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Market predictions are foolish. All of us discovered this a very long time in the past. However that doesn’t imply they’re fully nugatory. Regardless that forecasts are nearly all the time unsuitable, they are often entertaining and academic. That’s all I’m making an attempt to do with this publish. Entertain and educate. For sure, however I’ve to say it anyway, nothing on this record is funding recommendation. I’m not doing something with my portfolio primarily based on these predictions, and neither do you have to.
Right here is my record from a yr in the past. I acquired some proper and a some unsuitable. I anticipate my predictions to have a horrible monitor file, and that’s why I attempt to trip the market somewhat than outsmart it. So why am I doing this? Properly, it’s enjoyable to look again on what you thought was doable a yr in the past. Whenever you see that you just had been so off on some issues, it reminds you simply how troublesome it’s to foretell the longer term. I additionally be taught loads by doing this. I uncovered some issues that I didn’t know or forgot I knew. So with that, these are my ten predictions for 2024.
- No consolidation in media/streamers.
- Apple will get dropped from the magnificent 7. Netflix Replaces it.
- Amazon features >25%/Microsoft turns into the primary $4 trillion inventory.
- Robinhood will get acquired
- Cash stays in cash market funds
- Inflation will get to the Fed’s goal. The economic system overheats. Inflation picks up.
- The vibecovery begins
- No recession. Shares acquire 20%. Massive-cap tech rolls on. The opposite 493 and small caps catch up.
- Bitcoin hits 100k
- Compulsory, one thing comes out of nowhere that makes not less than half of those predictions look very dumb.
No consolidation in media/streamers.
My first prediction is the one that may turn into unsuitable the quickest. Final week, a day after I informed Josh he was loopy for pondering that WBD would purchase Paramount, we acquired information that the 2 had been having exploratory talks to merge. I don’t purchase it, sorry, and the market doesn’t both. Since that information got here out, Paramount’s inventory has fallen 5%, and Warner Brothers Discovery is down 2%. The market is up 1% over the identical time.
These firms are in serious trouble and the decline is structural, not cyclical. Within the first quarter of the yr, TV suppliers in america misplaced 2.3 million clients, its worst exhibiting ever. Describing the state of the business, SVB MOffettNathanson senior analyst Craig Moffett wrote, “We’re watching the solar starting to set.”
WBD networks (TNT, CNN, TLC et al) income fell 7% y/o/y in the newest quarter. The debt state of affairs isn’t nice both. WBD has $43 in debt and $2.4 billion in money with slightly below $3 billion maturing on common yearly over the following 5 years.
Right here is the share value of WBD because it spun out of AT&T within the spring of 2022. Even a $1.4 billion blowout from Barbie couldn’t save this inventory.
Paramount isn’t in a a lot better state of affairs. Their inventory has additionally been greater than minimize in half over the identical time because the enterprise tries to determine the place to go from right here.
Paramount+ subscription income grew 46% within the third quarter to $1.3 billion, however the firm remains to be dropping cash. Within the 9 months ended 9/30 of this yr, their adjusted OIBDA (???) was -$1.173 billion, barely higher than the $1.244 billion loss over the identical time in 2022. It’s not shocking that the market killed a inventory whose fundamental enterprise is in secular decline, whereas its tried pivot remains to be dropping ten figures.
So why precisely would these firms be stronger collectively?
Right here’s what Wealthy Greenfield needed to say with Matt Belloni on The City:
The factor that nobody’s speaking about is Viacom merged with CBS. That’s how we acquired Paramount at this time. The inventory is dramatically decrease. Warner Media, which was a part of AT&T acquired merged into Discovery. It’s dramatically decrease than when it merged. So 1+1 on either side has equaled .5 or much less. Now we’re speaking about placing .5 and .5 collectively and can we find yourself with .1? Everyone seems to be form of lacking that placing issues collectively is just not the reply right here.
What I feel is a extra doubtless state of affairs is that these firms get smaller, not larger. Lucas Shaw reported that Paramount is in talks to promote BET. I’m unsure if there are personal fairness consumers for issues like Nickelodeon, MTV, or Comedy Central, however possibly it is a state of affairs the place the sum of elements is larger than the entire.
Streaming is a troublesome enterprise. The losers had been late, and now the patron is hitting a wall with what number of platforms they’ll pay for. Cancellations hit 5.7% in October, the best on file. So yeah, linear TV is in secular decline and customers are saying no mas to further month-to-month streaming payments.
The streaming wars are over. There’s Netflix, Amazon, YouTube, and all the pieces else. Disney/Hulu aren’t far behind, however I’ve already gone too lengthy on the primary prediction.
So no, I don’t suppose Paramount or WBD or discover a lifeline. I additionally don’t know that I’d guess towards their shares. Certainly all the pieces I simply wrote is well-known by actually each market participant. I additionally don’t know that I’d purchase their shares right here, as tempting as a 50%+ drawdown is. Absent a purchaser, I simply don’t know what the catalyst can be to re-rate these shares greater, given the structural declines of the companies. I’m excited to see how this story performs out.
Apple will get dropped from the magnificent 7. Netflix Replaces it.
Apple the enterprise didn’t have an incredible yr. Within the final twelve months, income is down, bills are up, and working revenue is down. Earnings per share are up a penny as a result of they’re shopping for again a lot inventory.
Whereas the enterprise has struggled to develop, the inventory delivered one other phenomenal yr for its shareholders. Apple goes to complete 2023 simply shy of a 50% acquire. Since 2010, it’s delivered a mean annual return of 31%, 18% higher than the S&P 500. Actually one among if not one of the best runs any inventory has ever had.
Apple’s inventory shined even because the enterprise waned due to a number of enlargement. It got here into 2023 buying and selling at 21x TTM earnings and exited at 31x. Now definitely a few of that was partially on account of the truth that providers, a really excessive margin enterprise, was 25% of gross sales in the newest quarter, up from 21% a yr in the past. However even nonetheless, valuations are considerably greater than they’ve been for the final decade with out the entire progress to assist it.
Apple is clearly one of many largest and finest firms of all-time. However possibly with a market cap of $3 trillion and progress waning, it’s time for his or her shares to take a breather.
Massive tech could have one other good yr, however Apple received’t. They are going to underperform the S&P 500 by greater than 10%, and might be faraway from the Magnificent Seven. Taking their place would be the winner from the streaming wars, Netflix (a inventory I personal).
May 2023 look any totally different from 2022 for Netflix the enterprise and the inventory? It’s wonderful that for as a lot as we discuss Netflix, we would not discuss this angle sufficient; Its rise and fall and rise once more.
This little streaming enterprise introduced Hollywood to its knees.
As Netflix garnered a whole bunch of thousands and thousands of subscribers and added a whole bunch of billions in market cap, the incumbents scrambled to catch up. However then one thing fascinating occurred; we discovered that streaming wasn’t such an incredible enterprise for everyone however Netflix. Traders appeared previous that through the ZIRP/covid period, and these firms and shares got the advantage of the doubt. Don’t fear about {dollars}, deal with progress! And so they did.
However when Netflix reported that it misplaced subscribers final yr, its inventory tanked and it took the remainder of the business down with it. The incumbents had been chasing a automotive going 100 mph proper earlier than it crashed right into a wall. Just like the scene in Go away the World Behind, all of the automobiles piled up behind them.
Netflix shed 75% peak-to-trough and ended up falling 51% in calendar yr 2022. In 2023, because it centered on progress by way of an ad-supported tier and killing password sharing, its inventory sharply rebounded, gaining 64% on the yr.
In 2024 it’s going to rejoin the Magnificent Seven, after being faraway from FANMAG a few years in the past.
Amazon features >25%/Microsoft turns into the primary $4 trillion inventory.
Do you know that Amazon has underperformed the S&P 500 over the past 5 years?
Amazon’s inventory hasn’t hit an all-time excessive in 624 days, by far the longest streak since 2009.
The inventory has been underneath strain for official causes. 23% of Amazon’s income comes from abroad, which has skilled an working lack of $4.5 billion over the past twelve months.
What’s weighed on Amazon’s shares most of everywhere in the final couple of years is that Amazon Internet Companies, the phase that’s been chargeable for the lion’s share of the earnings, has been slowing as Microsoft and Google have been fiercely competing for the enterprise.
And regardless of its challenges, Amazon’s free money flows have had a dramatic turnaround.
Very like Netflix, Amazon is ready to earn some huge cash by way of adverts by way of its streaming service, which is ready to drop in January. At a $40 billion run price, Amazon is already one of many largest promoting companies on the earth.
Amazon has been left within the mud by the remainder of the magnificent seven. In 2024, its shares will acquire 25% and hit an all-time excessive. Full disclosure, I lately purchased the inventory.
***
Microsoft is an anomaly. Its huge dimension isn’t slowing down its progress.
Simply 4 years in the past in 2019, Microsoft did $126 billion in income. Its cloud division, which makes up greater than 50% of its income, is now on a $127 billion annual run price. And the gross margins on this enterprise are an eye-watering 72%.
The most important driver of the cloud enterprise, Azure, remains to be rising at 28% a yr. And we haven’t even begun to see how AI, which Microsoft is nicely positioned for, will add to its backside line.
$4 trillion admittedly seems like a stretch, however we’ll verify again in twelve months.
Robinhood will get acquired
The wealth administration was going through substantial headwinds coming into 2023 for the primary time in a very long time. In a yr like 2017, when shoppers can earn lower than 1% on their money whereas the S&P 500 features 20%, monetary recommendation is in excessive demand. In a yr like 2023, when you may earn 5% on money and the S&P 500 enters the yr in a 20% drawdown, money is stiff competitors.
That is how an organization like Morgan Stanley can see their web new property decline by 45% year-over-year.
The secret in wealth administration is buyer acquisition. And everyone seems to be all the time seeking to appeal to the following technology of shoppers, who’re set to inherit trillions of {dollars} over the approaching years. By 2045, millennials and gen X are projected to manage 80% of all personal wealth.
That’s why Robinhood and its 23 million accounts are such a horny asset (10.3 million month-to-month energetic customers). Positive, the common steadiness is underneath $4,000, however that’s the chance. What number of clients does Robinhood have who view that as their play account? What’s the common web price of those clients? And what’s that going to be 5 and ten years from now?
With an enterprise worth of $6.8 billion, that represents an acquisition value of $294 per account ($658 per month-to-month consumer). Robinhood solely generated $77 per account ($172 per month-to-month consumer) over the past twelve quarters. If a purchaser thinks they’ll make these numbers converge, then an acquisition right here can be a steal.
Now, whether or not or not an organization like that or every other desires to be related to meme buying and selling and all that, nicely that is likely to be sufficient to maintain them away.
Robinhood’s inventory has been lifeless cash, falling 63% from its IPO in 2021.
However one factor that Robinhood does have going for it’s that like most money-losing firms, it has been working arduous to turn into worthwhile, and will get there subsequent yr.
Cash stays in cash market funds
There’s some huge cash in cash market funds. Over six trillion to be exact. And one-quarter of all these property flowed there in 2023 because the risk-free price soared to five%.
In the beginning of December, I requested Eric Balchunas for some information right here and he shared a mind-blowing stat; Fourteen cash market funds have taken in over $20 billion every in 2023, and the Prime 12 and 25 of the highest 30 flow-getting mutual funds are cash market funds. The tidal wave of cash transferring into higher-yielding devices is a price story, not a inventory market one.
Cash rushed out of the market and into money throughout The Nice Monetary Disaster. That’s not even near what occurred in 2023.
Cash market fund flows, and I can’t show this, got here from checking and saving accounts that had been producing nearly nothing. So even when charges come down, and even when the market continues its momentum, cash market funds will retain many of the flows from 2023. Actually I anticipate leakage in some unspecified time in the future if the fed cuts, and extra if the market rips, however I’d guess that that cash is stickier than some would suppose.
Inflation will get to the fed goal. Financial system overheats. Inflation picks up.
What an unimaginable trip the economic system has been on over the previous couple of years. We acquired used to a world with low inflation and the low-interest charges that accompanied it. After which the pandemic occurred and shattered the economic system as we knew it. An excessive amount of stimulus led to an excessive amount of demand. Combine all that with too little provide and also you get an atomic response.
CPI isn’t removed from the Fed’s 2% goal, and it’s already there for those who use a extra present measure of shelter inflation.
More often than not the Fed raises charges as a result of they wish to calm down the economic system. They wish to cease it from overheating as a result of there may be extra within the system. That’s not likely what occurred this time round. Positive there have been extra financial savings, however, and I’m making this up, I’d guess that greater than, and I can not stress sufficient that I’m making this quantity, 70% of the inflation we skilled was on account of provide chain-related points. So the slowing of extra that hardly existed wasn’t a lot of a think about bringing down inflation.
All that is to say that we threat seeing an overheated economic system if the Fed begins to chop, which the market thinks it’s going to. The overheating will come from two of the most important elements of the economic system that affect client spending; homes and shares.
The market is at present implying an 80% likelihood that the decrease vary of fed funds might be beneath 4% this time subsequent yr. I’ll take the underneath on that.
Sentiment/vibes enhance.
We spent a lot time questioning and debating why there was a big cap between how the economic system was doing and the way folks felt about their private monetary conditions. The disconnect isn’t as difficult as we would have made it out to be. It’s inflation, interval. Positive there are different issues to think about however they’re simply the toppings whereas costs are your complete slice. Squeezing a decade’s price of value will increase into simply two years will destroy client morale. In a wholesome economic system, folks don’t change their spending habits. They simply spend greater than they used to for a similar factor. And it pisses them off.
2024 will nonetheless be crammed what scary headlines. Social media will proceed to rot away on the cloth of our society. And I’m positive the election season might be as terrible as ever. However so long as costs cease going up, then the entire traditional considerations that factored into the vibecession will fall by the wayside.
John, our Senior Inventive Media Producer shared this on Slack the opposite day. “Vibes verify. Simply acquired my yearly lease paperwork dropped off to my door. No lease enhance, identical lease for the renewal – first time ever, I’ll take it!”
John is only one of 45 million households in america who will get to expertise this win in 2024.
Sure, rents are nonetheless up a ton, as you may see beneath. However they’re coming down, and generally the course is extra vital than the extent.
The vibecovery begins in 2024.
No recession. Shares acquire 20%. Massive-cap tech rolls on. 493 and small caps catch up.
Massive shares beat the crap out of all the pieces else in 2023. There was a 13% unfold between the cap and equal-weighted variations of the S&P 500, adequate for the second strongest calendar yr ever, outdoors of 1998. I’d be very shocked if this continued subsequent yr.
The explanation for the hole was fairly easy. It was pushed by totally different exposures to sectors of the market. Having an enormous underweight to tech and communication providers, which gained 56% and 52% final yr will definitely go away a mark.
Folks spent your complete yr speaking about the way it was solely the magnificent 7 that had been carrying the market. And that was true for many of the yr! The equal-weight index was flat on the yr by way of November ninth. Nevertheless it ended 2023 up 14% with an incredible winter rally.
I’m not predicting giant tech to have a troublesome yr as I’m bullish on 2024 (I cringed writing that), however I do suppose the S&P 493 will outperform the S&P 7 as greater rates of interest are extra of a headwind for firms with out trillion greenback market caps and a whole bunch of billions of {dollars} in money.
Valuations are by no means a catalyst and the timing of when (if?) they matter is hardly a settled matter. Nonetheless, the unfold right here is fairly dramatic.
The market completed the yr with a bang. The S&P 500 was up 9 straight weeks for the primary time since 2004.
You is likely to be questioning what historical past says in regards to the yr following a 20% acquire, which has occurred 19 instances since 1950. It was greater the following yr 15 instances, with 10 of 19 seeing a double-digit acquire. This can be a very small pattern dimension to be rendered inconclusive.
The S&P 500 will acquire 20% subsequent yr. The equal weight will acquire extra.
I in all probability might have stated extra on this one, however after three thousand phrases I’m working out of steam.
Bitcoin hits 100k
You would possibly suppose that with a 150% acquire in 2023, the ETF information is priced in. You may also keep in mind the runup in 2017 when the CME launched its Bitcoin futures buying and selling, which marked a fairly vital prime.
I don’t anticipate the ETF to be a sell-the-news occasion as a result of there might be tens of billions of {dollars} of shopping for strain now that buyers can get entry to Bitcoin by way of their car of selection. Bitcoin is a provide and demand story, and 60% of the availability has been held by buyers for greater than 1 yr, the best price ever (h/t Tom Dunleavy). These folks don’t promote.
I’m of the easy view that subsequent yr demand will drastically outpace provide, pushing the worth loads greater.
One thing comes out of nowhere that makes not less than half of those predictions look very dumb.
Ben Graham as soon as stated, “Almost everybody all for widespread shares desires to be informed by another person what he thinks the market goes to do. The demand being there, it have to be provided.”
Predictions are not possible. Everybody is aware of this, I hope.
When you reframed the query of “What do you suppose the market will do subsequent yr” to “Do you suppose you may predict the longer term,” then possibly it might turn into extra obvious how foolish all of that is. In fact no one can predict the longer term. In fact no one is aware of what the market goes to do subsequent yr.
I encourage everybody to make a listing like this. It’s going to function a reminder twelve months from now about how unsuitable you had been about so many issues, and hopefully that can encourage you to not put money into a method that counts on you getting the following twelve months proper.
Thanks everybody for studying. Wishing you one of the best in 2024.
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