After many instances of prodding from readers, I finally bought and read The Fourth Turning, and I'm sorry that I waited so long.
Q2 earnings seasons is now (with 93% of firms reporting) over, and it is time for post mortem. The bottom line for those strapped for time is the following: In order to salvage the 2012 earnings consensus for the S&P, the sell side crew and asset managers, as wrong but hopeful as ever, are now expecting Q4 2012 earnings to grow 15% versus 4Q 2011, which is more than twice as fast as any other quarter. Indicatively, Q2 2012 earnings rose at a rate of 3% compared to Q2 2011. Elsewhere, revenues came 2% lower than consensus estimates at the start of the earnings season. In other words, the entire year is now a Hail Mary bet that in Q4, the time when the presidential election, its aftermath, as well as the debt ceiling and fiscal cliff acrimony will hit a peak, a Deus Ex Machine will arrive and lead to a 15% rise in earnings. Why? Because global central bankers will have no choice but to step in and thus lead to a surge in EPS multiples even if the underlying earnings are collapsing. With the presidential election around the corner making Fed QE before 2013 now virtually impossible, with Spain (and Italy) refusing to be bailed out and cede sovereignty thus precluding ECB intervention, and with China spooked by what may be a surge in food costs, this intervention, and any hope that the Hail Mary pass will connect, all look quite impossible.
When we wrote Part I of this paper in June 2009, the total U.S. public debt was just north of $10 trillion. Since then, that figure has increased by more than 50% to almost $16 trillion, thanks largely to unprecedented levels of government intervention. Once the exclusive domain of central bankers and policy makers, acronyms such as QE, LTRO, SMP, TWIST, TARP, TALF have found their way into the mainstream. With the aim of providing stimulus to the economy, central planners of all stripes have both increased spending and reduced taxes in most rich countries. But do these fiscal and monetary measures really increase economic activity or do they have other perverse effects?... The politically favoured option of financial repression and negative real interest rates has important implications. Negative real interest rates are basically a thinly disguised tax on savers and a subsidy to profligate borrowers. By definition, taxes distort incentives and, as discussed earlier, discourage savings.... The current misconception that our economic salvation lies with more stimulus is both treacherous and self-defeating. As long as we continue down this path, the “solution” will continue to be the problem. There is no miracle cure to our current woes and recent proposals by central planners risk worsening the economic outlook for decades to come.
While we are not certain how many times we have used the above headline in the past we know it is not the first time. Nor the fifth. Yet here we are again, reporting that Greece is out of money again. "Near-bankrupt Greece is fast running out of cash while it waits for its next installment of aid from international lenders, a deputy finance minister said on Tuesday, sounding the alarm on the country's precarious financial position. Greece's European partners have repeatedly promised the country will be funded through August, when it must repay a 3.2 billion euro bond, but the details of the funding have yet to be disclosed. In the absence of that money, Greece would run out of funds to pay everyday public expenses ranging from police and other public service wages to pensions and social benefits. "Cash reserves are almost zero. It is risky to say until when (they will last) as it always depends on the budget execution, revenues and expenditure," Deputy Finance Minister Christos Staikouras told state NET television" In other words just like the US yesterday, Greece has also overestimated its revenues and underestimated its expenditures; also Greece in August is what the US itself will be in about 3-4 months, when the debt ceiling is hit. Luckily, the political environment in D.C. is open and cordial, and a prompt resolution to both the debt ceiling issue and the fiscal cliff, especially as they all coincide just in time for the presidential election is guaranteed.
Treasury Admits It Underestimated Debt Needs, Predicts Ceiling Breach In 2012; $600 Billion More Debt In Second HalfSubmitted by Tyler Durden on 07/30/2012 16:15 -0400
Back on April 30, when the US Treasury, together with the TBAC chaired by Matt Zames (who as everyone knows is being groomed to take over JPMorgan after Jamie gracefully steps down) sat down put together its latest debt funding needs projection, we openly mocked the numbers when we said "Now obviously we are all for the US needing less debt, however we wonder: did the US discover some magical source of tax revenue: last we checked the companies with $100+ billion in cash were paying virtually zero taxes, and US workers were making less and less courtesy of more and more jobs being converted into temp jobs with lower wages, and less withheld tax as a result." Sure enough, minutes ago the Treasury just admitted what we and our readers knew all along: in its quarterly Treasury refunding appetizer, it noted that during the "September 2012 quarter, Treasury expects to issue $276 billion in net marketable debt, assuming an end-of-September cash balance of $60 billion. This borrowing estimate is $12 billion higher than announced in April 2012. The increase is primarily due to lower receipts, higher outlays, redemptions of portfolio holdings by the Federal Reserve System, and higher issuances of State and Local Government securities." In other words: if only it wasn't for that pesky lack of revenue and excess spending our mocking would have been for nothing. Alas, it was spot on, and as a result instead of needing $253 billion in fiscal Q4, the US will need $272 billion (after having a $5 greater financing need in Q3 as also expected).
Yes, we know it doesn't matter because Ben & Mario have got our backs at whatever multiple is required to levitate the economy market, but as Citi's credit desk points out; despite the constant chatter about EPS beats (despite top-line misses), the trick is that analysts have been dragging down expectations since the earnings-cycle began and so judging 'misses' must be done against a 'frozen' pre-earnings number. If we do this 'fair' approach to considering expectations, the percentage miss in the S&P 500's EPS for Q2 2012 is as bad as the Q2/Q3 2011 Tsunami-driven miss - and the worst we have seen since Lehman Brothers shuffled off this mortal coil. So as usual, be careful what truth you believe and consider just how much more 'hope' is now in this market given this reality.
While Dos Equis has its most-interesting-man, we think we have found the 'most hypocritical'. Until today we thought Sandy Weill was the undisputed champion in this category, but after seeing this clip we think he has strong competition. At around 40 seconds into this lengthy diatribe, everyone's favorite Libertarian Las Vegan utters the most two-faced hypocritical words that he could possible have uttered: "I think we should audit the Federal Reserve". Between Harry Reid's recent vehement anti-Paul behavior and the whip-order that Democrats received on Ron Paul's bill yesterday, this is stunning. While the sell-out nature of this kind of politician does not surprise us, we thought it prudent for all US citizens to understand the true nature of the political class that decides an increasing amount of our day to day lives.
The avuncular Art Cashin is sounding a lot less sangune than many of his market-watching peers. UBS' main man notes that traders are particularly struck by the continued weakness in the transports group (with FedEx and UPS down 8 of the last 11 sessions - and the Dow Transports down the equivalent of 300 points for the Industrials on Friday alone). "The sharp contraction in the Transport area and recent sharp drops in several trucking statistics add to growing fears that the economy may have stalled over the last four weeks," is how he puts it, but it is his cocktail-napkin charting that concerns the most. Historically, even in years that don't have multiple "end of the world as we know it" headlines in the news, the equity markets decline in the week after July option expiration. Twice in the last five years the S&P lost more than 4% in the week after July expiration. So, does that mean we should tether the elephants? No, but we should be alert and nimble on a week with a somewhat spotty history - with 1332/1335 as his key line in the sand for more downside in cash S&P.
The World Gold Council have just published their commentary on gold’s price performance in various currencies, its volatility statistics and correlation to other assets in the quarter - Gold Q2, 2012 - Investment Statistics and Commentary. It provides macroeconomic context to the investment statistics published at the end of each quarter and highlights emerging themes relevant to gold’s future development. One of their key findings is that gold will act as hedge against possible coming dollar weakness and gold will act as a "currency hedge in the international monetary system." The key findings of the World Gold Council’s report are presented inside.
"A week after Bernanke spoke last year we saw the highs for H2 2012 (1345) before moving aggressively lower into the low 1100s through August- October as Europe’s problems intensified and the US debt ceiling problems came to a head. One year on and the biggest H2 risks are probably similar. US data is weakening, Europe’s problems could easily come to a head again and the fiscal cliff could become a major issue, albeit slightly later in the year. We also now have a China slowdown to contend with. So the parallels are there."
Ben Bernanke will deliver the semiannual report on monetary policy to the Senate Banking Committee Tuesday. The market is hoping and praying that the Chairsatan will make it rain. He won't. In fact, as explained earlier, it is likely that Ben will say absolutely nothing of significance today and in a world in which only the H.4.1 matters, this is not going to be taken well by the market. Of course, if Benny does crack and promises to push the S&P to 1450 just in time for the re-election, all bets are off.
While economists may waste lots of hot air debating this, that and the other about the future growth trajectory of the US economy, in the aftermath of Goldman's cut of US GDP to just a 1.1% annualized rate of growth. And with the fiscal cliff, debt ceiling, Europe, China, and a plethora of other unknowns up ahead, this number will certainly decline further. Now here lies the rub: as the chart below shows total US marketable debt has doubled in the past 4 years, or an annualized growth rate of just above 21%. And as Zero Hedge has shown before, total US Debt/GDP is on the verge of crossing 102%, the highest since WWII. Simply said, the divergence between the two data series will only accelerate as every incremental dollar of debt generates ever less bank for the GDP buck. And that, from a "sustainability" perspective, is what the problem is in a nutshell.
Last week the S&P erased 6 days of consecutive losses in 30 minutes of trading on the back of news that JPMorgan lost at least 25% of its average annual Net Income in one epic trade, and stands to make far fewer profits in the future, even as the regulators are about to fire a whole lot of traders for mismarking hundreds of billions in CDS. This was somehow considered "good news." This being the "new normal" market, where nothing makes sense, and where EUR repatriation as a result of wholesale asset sales by European banks drives stocks higher, we were not too surprised. Sadly, even in the new normal, things eventually have to get back to normal. And that normal will come as corporate earnings are disclosed over not so much over the next 3 weeks, when 77% of the companies in the S&P report Q2 results, but in the 3rd quarter. Why the third quarter? Simple: as Goldman's David Kostin explains, "consensus now expects year/year EPS growth to accelerate from 0% in 2Q, to 3% in 3Q to 17% in 4Q." Sorry, but this is not going to happen...
While conflicts within and with the Middle East region are still among the top global risks, the paradigm has definitively shifted to China and Europe.
- Merkel Backs Debt Sharing in Germany Amid Closer EU Push (Bloomberg)
- With a ruling as early as today, here are four health care questions the Supreme Court is asking (CBS)
- George Soros - Germany’s Reticence to Agree Threatens European Stability (FT)
- China Stocks Drop to Five-Month Low (Bloomberg)
- The New Republic of Porn (Bloomberg)
- That's a costly detached retina: Greek Lenders Postpone Mission to Athens (FT)
- Spain Asks for Aid as EU Fights Debt Crisis (FT)
- Wolfgang Münchau - Why Mario Monti Needs to Speak Truth to Power (FT)
- U.S. Banks Aren’t Nearly Ready for Coming European Crisis (Bloomberg)
- MPC Member Wants £50bn Easing (FT)
- India Boosts Foreign Debt Ceiling by $5 Billion to Defend Rupee (Bloomberg)