets by creating massive monetary inflation on an escalating basis. The only thing that stopped the carnage for the time being was the Fed aggressively expanding its balance sheet by about $2 trillion in just 2 months, the kinds of extreme price fixing measures we have never seen before, putting their tentacles even farther into the credit markets. ... even taking over the junk bond market now to prevent a collapse. If they stop (which they won't do willingly), or they completely lose control, the bubble they are propping up is going to deflate. Then, there will be a great chance to go bargain hunting, especially if things overshoot to the downside as they usually do. But if that opportunity comes, you are probably talking about a 50 to 80 percent decline in stocks from where we still are.

 

I don't think he is this calculating, but that was a much more effective way to get the price of oil to jump (and it did -- up 16, 17 percent) than his tweet yesterday morning about the government funding oil and gas producers with handouts. That one made me laugh, because there needs to be a lot of bankruptcies to get rid of the supply / demand imbalance, and subsidizing their failure is one way to prevent it from happening more quickly.