"In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. The catalyst will unfold according to a basic Crisis dynamic that underlies all of these scenarios: An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability – problem areas where America will have neglected, denied, or delayed needed action.” - The Fourth Turning - Strauss & Howe – 1997
With 97.5% of the S&P 500 having reported earnings, as of May 29, 2014, we can take a closer look at the results through the 1st quarter of the year. Despite the exuberance from the media over the "number of companies that beat estimates" during the most recent reported period, operating earnings FELL from $28.25 per share to $27.32 which translates into a quarterly decrease of 3.4%. The ongoing deterioration in earnings is something worth watching closely. The recent improvement in the economic reports is likely more ephemeral due to a very sluggish start of the year that has led to a "restocking" cycle. This puts overly optimistic earnings estimates in jeopardy of being lowered further in the coming months ahead as stock buybacks slow and corporate cost cutting becomes less effective.
Pause and think about what linoleum means to you. If flooring isn’t your thing, go ahead and think about Formica cabinets or anything else that fits the genre. To me, it is something functional, which looks okay from a distance, but doesn’t stand up well to closer inspection. It conveys the disappointment of something that looked good, but turns out only to be a thin veneer covering cheap particle board. That is how we see the economy right now.
Tuesday looks to be a busy day in June ($7.45bn or 30% of POMO buying on that day) as the Fed announces the schedule for its Permanent Open Market Operations (POMO) buying. The tapered $25 billion buying schedule does offer some 'investing' insights as The Fed refuses to buy on a Friday... (that should make for long weekends and even greater weekly cyclicality in stocks)...
Western companies have buybacks that only reward shareholders here and now; the East actually spends capex to invest into the future. Case in point: today's "holy grail" gas deal announcement, which in addition to generation hundreds of billions in externalities for both countries over the next three decades will result in an immediate and accretive boost to GDP, to the tune of $55 billion for Russia and $20 billion for Beijing.
Market bears take the position that stocks are expensive, citing a variety of indicators and arguing that profit margins should “mean revert” from record highs. On the other side, market bulls dispute the indicators and propose that fat margins are no big deal – they might just remain at record highs indefinitely.
“High margins reflect a long-term structural change, not a short-term cyclical one,” according to one account of a popular position. Or “It’s a mistake to think that margins will revert to a long-term mean just for the sake of reverting to a mean.”
The message seems to be that mean reversion is for losers. This is a new era, or it’s a new economy, or whatever. We're paraphrasing, but the story sounds a lot like the capital letter New Economy of the late 1990s. There’s even a technology angle once again, along with huge confidence in monetary policy and recession-free growth. Above all, there’s a notion that the world might be different. Needless to say, the new, new economy story comes with plenty of red flags.
From "contrarianism takes courage" to "expect bullshit," Doug Casey's nine secrets for successful speculation are principles everyone can learn from.
The tyranny of models is rampant in almost every aspect of our investment lives, from every central bank in the world to every giant asset manager in the world to the largest hedge funds in the world. There are very good reasons why we live in a model-driven world, and there are very good reasons why model-driven institutions tend to dominate their non-modeling competitors. The use of models is wonderfully comforting to the human animal because it’s what we do in our own minds and our own groups and tribes all the time. We can’t help ourselves from applying simplifying models in our lives because we are evolved and trained to do just that. But models are most useful in normal times, where the inherent informational trade-off between modeling power and modeling comprehensiveness isn’t a big concern and where historical patterns don’t break. Unfortunately we are living in decidedly abnormal times, a time where simplifications can blind us to structural change and where models create a risk that cannot be resolved by more or better modeling! It’s not a matter of using a different model or improving the model that we have. It’s the risk that ALL economic models pose when a bedrock assumption about politics or society shifts.
As happens at the end of every year, sellside analysts and economists, all predicted that this year would be different, and the long overdue capex spending would finally be unleashed. Apparently they had far greater visibility on this matter, than on the topic of snowfall in the winter, and its disastrous impact on a $17 trillion economy, whose Q1 GDP growth forecast has cratered from 3% at the start of the year, to barely half that number currently. One of the firms that preached that the CapEx recovery is imminent is none other than Goldman Sachs, the same firm that also year after year predicts a new golden age for the US, only to see its forecast crash and burn some 4-6 months later, couched in the tried (or is that now trite) and true scapegoatings: snow, unrest in Europe, inflation or deflation in Japan, the usual. However, this time may indeed be different, and the same Goldman has just released a piece wondering "Why no capex recovery?" (despite the firm's own forecasts to the contrary -just recall David Mericle's "Capex: The Fundamentals Remain Strong" which now in retrospect is completely wrong).
Last year we exposed the reasoning for the extremely predictable cyclicality in US macro-economic surprise data. Each year of the last few, the third quarter has exhibited unusual "strength" surprising 'economists' - thanks to government agencies executing their final budgets to use up all their allotments - only to stabilize in Q4 and the fade rapidly in Q1. 2013 was "different" as we had the government shutdown which threw the seasonal pattern off... but once the agencies were re-opened, the spice did flow and we got what is now clearly not a sustainable 'surprise' in growth but a lagged cyclical bounce. However, the lag introduced by the shutdown is now catching up to us - so it is different this time (2mo. lag) but the same...
The stock market. Source of unknown riches - but not necessarily for investors. So-called "professional" investors offer to manage your money. However, their fees are based on the level of assets managed, not performance. Hence their goal is to maximize assets, not performance, and prey for markets to behave. You will never hear a bad word about stocks from a professional money manager. the by-laws of many mutual funds do not allow the manager to have cash levels above 5% of assets. He has to be invested at least 95% at all times. On one hand, it is probably right to force money managers to concentrate on stock picking, not market timing. On the other hand, this puts the onus of market timing onto the inidiviual investors. Lighthouse's Alex Gloy's excellent presentation below proves finance doesn't have to be complex (people make it complex). Gloy goes on to discuss the link between GDP and Profits, performance, valuation, inflation, and war and their effect on all markets.
With just a tad more than three weeks left in the year it is time to start focusing on what 2014 will likely bring. Of course, what really happens over the next twelve months is likely to be far different than what is currently expected but issuing prognostications, making conjectures and telling fortunes has always kept business brisk on Wall Street.
"We're Stuck In An Escher Economy Until The Existing Structure Collapses And Is Rebuilt On Stronger Principles"Submitted by Tyler Durden on 11/09/2013 13:26 -0400
1. Even if the economy returns to full employment under existing policies, it won’t remain there after (and if) interest rates normalize.
2. Based on today’s debt and valuation levels (charts 8-9, for example), rising interest rates will have an even harsher effect than suggested by the 60 year history
3. Contrary to the establishment’s “sustainable recovery” narrative, the most plausible outcomes are: 1) interest rates normalize but this triggers another bust, or 2) interest rates remain abnormally low until we eventually experience the mother of all debt/currency crises.
We’re stuck in an Escher economy (see below), thanks to the impossibility of the establishment economic view, and this will remain the case until the existing structure collapses and is rebuilt on stronger policy principles.
The Fed will have to increase QE (not taper it) because systemic debt is compounding faster than production and interest rates are already zero-bound. Lee Quaintance noted many years ago that the Fed was holding a burning match. This remains true today (only it is a bomb with a short fuse). Thirteen years after the over-levered US equity market collapsed, eleven years following Bernanke’s speech, five years after the over-levered housing bubble burst, and four years into the necessary onset of global Zero Interest Rate Policies and Long-Term Refinancing Operations, global monetary authorities seem to have run out of new outlets for credit. In real economic terms, central bank policies have become ineffective. In other words, the US is now producing as much new debt as goods and services.
It appears the market may need to resurrect the implode-o-meter as surging mortgage rates and plunging mortgage applications are (unsurprisingly) taking their toll on the mis-allocated surge in mortgage lenders that 'market' signals encouraged. The latest, as Boston.com reports, is 1-800-East-West Mortgage which has largely suspended operations and laid off its workforce. "As rates rose, a number of people just went to the sidelines," the CEO said. The market, he added, "went into a drought." And yet, homebuilders (again unsurprisingly) remain as 'hopeful' as they have been since 2005 that all will be well.