WHY AREN’T EQUITIES SELLING OFF MORE SIGNIFICANTLY?
The deterioration in the economy has been clear in recent months, but the equity markets have confounded many investors. Stocks are just 10.6% off their highs and have shown some remarkable resilience, particularly in the last few weeks. There’s a great tug-of-war going on underneath what appears like a potentially frightening macro picture.
A closer look shows that what we’ve primarily seen is deterioration in the macro outlook and not so much in specific corporate outlooks. Despite the persistently weak economy, earnings aren’t falling out of bed. Without a sharp decline in earnings there is unlikely to be a sharp decline in the equity markets (outside of some exogenous event such as a sovereign default).
The most distinct characteristic I can recall from the the 2007/2008 market downturn was the persistent deterioration in earnings. Like dominoes we saw the various industries go down one by one: housing, then banks, then consumer discretionary and on down the line. While the macro picture has deteriorated recently we haven’t seen the same sort of deterioration in earnings that we saw in 2007 and 2008.
In a recent strategy note JP Morgan elaborated on the divergence between the macro outlook and the earnings outlook:
“What matters for equities is earnings and not GDP growth. US GDP growth projections are being cut, but earnings projections have been little affected so far. Investors and analysts are hoping that, to the extent the soft patch in US GDP growth lasts for only a few quarters and does not spillover to the rest of the world, US companies will be able to protect their revenues and profits. Indeed, this is what happened during 2Q, when US companies were able to deliver strong top line and EPS growth even as US GDP grew at only a 1% pace.
It is a prolonged soft patch that poses the greater threat for corporate earnings and equity markets as it raises the specter of deflation and profit margin contraction. Why is deflation bad for corporate profitability? When nominal interest rates are bounded at zero, a fall in expected inflation causes a rise in real interest rates and the cost of capital, hurting corporate profitability. In addition, nominal wage rigidities mean that deflation reduces output prices by more than input prices putting pressure on corporate profitability. Indeed, the Japanese experience of the 1990s provides an example of the erosion in corporate margins under a deflationary environment.”
BlackRock’s Bob Doll also highlighted this in his latest strategy note:
“To us, one of the more interesting features of the current economic and market landscape has been the continued resilience of the corporate sector in the midst of weak economic data. The growth in corporate profits and the ongoing decline in corporate credit spreads are forecasting economic strength. In fact, corporate profit margins as a percentage of GDP are near 40-year highs. During a normal economic cycle, such levels would encourage companies to spend more on capital expenditures and/or ramp up hiring plans, but most companies have remained reluctant to reduce their cash levels. We have seen some increases in capital spending, but a lower amount than would normally be expected given current profits, and, of course, private sector hiring has remained anemic. Some of this reluctance to spend can be attributed to uncertainty surrounding potential legislative and regulatory changes coming out of Washington, but we believe that we are at a point where companies will need to either accept slower growth levels or begin to put more of their capital to work.”
The ability of US corporations to maintain their bottom lines in the last two years has been remarkable. But this strength in earnings will not persist without a rebound in revenues. As I recently highlighted analysts have become increasingly optimistic about the rebound in corporate profits, however, the sustainability of a margin based recovery is limited without organic revenue growth. My analysis leads me to believe that the macro outlook will remain weak despite recent signs of strength in some reports. Corporations tend to be reactive to the macro outlook which likely means they will keep their cost controls tight and maintain a defensive posture. At the end of the chain is the analysts, who tend to be reactive to what corporations tell them.
The best way to visualize this is with the following image. The macro economy tends to be the leading factor in corporate decisions. This is why we will often see the business cycle peak at the point of rampant exuberance and mass layoffs at the trough in the cycle. Corporations are not always out in front of the business cycle and in fact are usually reactive to the macro environment. When times are good they spend. When times are really good they spend excessively. The opposite goes for the downside.
Analysts are the ultimate lagging factor in the equation. A close study of analyst’s expectations will reveal very close ties to what corporations actually tell them. This generally comes via the form of press releases (when Apple says they’ll earn $1 next quarter 75% of the analyst estimates are near $1 even though Apple ALWAYS beats), but can also come via the form of direct communication with analysts. Corporations understand that the estimates matter a great deal to their stock price performance so they keep communications tight. A growing economy is the perfect environment for wise executives who literally toy with the analysts by continually under promising and overdelivering.
The macro picture has deteriorated in recent months, but it has not collapsed. This has reduced the margin for error in terms of corporate earnings. Toying with the analysts isn’t as easy as it was 6 months ago. Intel and Cisco’s warnings a few weeks ago were likely previews of what will become a trend in the coming two months. If the macro picture continues to deteriorate (which I think there is a fairly high probability of) we will slowly see a deterioration in corporate earnings and a lagging effect at the analyst level. But with a slowly deteriorating macro picture this won’t unravel overnight. While most investors like to wish that this process would occur immediately (the equity markets suffer from a nasty case of A.D.D.) that just isn’t the case.
The global economy is like a battleship moving through rough sees. Right now, I think we’re at a critical juncture where the ship is turning south through rough seas. Deterioration at the macro level is clear, though we are likely to see it play itself out over the course of several quarters. If the macro environment deteriorates more than I presume the earnings picture will have a snowball effect. And of course, the same can be said of a positive macro surprise (with markets reacting positively). While we’re beginning to see cracks in the earnings foundation we are not seeing a full blown collapse as we saw in 2008. The market has been volatile, but it has remained resilient because we just aren’t seeing the weakness in corporate earnings. Persistent macro weakness and a few more earnings seasons will likely change that as corporations move to adjust expectations heading into a more difficult environment and the analysts subsequently play catch-up.
I think that once again we come to the problems of the analysts and more certainly their objectivity when analysing corporate accounts and macro data.
I realised that when studying for an analyst designation. It’s “easy” for the corporate accountants to trick the analysts. Therefore to avoid playing with their reputation they prefer to think like everybody (or at least being on the average of the estimation).
It’s easier to say “I was wrong but everyone was…”. Contrarian analysts are very rare in the financial world…certainly when there is a tight link between the analyst and the investment banking department.
A question about this sentence:
“The market has been volatile, but it has remained resilient because we just aren’t seeing the weakness in corporate earnings.”
Does that mean that earnings estimations will be adapted with a lag therefore leading to a bear market? (based on e.g. DCF model it should put pressure on the down-side – you review the earnings, then it impacts your valuation, etc…)
Then might that lead to a change in the asset allocation of most people and again pressuring the interest rates of bonds towards 0% for “protection”?
(You will excuse me if I am not clear enough but unfortunately English is not my native language)
Paul
PS: Thanks for the article you post on this website! Really really interesting!!
I think everyone likes to believe that the market is this great forward looking indicator, but what’s really going on is that everyone is basically making huge GUESSES based on the macro outlook. It doesn’t get baked in until we actually see the corporate press releases. So, we can sit here all day and guess about how a certain economic report will influence earnings, but we won’t KNOW until the press release hits the wires. This is why earnings reports result in enormous fluctuations in price. We like to think that Apple’s earnings are priced in, but the reality is that we won’t know how well Apple is really doing until they actually tell us. And if that report surprises one way or the other the market adjusts. So there is this guessing game and a lag effect based on the real reports and how analysts and the market responds….
Does that make sense?
For what it is worth, Minyanville wrote a couple of articles that there was evidence of an “invisible hand” at work, artificially holding up stock prices (I tried to find the articles, they were a couple of quarters months ago). I believe they pieced together how only the Fed. could have the resources to do this.
I’m not an economist or a professional investor, just a common-sense real estate broker. It all seems simple to me. In 2009, pretty much all business spending came to a halt and earnings estimates were lowered substantially. In 2010 businesses spent most of the year rebuilding inventory which made it look like the economy was fine and earnings were growing, since it was easy to hit the lowered estimates. Businesses sold to other businesses to restock inventory.
The problem I see now is that it’s all tied to the consumer, and consumers are broke! This is missed by most of the wall street pundits, investors, and analysts since they are truly out of touch with what’s happening to the average Joe on main street.
For the last 20 years the average consumer followed a vicious cycle. First, keep up with your neighbors by purchasing stuff. Then, refinance your home, pull out some cash and pay off the credit cards. Then run the credit cards up again and often do a second refinance or add a second mortgage, since housing prices were always going up, and pay off the cards again. The problem is that now home equity is fully tapped out and values have decreased. The credit cards are full again and the housing ATM is broken, so consumers have no way to spend like they did. I see it every day in people who want to sell their home but can’t since they owe way more than it’s worth and they have no cash savings at all.
If the average consumer is tapped out and can’t use home equity to go on vacations or to buy cars, flat screens, pay for college, etc., isn’t the US economy doomed? Isn’t the stock market just being held up artificially by the constant stream of automatic 401k money that flows in to mutual funds each month, along with banks that are investing the cheap bailout money they’re receiving from our wonderful government?
FWIW, I think you’re spot on here. Corporate earnings have held up so far first through dramatic cost cutting followed by inventory build. That inventory build is still going on if we are to believe the ISM and rail shipping date, but ultimately, it comes down to final demand, which is the consumer. This is the drum that Rosenberg has been banging for some time now. He’ll prove to be right ultimately, but so far corporations have been able to dance away from that fire by doing all the things they can do without that demand. Maybe the demand will come. Who knows? Maybe we’ll see a burst of hiring that will bring some confidence back. Without employment growth, it’s difficult to see how the end demand will be strong enough to justify current estimated for 2011.
How the market behaves is a totally different animal of course. The economy might be the big aircraft carrier that TPC describes, but the stock market is more like the escort of destroyers and frigates, which can be pretty stomach churning rides in rough sees.
Today is a perfect example. It took the month of August for the market to grind its way from the top end of the trading range to the bottom of the range on a series on undeniably bad economic reports. It has taken THREE days (based on today’s futures) to go from the bottom of the range back to the top of the range. But has anything really changed in a month? On balance, not really. A confusing number from the ISM and an employment rate that got worse, albeit with some positive trends within that number. This is reason for the market to rally more than 6% in 3 days?
‘All tied to the consumer’. Are we sure about this. Wasn’t their a significant portion of the S&P 500 revenue that came from business overseas. I’d like to see how much foreign revenues have been affected before I form an opinion.
“This is missed by most of the wall street pundits, investors, and analysts since they are truly out of touch with what’s happening to the average Joe on main street.”
You sure hit the nail on the head with that statement. This group (wall street pundits, investors, and analysts) are completely clueless and desperately need to spend some time in the real world.
Great analysis TPC. The fact that ECRI growth rate has stabilized, even though at a bad -10% recessionary-like level, and not plunged to -20 to -30% that we saw in 2008, confirm your thinking.
What does this mean for my investment, that’s the $10 million question. Purchasing puts on SPY probably won’t work very well here as those puts are expensive and would take a significant fall in order to make money on it once you start losing time value. I have been doing that to pair off my short single stock put positions and that hasn’t worked very well (I use the short stock put premium to buy the SPY puts, hoping my stock selection beats SP500). I have started to cut back on SPY put purchases and start selling short puts on SH (the short SPY ETF) to pair against my short stock put positions, to earn put premium on both sides. IN a range-bound market, even one that is moving lower or higher over time, it should work. It will not work if the market plunges or rise sharply.
Any comment on this approach is appreciated.
I can’t really speak to the validity of any single trading strategy without knowing more about you and your goals, etc. This is a market where you need to get the directional bet correct and that’s incredibly difficult given the volatility.
Give me enough “liquidity” and I’ll keep equities up long enough to sell everything you’ve ever bought over the past 10 years.
The most distinct characteristic I can recall from the the 2007/2008 market downturn was the persistent deterioration in earnings. Like dominoes we saw the various industries go down one by one: housing, then banks, then consumer discretionary and on down the line. While the macro picture has deteriorated recently we haven’t seen the same sort of deterioration in earnings that we saw in 2007 and 2008.
Back during 2007-8, the S&P 500 peaked at around 1550. As of yesterday, it was 1090, or about 30% lower than it was then.
The deterioration that you describe is mostly priced into the market, right now. If there is to be a correction, it would take a depression to make the amount of that correction meaningful. Anyone who is waiting for Dow 4000 to buy stocks had better be fond of cash, as they will not be holding any equities in the future.
That 1550 S&P number was driven by fictional earnings from industries and companies that have either disappeared or will never get back to those levels again, and nothing is stepping into that gap to replace those lost earnings. The Dow may not get back to 4000, but 7500 – 8000 is not an unrealistic target. I won’t disagree with you that sitting on a pile of cash is not the smartest thing in the world.
Ah yes. It’s all priced in already. You really think the participants in this market have one damn clue what is coming down the line?
The stock market is populated by a few million chickens running around with their heads cut off chasing gains and running around like schizophrenics. They’re not “pricing in” anything. They’re just guessing what is coming down the line. If it all disappoints the market will move lower. Nothing is “priced in” accurately.
The stock market is populated by a few million chickens running around with their heads cut off chasing gains and running around like schizophrenics. They’re not “pricing in” anything.
Markets are neither completely rational nor completely irrational. The ratio of rationality to irrationality varies over time, but there is generally some element of rationality at work.
S&P 1550 was at one extreme, a reflection of heady irrational exuberance. S&P 666 was at the other extreme, reflecting utter panic, and driven by technical moves downward and develeraging. We’ve settled into a range that is quite a bit more reasonable than either extreme. It can correct a bit, but it seems more like a traders’ market (volatile, but generally trending sideways to slightly higher) than it resembling either a pure bull or bear.
For over a year, I’ve been referring to what I believed to be a “square root” economic recovery, and I believe now that we are probably entering the tail of the square root. (Admittedly, I would have expected to happen a couple of quarters from now, rather than today, but timing is always tough…) Once the double dip doesn’t happen, I would expect the market to trend somewhat upward in celebration of the single-dip economy, but it’s still going to be a traders’ market, regardless.
Too many LITTLE BOYS BEARISH (last week AAII= 29%).I said TPC and ALBERT EDWARDS from SGEN WAS IN BAD COMPANY.And that was true.
D,
take it easy. This is not your schoolyard. The mkt jumped because of fundamentals and not only because of psychology. I assure you most of us are grown men or women so leave the caps button off and the chatter for another site. Thanks and nice call.
My calls posted here at TPC, I am a CFA, contributur to TPC
Jan 2010, 20% correction 1st half, rally into Oct
late May 2010, no crash 2010, less than 20% decline (actual, DJ -14.2%), DJ 11500 by Oct
Technical perspective
1 – Presidential cycle, crash into Oct 2010, huge rally 2011 – unlikely, too mainstream
2 – Louise Yamada, 1937-41 comparison, 20% correction, retrace, 2-year bear market
3 – 15 year H&S on DJIA, more bullish short-term (11.5k), more bearish long-term (4-5k)
essentially we are in a period like 1999.q3-2000.q2 where DJ ranged 9800-11800
Jul 27 2010, looking for reverse H&S setup, top SPX 1120-1130 (Aug 9, 1129) down to 1050 in August (Aug 25, 1040)
Aug sentiment post
Want to see another interesting contrarian indicator.
Use google for crash by year and number of references
crash 2008 = 104 million
crash 2010 = 349 million
More than than 3x references for a crash in a year that hasn’t even crashed.
Aug 28 – Monthly return chart – Sept is big downer
The only problem with all these historical charts
- housing goes up 5-10% a year for 60 years before 2007
- stocks averaged 10% gains for 80 years before 2000
- stock Presidential cycle – 45% annual gains in third year
Is that as Alice says, we are on the other side of the looking glass, where white is black (swans and presidents) and up is down. If I flip a coin 20 times and get 15 heads, for next flip probability theory says 50% chance of heads, bettors (investors) will say 75% chance of heads, mean reversion says more tails than heads until only 50% heads total.
I think at least part of the reason is that, while the politicians and their politically well connected cronies are doing everything possible to kick the can down the road at a macro level, the private sector is doing everything possible to move profits forward to this year, to avoid realizing them in the more adverse tax environment that starts in 2011. Assuming that the Bush tax cuts are allowed to expire, I suspect that the reporting of profits in the private sector will degrade sharply once the new year rolls around.
I think Peter got it right. The good ole Plung Protection Team doing mischief throwing Billions of our hard earned dollars away buying each morning several hundred Million in Call Options to “rig” the market higher, along with the Fed.
Res. giving almost unlimited money to Wall Street Banks to juice the skids to keep equities rolling.
Why, Obama’s put his foot to Berneike,….”we need to get Democrats re-elected to Congress and Senate this November”. Spoils goes to who’s in power. The Republican’s had been abusing this for years too. Totally corupt Govt!
So, expect equities to stay flat to up until the November elections.
Mr. Salyer
Short term the markets seems to trade on sentiment with a slight downward tilt perhaps representing the larger macro picture.
talk about a no organic growth situation, let’s pile into bonds. Let’s loan $$ to the US Treasury @ 2.whatever% for ten years.
I’ll take my chances in equities were I have a growing earnings coupon, 30-40% of that coupon returned to me in a form of a dividend with growth prospects.
Top line for the S&P 500 increased 9% yoy.
The Market is forward looking and what is in the Future?
New Tax Incentives for Business
NO-NO-NO Repeal of Bush Taxcuts.
More QE-lite
More Fiscal Stimulus–Dems have to stay in office OR
Thank God the Republicans are coming back to Congress–Win-Win either way for the economy
Another New Home Buyer incentive program
Banks offloading these bad mortgages to investors
September/October decline allready priced in
Whats not to like for the Future?
“Pour something long and strong
a Hurricaine before i go insane”
YOY Top line growth is based off of extreme levels. This growth should be much higher.
I still believe Congress will be taken by the Reps, and within one year, we have the next financial crisis. I believe we became a housing based economy over the last 15 years and we are still holding on to this model. I think home prices will drop a little bit more, but the turnover of homes is incredibly low. The lack of transactions will have a nasty affect on local government budgets, banking and mortgage sector revenue and profits, but especially on jobs for the middle class. I just don’t see any way out of the current malaise without wiping out debt and starting from a lower economic base.
Obama could impose housing price supports where the gov’t buys up all the tracts of vacant houses (that it doesn’t already own through Fannie and Freddie) and bulldozes them into farmland.
FDR did this with milk. Why can’t Obama do this with houses?
First of all, there’s definitely a bunch of rumors going around – some of which have a basis in truth and others which are more geared towards the tinfoil hat type. But there are some very big oddities going on these days and one cannot help but dissect what’s going on here.
In regards to earnings, these are obviously lagging indicators. However, the traditional role of equities markets have been in pricing future expectations. To say that markets haven’t witnessed a decline in corporate earnings which would facilitate a decline in markets is to deny this historical trend – something which is usually only acceptable at inflection points. Some Macro factors cannot be ignored unless of course the assumption is that the government will continue to step in and push out money to maintain “growth” (without which, we would be in negative GDP territory). With S&P P/E at over 20 as of yesterday, not only are deteriorating macro factors not being accounted for but completely denied as the the Hopium peace pipe is making the rounds while we once again plan for a near goldilocks recovery (note: the big sell off in May was at a time of P/E of 22ish).
Then come the oddities – rallies in US Equities, US Treasuries and USDs while Japanese equities plummeted and JPY rallied. 4+ months of retail equity fund outflows (to the tune of $40+ bln) coupled with $40+ bln of equity index inflows from who knows where. Bad data on downwardly revised previous data causing rallies. The “ISM effect” (Rosenberg did a very thorough breakdown of this number and based on past ISM prints, there was between a 1-4% chance of an increase in ISM based on the underlying components) – and this doesn’t even consider the prior session $15.1 bln S&P futures buy in during the last 15 minutes of the session prior to a huge data release nor the overnight massive rally in futures. And yes of course, the HFT quote stuffing and sub-pennying scams finally being investigated by the SEC. And the Fed being oh so shady with “QE Lite” such as neglecting to mention that both principle + interests earned are being rolled into USTs and somehow Morgan Stanley has been able to predict the exact CUSIPs purchased by the Fed prior to the auctions with a 90% success rate.
Overall, something is amiss and there’s no surprise that one of the most famous fund managers is calling it quits (with Stevie Cohen hinting at the same if this isn’t a profitable year for him). Volumes are abysmal (80% of which is algo volume), except for those days where the news is really bad and volumes double or triple at the lows to magically keep the market afloat. I hate to be the tinfoil hat type and wouldn’t go as far as to say that this market is being directly manipulated but I wouldn’t even consider wading in to a trade as a market participant correlation of 1 means that “everyone” in the market on any given day is always chasing one side and what drives “them” to do so is as mysterious as how it always ends up going that way…..
I’ve heard from multiple sources that Steve Cohen was about to hang it up because the market is too difficult. Loeb says its all “rigged”. Pellegrini and Druckenmiller can’t hack it anymore.
If these guys are having trouble then who isnt?
Or is this 2002 all over again when Julian Robertson shut down Tiger?
a hedge fund manager complaining the market is rigged…LOL!!!!!!!!
My sentiments exactly. A -5% YTD performance for Drukenmiller isn’t exactly horrible after 29 years of never being negative but these guys definitely hold themselves to a much higher standard. Cohen is a narcissist – in 2008 he was having his worst year ever going into the fall and refused to go to a prestigious yearly Fund Manager event because of such. But he’s also very frustrated with this schizophrenic market and I guess once you have a few billion dollars, there’s little reason to keep working if it causes you undue stress and little enjoyment.
On the sell side, things are getting borderline dire due to the low volumes and lackluster volatility (summertime is always a bit slow but not like this). Whole desks are being shut down and its not for the sake of finreg even if PR propaganda has billed it as such. The scary part is flow trading is doing horribly. How a desk in which every trade STARTS with a profit yet somehow manages to create losses in the end (and sizable losses at that) is beyond me but again the answer is simple – efforts by desk traders to make BIGGER returns have been solely in vain and to the detriment of all. Don’t expect financials to be clocking big profits from trading for quite some time (save for perhaps Fixed Income).
And then there’s those pesky HFTs which have become completely evil. In a world where computers are trading against each other, it was inevitable that they eventually begin to feed on each other using the most odious tactics. From a technological standpoint, what is going on is nothing short of techno terrorism. The flash crash in May and many other events since them should be clearly defined as denial of service attacks against the exchanges where HFT systems are flooding quotes to the exchanges on the order of 5000+ quotes per second. That combined with premium data services and sub-penny order jumping allows these systems to literally create timing gaps between the NBBO from the Consolidated Quote System vs. Premium Data services provided by the exchanges (ie. NYSE Open Book). In fact, its so egregious that the magic number is available: 20,000 quotes per second start creating delays between NBBO quotes and NYSE open book quotes with the former trailing the latter (during the flash crash, this delay became as large as 24 seconds in some cases – a veritable eternity in the stock market). So while everyone else is posting orders on stale data, Skynet is picking off suckers with impunity. And this all illustrates one glaring fact – while the SEC has been informed many times about this over the past few months they’ve only recently started looking into it as a potential cause for market manipulation. One can only surmise that this is because the Fed is using these same sort of systems via their banking cartel proxy as the megabanks (and a few large hedge funds) are the only ones that have the infrastructure and resources available to deploy and utilize such systems. I even know quite a few algo traders who despise such tactics as immoral attempts to turn profits via explotation rather than algorithmic innovation.
Oddities are bound to happen when we have zero interest rates from the Fed. The only place to get any yield is from stocks, and the pros are going to be trying to milk all they can from it by any means necessary.
The graph of the DOW has an awfully close visual resemblence (at a lower level) to where it was in Nov-Dec 2007, about a year before the crash. There is still plenty of time for earnings to decay or new stimulus to kick in before the market crashes again.
If the GOP takes Congress (still a very big if), The Great Obama may want a market crash so he can blame it on the Republicans. So, you can bet that if the GOP wins, there will be no new stimulus of any kind, and Obama will actually accelerate his plans for socialist transformation.
The stock market actually goes down when earnings growth is expected to be high and vice versa. Ned Davis chart from 1980 shows that when the median S&P 500 expected earnings growth exceeds 14%, as is the case now, the average gain per year is -5.7%. Take that combined with a crumbing economy and big down gaps in the S&P 500 seem plausible.
And earnings growth expectations in March ’09 was -20%, obviously a good buying time.
That’s why I use the expectation ratio. It measures the divergence between corporate earnings and where the analysts are.
“Over 50% of the industrial companies on the NYSE were using excess cash to buy their own stock at low 1930 and 1931 prices. Some retired it and some kept it as treasury stock for future use in mergers or for other purposes.”
(www.futurecasts.com)
Vol. 3, No. 5, 5/1/01
When analysts and pundits discuss “Corporate Earnings” I assume everyone looks at Fortune 500 companies calling them “the market”. With small businesses (which employ by far teh majority of Americans) suffering and their confidence, employment plans, sales and earnings plummeting, what is happening most likely is a transfer of “Customers” from small businesses to larger ones (when yet another corner shop shuts down, consumers have no choice but to switch to a Big Box to buy their necessities). So, while this transfer is going on, F500 companies will “enjoy” the floor under their sales and earnings… but this cannot last or can it?! When more and more people get unemployed and at some point all Mom and Pop shops go out of business and Walmart and Target are the only game in town “beating earnings” expectations, does it matter?
TPC, you are great at fundamental analysis and I agree with you for the most part. But short term, the market trades on technicals more than fundamentals. This rally is just an oversold rally off the strong support at 1040. It so happened that economic data weren’t as awful as people feared. So that helped too.
egghead168.blogspot.com
If consumers are broke but the stores are doing well.
How on earth does this work and for how long?
If analysts would take a few days away from the same computer programs they used in the fantasia precrash world and visit empty parking lots and abandon shopping center in the real world they would realize that personal spending is not improving.In the real world unemployment including discouraged workers rose to 16.7%.
Negative real interest rates did help the bottom line but it is not growth its a transfer and as no positive impact on the macro outlook.
WHY AREN’T EQUITIES SELLING OFF MORE SIGNIFICANTLY?
They have slashed labor costs, gotten more efficient, cut the fat from the bubble years, borrowed in the corporate bond market @ insane terms, and simply gotten better at what they do.
TPC suggests that the Macro picture in the US will begin to overwhelm them and there will not be enough customers.
Thats the million dollar question.
As of right NOW, corporations are winning that battle. Slashing costs and getting product to shelf quicker and better than ever and spitting out decent earnings in the face of 10-15% domestic unemployment.
Remember the S&P 500 is not a tanning salon in Toledo. 50% of the index is composed of just 25 companies. Some pay 0% in taxes (GE comes to mind), and most have industry subsidies (Banks, Pharma, oil, Ag) The data is murky, but 20-40% of their revenues are from overseas. The global growth story is still happening (sort of)..
Many think this cannot continue. I think it can for some time. Guidance for the next few years is critical.
Its sickening, but Main Street will struggle and cut into their retirement – but still go to Walmart, buy McDonalds, buy Ipods, load up on Prozac and Zocor, smoke Marlboro’s, drink coke, pay for cable, fill up their SUV at Mobil, Google new chain steakhouses and eke out a living..
Not pretty, but that’s how I see it. S&P can do 90$ in earnings. We shall see.
You shoulda bought the other day when you said you were looking for an entry point TPC. This market is insanely choppy. 5% in 3 days. Wow.
Hindsight….I use a timing algorithm that was showing severely depressed levels of psychology, but nothing severely strained in terms of the disequilibrium in the market (lots of factors there). It gave a soft buy signal yesterday, but this chop makes it so hard to trade this market. The market could definitely move higher in the short-term.
Requote:
“To us, one of the more interesting (perplexing) features of the current economic and market landscape has been the continued resilience of the (international) corporate sector in the midst of weak (domestic) economic data. The growth in (international) corporate profits and the ongoing decline in corporate credit spreads are forecasting (international) economic strength. In fact, (international) corporate profit margins as a percentage of (USA) GDP are near 40-year highs. During a normal (pre-globalization) economic cycle, such levels would encourage companies to spend more on capital expenditures and/or ramp up hiring plans (in the USA), but most companies have remained reluctant to reduce their cash levels (investing in the USA). We have seen some increases in capital spending, but a lower amount (in the USA) than would normally be expected given current (international) profits, and, of course, private sector hiring has remained anemic (in the USA). Some of this reluctance to spend (in the USA) can be attributed to uncertainty surrounding potential legislative and regulatory changes coming out of Washington (and an overindebted American consumer who has little left to give), but we believe that we are at a point where companies will need to either accept slower growth levels (in the developed world) or (and) begin to put more of their capital to work (overseas in rapidly growing emerging markets).”
“American” international corporations != Main Street. S&P500 != America.
Look at the earnings reports of FedEx, UPS, Wal-Mart, etc. The trend is clear. Look at Foxcomm hiring trends. Look at Wall Street hirings in China. Too many people are confounding US market indices with the US economy. That’s less and less the case every day. Again, read Wal-Mart’s latest – where their profits are coming from. It ain’t Anytown USA.
Mind you, this doesn’t mean I think the forward trend necessarily looks good. But the above dynamic does help to explain the previous 6-12 months. The emerging markets are picking up the slack that the developed world has dropped.
The trillion dollar question is, for how much longer can this go on? If our decline is slow enough, perhaps for a long, long time. If it accelerates, then it will overwhelm the macro picture, earnings supported by emerging markets included. We shall see.
This helps explain why the “USA” stock market hasn’t fallen as far as it “should have” by now. Because INTERNATIONAL earnings are supporting equities above DOMESTIC growth rates.
Context, people. It’s a great big world out there. It’s not easy to look into the future and find yourself increasingly marginalized in it. But … we ain’t the growth center of the world anymore. And money flocks to where the growth is. Japan’s malaise did not bring down the entire world’s economy. Could be our’s doesn’t either. I think it will, but I’m far more open to the possibility it won’t than many seem to be.
Take off your Americana googles, folks. We may not be the future anymore. Doesn’t (necessarily) mean that international corporations can’t still do well.
Er, yeah, what scharfy said. He (she?) was posting while I was typing.
Dude that isfunny…. we are on the same page it would seem.
TPC,
You are right that earnings drops are not baked in. This is the most rigged mkt in years. First they give us a GDP number that is totally bogus, and they get their one week bounce. Then a week later even GS comes out and says there is no way Qtr 2 GDP was 2.4%, that at best it was 1.7%. And true enough our first Qtr 2 GDP revision dropped it to 1.6%. Now this week BEA announces a ISM number that is totally out of statistical bounds when compared with the Philly, Empire State or numerous other data sources that had been put out. Once more everyone jumps on and we get our bounce up. Now Obama and his group have used their power to manipulate a short term gain which I believe will result in a much larger correction when the newer data comes out in the next few weeks. It would have been better to allow the market to adjust slowly to true facts than subject it to the shock that it will go through when the analysts realize that they can no longer trust the government data.
“no longer trust the government data”.
It alao does look as if some where buyng and expected those numbers several days ago.
Great post and comments…
What’s not priced in is interest rates going up. Yes, that opinion will shake our dear TPC who thinks that rates in a deflation always go down, right ? But you have to keep in mind that from march 2009 some $ 700 billion went into bonds and out of CDs and Money Market Funds.
That the US government can print it self out of trouble, right ?
When interest rates go (much) higher then companies WILL have to re-do their homework. Even LIBOR seems to be turning a corner and going the other way: UP !
TPC, didn’t you look at what to the 30 year T-bond future ibn the last, say 2 weeks ? It seems to me that the US bond vigilantes are waking up.
What’s not priced in is interest rates going up. Yes, that opinion will shake our dear TPC who thinks that rates in a deflation always go down, right ? But you have to keep in mind that from march 2009 some $ 700 billion went into bonds and out of CDs and Money Market Funds.
That the US government can print it self out of trouble, right ?
When interest rates go (much) higher then companies WILL have to re-do their homework. Even LIBOR seems to be turning a corner and going the other way: UP !
TPC, didn’t you look at what to the 30 year T-bond future ibn the last, say 2 weeks ? It seems to me that the US bond vigilantes are waking up.
30 bps and we’re talking about bond vigilantes? Long bonds were a little oversold. I said that 100 times. There is nothing unnatural occurring here.
It’s all well and good that earnings have not declined like 2008; however, we have seen significantly rising prices in stocks without corresponding increases in earnings. (If some one else already pointed this out, sorry for the duplication – did not read all 45 previous comments)
It’s all well and good that earnings have not declined like they did in 2008; however, we have seen significantly rising prices in stocks without corresponding increases in earnings. (sorry for the duplication if some one else already pointed this out – did not read all 45 prior posts)
The Depression will continue to unfold,,as nothing has been fixed. Eight million manufacturing jobs given away are gone forever,,and not coming back…John K., the realtor is “right on track”…
Low interest rates will force investors to stay the course with equities.
Low interest rates have also contributed to a strong bond market with almost zero yield.
In other words, there’s no where else to put your money
“There’s no where else to put your money”
This will not last it can not and when it stop watch out.
If a public company was buying its own shares every time seller would show up and maintaining and pushing up the price would we call it quantitative easing? We would call it price manipulation.
Imagine now that it would also have the capacity to print currency to purchase those same shares. We could say that the price could practically never go down.
The question is that eventually they would end up owning all the shares at a ridiculously high cost.
One day soon when investors start realizing what treasuries are really made of or simply start finding better returns the fed will still have to be the buyer of last resort. However the sellers of treasuries will have the choice to hold or to sell but take note that the Fed will not. When this happen disinflation in consumer goods and assets deflation will end in a flash and the winds of inflation will be back at hurricane speed.
“The ability of US corporations to maintain their bottom lines in the last two years has been remarkable. But this strength in earnings will not persist without a rebound in revenues”
A nice throwaway sentence, but: prove it.
“”To us, one of the more interesting features of the current economic and market landscape has been the continued resilience of the corporate sector in the midst of weak economic data. “”
why is this a shock given all the bailouts and tax credits???
“”I still believe Congress will be taken by the Reps, and within one year, we have the next financial crisis”"”
precisely the opposite. The economy will show 4% GDP growth as business become confident there will be no more economic nightmares from Obama. I expect the market to be up 20% next year. 2012 is a different story.
It turns out that politicians and economists alike have spent decades unlearning the lessons of the 1930s, and are determined to repeat all the old mistakes. And it’s slightly sickening to realize that the big winners in the midterm elections are likely to be the very people who first got us into this mess, then did everything in their power to block action to get us out.
Be patient a little while longer…
The market is setting up for another flash crash, this time bigger and without the sharp rebound. The Hondenburg Omen will be proven real.
It just takes time for social mood to gather force around a change in trend, and it won’t happen until it’s ready. Then it will turn down with frightening speed.
Calvin: Sell your puts NOW!
Steve S: All your stats were developed in a secular bull market environment — tear them up! The stats haven’t been drafted yet for the secular bear market we are now in…
All: Even if the Fed is buying futures/calls/etc. to prop up the market (which is doubtful), it simply won’t work very long, and will worsen the subsequnt decline. If you don’t believe this, try going to a state fair sometime, and offer to buy all the horse manure…
It depends on who is holding the stocks.
Retail never win since there are buy and sell side analysis for any given situation. Who’s writing those reports?
Guess who’s holding the stocks now? Do you think they will let them fall if they are holding it? Yes, they will once they are sold!