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.
In a surprise announcement, several hours ago Spain's Prime Minister Rajoy declared that Spain's King Juan Carlos is abdicating after almost 40 years on the throne and his son Prince Felipe will succeed him. "His majesty, King Juan Carlos, has just communicated to me his will to give up the throne," Rajoy said. "I'm convinced this is the best moment for change."
Paul Volcker Proposes A New Bretton Woods System To Prevent "Frequent, Destructive" Financial CrisesSubmitted by Tyler Durden on 06/01/2014 19:32 -0400
We found it surprising that it was none other than Paul Volcker himself who, on May 21 at the annual meeting of the Bretton Woods Committee, said that "by now I think we can agree that the absence of an official, rules-based cooperatively managed, monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth." We can, indeed, agree. However, we certainly disagree with Volcker's proposal for a solution to this far more brittle monetary system: a new Bretton Woods.
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.
Has the next major economic downturn already started? The way that you would answer that question would probably depend on where you live. If you live in New York City, or the suburbs of Washington D.C., or you work for one of the big tech firms in the San Francisco area, you would probably respond to such a question by saying of course not. In those areas, the economy is doing great and prices for high end homes are still booming. But in most of the rest of the nation, evidence continues to mount that the next recession has already begun for the poor and the middle class.
As we wrap up a holiday shortened trading week, there are several things to ponder this weekend. Will the breakout of the S&P 500 of the trading range it has been stuck in since February hold? Is the negative print of GDP in the first quarter simply a weather related anomaly, or something else? Is the decline in interest rates telling us something important? Are the currently high levels of complacency and bullishness in the markets a warning sign? Or, is this just a continuation of the bull market cycle that started over five years ago with plenty of room left to run. "I always thought that record would stand until it was broken?" - Yogi Berra
If clichés reflect overly common (if therefore unappreciated) wisdom, then we finally have a good explanation for why risk assets continue to rally. No, there are actually not “More buyers than sellers” – money flows are negative over the last month for both U.S. equity mutual funds and ETFs. And forget about investors “Downgrading on valuation” as stocks climb higher and higher; truth be told, that’s not even really a thing (unless you work on the sell side). Nope, this is a “Flight to quality”, “don’t fight the Fed”, “never short a dull market” environment with “easy comps” from a long rough winter. Want to call a top somewhere around here? Remember that “Markets discount events 6 months in the future.” A “Santa Claus rally” in June? That would fit the one cliché we know is actually the market’s True North: it will do exactly what hurts the most “Smart” investors. And that would be to rally further as the doomsayers double down and the timid cling to their bonds and cash.
The word "recession" is being used less and less in news stories as the world becomes complacently confident that the central planners have 'fixed' the business cycle. Of course, the unpopularity of the R-word was matched only by the pre-recession lows in 2007/8 before the last collapse in the US economy. In the same way that there can be no bubble when everyone is talking about bubbles... when no one is talking about recessions, we wonder what that means?
Even soothsayers and Abenomics spin doctors expected a downdraft after Japan’s consumption tax was jacked up. But not this.
- Ukraine Rebels Outfox Army to Dent Poroshenko Troop Goal (BBG)
- Russia Withdraws Most of Forces From Ukraine Border: U.S. (BBG)
- Super-Size Me! China’s ’Mini’ Stimulus Starts Expanding (BBG)
- Option B: The blueprint for Thailand's coup (Reuters)
- Big investors replace banks in $4.2tn repo market (FT)
- Draghi Shields Catalan Independence Bid From Market (BBG)
- U.S. companies seek cyber experts for top jobs, board seats (Reuters)
- Parsley CEO Emerges as One of Youngest U.S. Billionaires (BBG)
The temptations of extrapolation are hard to resist. The trend exerts a powerful influence on markets, policymakers, households, and businesses. But discerning observers understand the limits of linear thinking, because they know that lines bend, or sometimes even break. That is the case today in assessing two key factors shaping the global economy: the risks associated with America’s policy gambit and the state of the Chinese economy. It is often said that a crisis should never be wasted: Politicians, policymakers, and regulators should embrace the moment of deep distress and take on the heavy burden of structural repair. China seems to be doing that; America is not. Codependency points to an unavoidable conclusion: The US is about to become trapped in the perils of linear thinking.
Despite all the doom and gloom in the market, we would have loved to have these employment numbers three years ago.
Bottom line: someone is dead wrong on the economy, but we are glad that the weathermen formerly known as economists are putting all these timestamps out there in the public domain. Because we eagerly look forward to seeing just what the scapegoat will be when Q2 GDP mysteriously fails to soar to 4%. And judging by what the bond market is doing, the only place that may see 4% growth in Q2 is China (net of all the fabricated data of course).
Today is the day when economists weathermen everywhere jump the shark. Here's Goldman's Jan Hatzius: "Because of weaker inventory investment in Q1, we increased our Q2 GDP tracking estimate by two-tenths to 3.9%."
As if the official news that the US economy is just one quarter away from an official recession (and with just one month left in the second quarter that inventory restocking better be progressing at an epic pace) but don't worry - supposedly harsh weather somehow managed to wipe out $100 billion in economic growth from the initial forecast for Q1 GDP - here is some even worse news: if one excludes the artificial stimulus to the US economy generated from the Obamacare Q1 taxpayer-subsidized scramble, which resulted in a record surge in Healthcare services spending of $40 billion in the quarter, Q1 GDP would have contracted not by 1% but by 2%!