Ever get that feeling of Deja Vu when year after year things don't go quite as well as expected in the beginning of the year. We are sure the Fed does, but the chart below should provide enough evidence of the "value" being added by a consensus of equity analyst extrapolators over the last 36 years. On average consensus EPS growth rates have performed the anti-Gartman - slumping from over-optimistic highs of the left to dismal reality check lows on the left. Of course, hope remains that this year will be different... but it doesn't appear to be heading that way.
We strongly suspect that both government debt growth and money supply inflation will continue unabated – any pause will immediately bring about the kind of short term economic pain these policies have explicitly sought to prevent and will therefore be quickly reversed. It is not unlike the situation the revolutionary assembly of France found itself in during the late 18th century: when it issued new money, industry seemed to revive. As soon as it stopped, industry slumped again. And so it was decided to issue ever more money, until the entire scheme blew up. There can be little doubt that modern-day governments are on the road to a similar date with destiny – and lately the speed at which they travel toward it has increased markedly.
Today's JPY-driven opening ramp pulled the S&P 500 off its key trendline but is fading now as once again hope turns to despair and reality. As BofAML notes, while other US equity indices remain modestly constructive after a 2-day rally on nothing, the S&P 500 remains poised for a downside test (and likely break) of its 11-month trendline at 1666 (exposing the August 28th lows at 1627).
Not a day goes by without a story in the MSM by some industry shill about the imminent energy independence of the Great American Empire. Shale oil and gas will revolutionize the American energy prospects. We have hundreds of years of oil and gas under our feet. We will be a net exporter in the next few years. A glorious future awaits. It’s all hype. Royal Dutch Shell is one of the biggest corporations in the world, with financial resources greater than 99% of all the organizations on earth. Their CEO probably knows a little bit more about oil exploration than the Wall Street systers and CNBC bimbos. His company has poured $24 billion into shale exploration in the U.S. It has been a huge failure. If Shell can’t make it profitable, who can?
There is a profound disconnect between the Higher Education cartel and the economy and what higher education should cost in a world where information, instruction, and knowledge have fallen to the cost of bandwidth; i.e., near zero. What was once costly and scarce (knowledge and instruction) is now nearly free and abundant, readily available on any digital device anywhere in the world with a connection to the Web. There is no need to concentrate students in a campus with a library; every web-connected digital device is a library and university combined. The Higher Education cartel is perfectly happy to encourage degree inflation (at enormous expense, of course), but this zeal for issuing student-loan-funded diplomas fails to address two structural disparities: the one between the skills needed to prosper in the emerging economy and the skills colleges are providing students, and the widening income/wealth/education gap between the wealthy and the non-wealthy.
While we documented (and predicted) the surge in October 31 T-Bill yields, now that the market is increasingly pricing in the probability of a (supposedly brief) technical default of short-term US debt around October 17, aka the "X-Date", a more disturbing development has been the rapid rise in November 14 Bills, as increasingly more traders become concerned not only about a failure to successfully negotiate away the debt ceiling, but the possibility of a protracted debt ceiling fight continuing well into November. So just what are the US government's key obligations in the immediate aftermath of the X-Date? Here, once again, is a breakdown of key events and cash "deliverables."
The US government's foreign policy appears to be most effective when it is shut down. First, we learned that the CIA has accelerated its training and weapons supply of Syria's Al-Qaeda insurgents only after the funding for the non-critical government functions was halted. Then, overnight, John Kerry showed that while he gives to Al-Qaeda with one hand he takes from it with two following two U.S. raids in Libya and Somalia that captured an Islamist wanted for bombing its Nairobi embassy 15 years ago. These actions "show Washington's determination to hunt down al Qaeda leaders around the globe" Secretary of State John Kerry said on Sunday. So in 15 years the then secretary of state will be proud to announce that Al-Qaeda leaders operating in and around Syria, armed with US weapons, have also been captured. And so the wheel will keep on turning.
Secular bull markets are great parties. Investors arrive from secular bears really wanting to take the edge off. As the bull proceeds, above-average returns become intoxicating. By the time it is over, the past decade or two has delivered bountiful returns. In contrast, secular bears seem like hangovers. They are awakenings that strip away the intoxication, leaving a sobering need for an understanding of what has happened. If history is a guide, the inflation rate will at some point trend away from the present price stability. The result will be a significant declining trend in P/E. If this occurs over a few years, the market losses will be dramatic. These processes take many years. Be careful not to let hope for the next secular bull mask the reality of the current secular bear.
One of these things is not like the other...
“Spies … Can Now, For The First Time, Monitor Everything About Us, And They Can Do So With A Few Clicks Of A Mouse And – To Placate The Lawyers – A Drop-Down Menu Of Justifications”
It was all going so well... restating the same old news that Boehner would not end the world was working for a few more points every time and managed to get the S&P up to "shutdown" levels to run the stops. But then, reality hit...
*BOEHNER SAID TO TELL MEMBERS HE WON'T PUT CLEAN CR ON FLOOR
*BOEHNER SAYS 'THIS ISN'T SOME DAMN GAME', HE HAS NO INTENTION OF `ROLLING OVER' ON SPENDING
And sure enough stocks start to tumble...
There really is very little reason why this "government shutdown" cannot continue indefinitely because almost everything is still running. 63 percent of all federal workers are still working, and 85 percent of all government activities are still being funded during this "shutdown". It turns out that the definition of "essential personnel" has expanded so much over the years that almost everyone is considered "essential" at this point. In fact, this shutdown is such a non-event that even referring to it as a "partial government shutdown" would really be overstating what is actually happening. In the end, this shutdown could turn out to be very good for America. We have a government that is wildly out of control and that desperately needs to be reigned in.
"We may well have had a big, big rally in the U.S. stock market, but it's not based on reality.
I would encourage investors to know you're in a fool's paradise, be careful, and when people start singing praises, say, 'I've been to this party before, and I know know it's time to leave.'"
While the recent Federal Reserve inaction is bullish for stocks in the short term there are plenty of reasons to remain somewhat cautious. Stocks are overvalued, rates are rising, earnings are deteriorating and despite signs of short term economic improvements the data trends remain within negative downtrends. Investors, however, have disregarded fundamentals as irrelevant as long as the Federal Reserve remains committed to its accommodative policies. The problem is that no one really knows how this will turn out and the current assumptions are based upon past performance. Complacency is not an option; it is critically important to understand that market reversions do not occur without a catalyst. Whether it is the onset of an economic recession, a natural disaster or a financial crisis - there is always something that sparks the initial selloff that leads to a full blown market panic. With this idea in mind here are 3 rising risks that investors should be paying attention to.
The President warned yesterday that "this time is different," and now the Treasury has weighed in with an even more ominous warning. In their statement, they note:
*TREASURY OFFICIAL: CONGRESS ACTION ONLY WAY TO AVOID DEFAULT
*TREASURY SEES `TENTATIVE' SIGNS IMPASSE AFFECTING MARKETS
*TREASURY SAYS BILL YIELDS MAY REFLECT `NASCENT CONCERNS'
*TREASURY: DEFAULT IMPACT COULD BE PROFOUND, LAST A GENERATION
And so it seems not only are they looking at the same indicators as the smart money in the markets but it is clear that the rhetoric will be increased until the equity market cracks and the politicians get their catalyst to act.