My investing muse (14Oct24) - layoffs, market valuation & private equity risks
My Investing Muse (14Oct24)
Layoffs & Closure news
TikTok Reportedly Lays Off ‘Hundreds’ of Malaysia-Based Content Moderators Following ‘AI Hub’ Announcement - Digital Music News
Boeing to lay off 17,000 workers, delay 777X rollout amid machinists strike - UPI
US partners at EY have been told the firm will hold back some of their pay for 2024 after a tough financial year. - FT
The Big Four accounting firm told employees last week that it would embark on a re-organization of areas of the business affecting about 2,700 staff and partners - FT
Layoff & closure news continued into the week.
Earnings and market overvaluation
The trailing 12-month P/E ratio for $SPX of 26.7 is above the 5-year average (23.8) and above the 10-year average (21.7). - Factset
Can innovation improve productivity and thus, bring down the cost of operations? Is the P/E remaining elevated due to profits? The increase in P/E implies that the price of stocks are growing at a faster pace than the earnings of the businesses. Is this an overvaluation?
P/E ratio for Palantir (PLTR) as of October 2024 (TTM) is 719. At the end of 2022 the company had a P/E ratio of -33.8. Is Palantir undervalued?
If we wonder what does the P/E ratio imply, Palantir’s P/E ration at 719 meant the following:
If we buy all the stocks of Palantir, it will take us 719 years to recover our investment (based on the earnings). The P/E ratio cannot be the only indicator that is used to value a business. However, this does help to put some aspects into perspective.
Private Equity - are you the next to fall over the cliff of interest rates?
Private equity market size in the U.S. forecast 2024-2027
Published by Statista Research Department, Mar 27, 2024
The private equity (PE) market size in the United States is expected to reach 460 billion U.S. dollars in 2024. By 2027, the U.S. PE market is forecast to increase to 765 billion U.S. dollars, with a compound annual growth (CAGR) of 11 percent.
The size of the global private equity market now commands a staggering $4.5 trillion assets under management (AUM) according to industry reports and data, a testament to its ever-growing appeal. - From a recent Linqto post
Private equity relies on leveraged buyout. These transactions – which account for roughly three out of every four dollars of all private equity deals: you buy a business using a ton of debt, or leverage. - The Guardian article.
Given the high interest rates, could the Private Equity market be the next to fall?
Debts
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Federal student loan debt hit $1.61 trillion in Fiscal Year 2024, near the highest on record. Since 2007, US student debt has TRIPLED, according to the National Student Loan Data System. ~10 million borrowers, accounting for over 25% of the total, were behind on their student loan payments this year. After years of interest free student loans, borrowers are struggling to pay back their debt. The student loan crisis is back.
The U.S. government deficit hit a staggering $1.9 trillion in the first 11 months of FY 2024, with a $380 billion jump in August alone, per the Treasury Department. Over the last 12 months, the deficit stands at $2.1 trillion, equal to 7.3% of GDP. Government spending reached $6.9 trillion, 24.4% of GDP, while interest expenses soared to a record $1.12 trillion—doubling in just two years.
Auto loan delinquency rates keep on rising in the US: Subprime auto loan delinquency rates just crossed above 4% for the first time on record. The 60-day delinquency rate for subprime auto loans has more than DOUBLED in just 3 years. Delinquency rates now exceed both 2008 and 2020 levels. At the same time, prime auto loan delinquencies spiked to their highest since 2011. Meanwhile, car insurance costs skyrocketed 15% in the first half of 2024 to an average of $2,329, the most on record. The car market bubble is popping.
Who will be affected by the auto loan delinquency? How can the banking and auto market recover from this?
Will debts be one of the stumbling blocks of the economy?
My final thoughts
Some of us are excited about the market, expecting S&P500 to hit new heights. Some of us are concerned that the fundamentals of the economy are showing cracks in debts, inflation and unemployment.
These can co-exist. I have learnt that market highs are and lows are typical of cycles - the weak will be removed and the market is reset, hopefully for the better. A deeper look into the economies should reveal more concerns as some companies like the Magnificent 7 are the ones moving the market.
The below segment is taken from a recent post by Visual Capitalist:
The S&P 500 Equal Weight Index is Falling Further Behind
This graphic compares the performance of the S&P 500 to the S&P 500 Equal Weight Index (EWI) over the past five years, using two representative ETFs (SPY & RSP).SPY is the largest ETF tracking the S&P 500 ($585B in AUM), while RSP is the largest ETF tracking the S&P 500 EWI ($64B in AUM). from the Visual Capitalist Post.
From the above, it seems that the market is doing much better. Was this partly due to the interest rate cut and also China’s recent stimulation in the market?
My muse involves leverage for this coming week.
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The above quotes are taken from X user BrianFeroldi.
“Having a large amount of leverage is like driving a car with a dagger on the steering wheel pointed at your heart. If you do that, you will be a better driver. There will be fewer accidents but when they happen, they will be fatal.” - Warren Buffett
I recommend for us to spend within our means, avoid leverage. Let us research before investing and if possible, let us consider some hedging. Let us take care and invest well.
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