Larry Summers (35 minutes out in the video) - Economy at risk of overheating. We can't let inflation accelerate. The reality of the economy is an interest rate far below the neutral rate and we have got a tight labour market. That is a prescription for rising inflation, not falling inflation.
There are many traps in economics and finance, here we mention 5:
The liquidity trap is a term related to the great English economist, John Maynard Keynes. In a liquidity trap, monetary policy is ineffective due to very low interest rates combined with consumers who prefer to save rather than invest in higher-yielding bonds or other investments.
Japan's economy is in a liquidity trap. Its interest rates are near zero and the central bank buys government debt to boost the economy. But it doesn't work. People expect low rates and low prices, so they don't have the incentive to buy now. Without demand, businesses won't hire as many additional workers. Pay remains stagnant. The central bank has done as much as it could.
A bear trap (there is also a bull trap) is a market situation in which sellers expect the bearish movement to continue, but the market changes course. A bear trap is often triggered by a decline that induces market participants to open short sales, which then lose value in a reversal when participants must cover the shorts. Volume indicators are som of the best indicators that can signal a bear trap. Volume indicators shows how strong market participants are. Usually, a bear trap is reflected by low volume because bears aren't strong enough to pull the price down. As such, volume is supposed to be low.
A dividend (yield) trap is a stock that has an attractive dividend yield but has an otherwise shaky business is commonly known as a yield trap. Not only can the income paid by a yield trap be in danger, but the REIT stock investment itself could lose significant value if the business isn't doing well. If you're a dividend investor, higher yields are obviously desirable. However, not all high-yielding dividend stocks make good investments. In fact, some can be quite dangerous. A sound yield stock has a good cover of the yield. The worst example of a yield trap is perhaps a company with excessive debt, little or negative cash flow, dividends higher than earnings, too high yield or
A value trap is a stock or other investment that appears to be cheaply priced because it has been trading at low valuation metrics, such as multiples in terms of price to earnings (P/E), price to cash flow (P/CF), orprice to book value (P/B) for an extended time period. A value trap can attract investors who are looking for a bargain because they seem inexpensive relative to historical valuation multiples of the stock or relative to those of industry peers or the prevailing market multiple. The danger of a value trap presents itself when the stock continues to languish or drop further after an investor buys into the company. Value traps are investments that appear fundamentally sound but are actually in financial distress. Before attempting a value play, ask yourself why other investors are dumping the stock, whether those concerns are overblown, and the degree to which other investors have overestimated negative possibilities.
A peak earnings trap is a variant of the value trap most often related to cyclical stocks. Peak earnings are a common value investing trap that can hurt inexperienced investors hard.
Let's say an automaker makes $4 EPS at the top of the cycle, and trades at $60, for a P/E ratio of 15; while it makes $2 EPS near the bottom of the economic cycle, and trades at $50, for a P/E of 25. If you buy the stock for $60 focusing on the low P/E ratio alone, the value of your investment will actually fall as the economic cycle turns.
This is called a Peak earnings trap.
All cash transactions―cash in (receipts) and cash out (disbursements)―fall into three categories:
Operating cash flows arise from the normal operations of producing income, such as cash receipts from revenue and cash disbursements to pay for expenses. Investing cash flows arise from acompany investing in or disposing of long-term assets. Financing cash flows arise from a company raising funds through debt or equity and repaying debt. During the startup phase of a business, it is normal to see negative operating cash flows, negative investing cash flows and positive financing cash flows. The startup will be obtaining financing cash to start the business and will be using these funds to make investments for the future of the business. There likely will be a few years of operating losses resulting in negative cash flows while the company has expenses but little revenue.
There are various earnings concepts.
Then EBIT is earnings before interest and taxes and EBITDA is earnings before interest, taxes, depreciation and amortization, a concept that Warren Buffet dislikes.
"It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it.”
“We won’t buy into companies where someone’s talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don’t, I suspect you’ll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft — they’ll never use EBITDA in their annual report.”
There are many indicators of a company’s financial performance.
A Flawed Definition of Cash Flow, EBITDA, Leads to Overvaluation.
It is not clear why investors suddenly came to accept EBITDA as a measure of corporate cash flow. EBIT did not accurately measure the cash flow from a company‘s ongoing income stream. Adding back 100% of depreciation and amortization to arrive at EBITDA rendered it even less meaningful.
Those who used EBITDA as a cash-flow proxy, for example. Either ignored capital expenditures or assumed that businesses would not make any, perhaps believing that plant and equipment do not wear out.
Source: Seth A. Klarman | Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor
Trumpeting EBITDA (earnings before interest, taxes, depreciation and amortization) is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a “non-cash” charge. That’s nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid up front, before the asset acquired has delivered any benefits to the business. Imagine, if you will, that at the beginning of this year a company paid all of its employees for the next ten years of their service (in the way they would lay out cash for a fixed asset to be useful for ten years). In the following nine years, compensation would be a “non-cash” expense – a reduction of a prepaid compensation asset established this year. Would anyone care to argue that the recording of the expense in years two through ten would be simply a bookkeeping formality?
Source: Warren Buffett on depreciation | 2002 Berkshire Hathaway Letter page 21
This note is written 2 february 2022, when the finace news are dominated by US inflation fear, FED increasing the fed funds rate, implementing quantitative tightening and shrinking the balance sheet there is a great foccus on pricing power. The price elasticity of a good that can be estimated via econometric analysis indicate how the demand for the good reacts to a price change. A price elasticity of -1 say the the demand fo a good decreases by one percent if the price increases by one percent. A good is price elastic in demand if a price change causes a substantial change in demand. A good is inelastic in demand if a price change does not cause demand to change very much. In that regard a good or service that is price inelastic in demand does not decrease much if the price is increased. That is important in an inflationaru enviroment.
The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.
Dividend distribution and share buyback are both equity transactions. As a shareholder you want return on you investment so in the short run dividend distribution is perhaps good for you. But share buybacks may be better in the long run, especially if the buyback happens in a correction or crash.
Today, when this is written, Meta's stock price tanks and is down 25 %.
Let us assume that company A have one million shares divided 50% between the passive owners and 50 % traded (the float) in the market. The share price falls from USD 100 to USD 75, a loss of 25 %. The company earns money and is in a position of distributing USD 5 / share in dividends. What is best for the shareholder, using USD 5 million to give out dividends or using 5 million to buy back stocks at USD 75 / share? In both cases the company gives back to the shareholder, USD 5 / share now or USD X / (fewer shares) in the future. If the stock price is drawn down in a bear market (25 % fall in stock prices) I personally know what I prefer as a long term investor.
This relates to big (tech) stocks that earn money. How shall you value a big tech stock with a trailing P/E of 120 that is expected to double earnings next year and gives a yield of 4 %? Expected earnings growth is 100 %. A better metric to value such companies is by the growth adjusted P/E ratio, PEG or the yield adjuste PEG ratio, PEGY. Let us assume that P/E is constant at 120, then PEG=120/100 = 1.2 and PEGY= PEG / 4 = 1.2 / 4 = 0.3, well below 1 that is ceteris paribus seen as a good investment.
Streaming services like Netflix are critically dependent on subscribers. In the beginning of 2022, the Netflix share price have fallen nearly 50 % from a top of USD 700.
The customer churn rate = (Customers beginning of month - Customeres end of month) / Customers beginning of month,
measures customers churn. The Churn rate, is also known as attrition rate. As the formulae shows, it is the rate at which customers stop doing business with a company over a given period of time. Churn may also apply to the number of subscribers who cancel or don’t renew a subscription. The higher your churn rate, the more customers stop buying from your business. A high churn rate may indicate that your advertising budget is not good enough to keep or get new customers.
Net Revenue Retention (NRR) calculates total revenue (including expansion) minus revenue churn (contract expirations, cancelations, or downgrades) according to this formulae:NRR= (MRR at start of month + Expansions + Upsell - Churn - Contractions)/ MRR at start of month
MRR = Monthly Recurring Revenue
Net Revenue Retention (NRR) Rate, also known as Net Dollar Retention (NDR), is the percentage of recurring revenue retained from existing customers in a defined time period, including expansion revenue, downgrades, and cancels. This churn metric gives a comprehensive view of positive as well as negative changes with respect to customer retention. A good NDR can range between 90% to 125%, based on target customer size.
Firstly, it’s a significant indicator for determining customer success. Retaining net revenue speaks to repeat business from the same customers, who are eventually turned into fans and are even more likely to refer other customers to your SaaS product. Plus, an NRR of more than 100% means that even if your business never onboarded another customer, you would continue to grow.
Secondly, an excellent net revenue retention rate (over 100%), suggests predictable and scalable business growth. The fastest-growing SaaS companies are generating $3.9 for every $1 lost to churn. Therefore, the higher the NRR rate, the more attractive your business will be to investors.
Identifying free cash flow by technical analysis. A positive and incrasing free cash flow should be reflected in the stock price, so increased free cash flow should be correlated with the trend in the stock price over the long run. So the stock price trend may (finanace and stock analysis are not an exact science) be a proxy for increasing free cash flow.