Chart Of The Day: Q4 Deja Vu Dead Cat Bounces Again
Today's just announced revenue and EPS misses from both megacaps McDonalds and GE (in addition to MSFT, GOOG, INTC, IBM and everyone else) merely adds to what has so far been an abysmal earnings season, and one which is set to continue for far more weakness into Q4 (why? Hint: China, and its unwillingness to ease, and thus provide the much needed demand oomph US corporates need). Yet, the pundits will claim, economic conditions in the US have improved. How does one reconcile this disconnect? Simple: as Bloomberg Brief shows in two simple charts, what we are undergoing is not the first, but second case of annual deja vu, as the economy supposedly picks up in Q3 and Q4, courtesy of the latest and greatest artificial sugar high from the Fed, only to slide promptly back into decline once the initial euphoria fizzles. However, this time there is a major difference: corporate Y/Y revenue (and in many cases EPS) comps have turned negative, which means that unlike before when corporations would be the silver lining in a dreary macro environment once the economic downward trend resumed, this time around there won't be a convenient Deus Ex to provide a last gasp reason to hold on to the myth that things are getting better. This, in turn means, that with "dividend" assets no longer attractive, the investing/trading crowd will rush into hard assets like crude (recall the $125/barrell Brent barrier for economic decline)... and gold. But that is a story for another day.
From Bloomberg Economics Brief by Joseph Brusuelas:
Recent growth data and a number of positive economic surprises are following an eerily familiar pattern that has repeated over the past three years. Inthis pattern, indicators point to possible improvement in the economy in the fourth quarter of each year, only to disappoint when the roughly 2 percent growth trend (2.2 percent since recovery) reasserts itself in subsequent quarters.
Will this year follow the pattern, or represent a breakout?
Some developments in the economy do point to signs that this time may be different, especially if policy makers successfully avoid the fiscal cliff.
The lagged impact of past fiscal and monetary policy may be gaining traction, supporting auto sales that are 50 percent above recession lows and home purchases that are up 9.3 percent on a year-over-year basis. A mid-cycle improvement in auto sales and housing starts, areas that traditionally lead the economy, is a welcome development.
The 35 percent year-over-year increase in housing starts will probably be sustained due to real demand for rentals of multi-family dwellings as new entrants to the workforce start households and homeowners transition to renter status.
Other positive factors appear to be more temporary. Pent-up demand for consumer goods, and the ability of upper income households to access credit to purchase them, can help support temporary bumps in spending in the latter parts of the year when new consumer products such as the iPhone and iPad are released. This support for the economy is likely transitory and insufficient to move the economy back toward its long-term growth trend of 2.5 percent.
Personal income continues to stagnate. Disposable personal income is up 1 percent on a year ago basis, half the 2 percent average posted during the previously cyclical expansion.
And new bookings of capital orders excluding non-defense aircraft are down 5 percent year-over-year, with total manufacturing orders off 2.5 percent and durable goods orders down 7.2 percent.
While the housing story is encouraging, and a recovery in housing is an essential component of a sustained expansion, total residential investment accounts for only 2.3 percent of GDP, down from 6.3 percent at the peak of the housing boom. The U.S. economy is undergoing a structural change from an overreliance on household consumption to a growth model based on value-added manufacturing, technology and energy.
Those hoping for the old growth model to reassert itself in the wake of the housing collapse, financial shock and ensuing Great Recession may as well be waiting for Godot.
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With that said we want to reiterate what we said earlier: until and unless China resumes a major monetary easing episode (and it has so far sternly refrained from doing so due to fear of food price shocks and imported inflation), the latest episode of macro optimism will end in tears far sooner than all expect. And this time the Fed will truly be exposed as the naked emperor it is.