Where The Consensus Is... Wrong

Tyler Durden's picture

The equity markets, despite a verey modest drop so far today, continue to hang in despite slowing profits growth. David Rosenberg notes that while many tout the +6% YoY earnings growth being better than the +2.4% consensus, it is significantly lower than the +8% in Q4 2011 and once adjusted for special factors like reduced expenses related to pension funding, the growth rate in earnings is a meager 40bps! So, he notes, it appears not to be about earnings but about what investors are willing to pay for the earnings stream and lays out four reasons for the market's 'comfort'.

However, while Mr. Market is catching on to the Fed's overt attempt to reflate the economy by reflating asset values, he warns, we have seen in the past how these cycles turn out - and whether you are a trend-follower or contrarian, take note of the overwhelming consensus across almost every asset class right now. Dow Theory advocates have been doing high-fives all year long as the S&P Industrials and Dow Transports make new highs, reinforcing the notion (mirage is more like it) of economic escape velocity, but Rosenberg has more than a few 'anomalies' that show things are actually stagnating (or contracting) and don't pass his smell test.


Via Gluskin Sheff's David Rosenberg,


The equity market continues to hang in despite slowing profits growth. To be sure, with 305 of the S&P 500 companies now reporting, we have +6% YOY earnings growth which is better than the +2.4% that was being discounted by the consensus heading into the quarter. However, it is still slower than the +8% growth in the fourth quarter of 2011 and once you make the adjustments for special factors like reduced expenses related to pension funding, the growth rate in earnings is literally 40 basis points above zero.

What The Bulls believe:

So it is not about earnings but about the price that investors are willing to pay for the earnings stream.


First, investors like what they are still seeing on the cost-cutting front.


Second, they like what they are seeing in terms of top-line growth as 70% of companies reporting thus far have managed to beat on revenues which compares to 41% in the third quarter (and even fractionally above the historical norm of 66%).


Third, many multinationals have reported decent results from the Asian and Latin American economies - and the S&P 500 is increasingly seen as a play on the global, not just domestic economy.


Fourth, with financial sector earnings leading the pack at +13% profit growth, this has lent a certain degree of comfort that the banks have become increasingly stable animals.


So you do have quite a few institutional investors out there who see a 15x P/E multiple as being attractive and positioning themselves for even further expansion to 17-18x so long as central banks globally continue to narrow in the financial tail risks that they so obviously missed doing in 2007 and 2008.

Now you don't have to agree with any of this, but it offers up an explanation as to what is driving the markets - an investor class that is turning more optimistic on the outlook at a far faster rate than the CEO class.

And of course, what Mr. Market is increasingly catching on to is the Fed's overt attempt to reflate the economy by reflating asset values... and we have seen in the past how these cycles turn out even if it may be a tad too early to discuss it today - My, oh my, how I angered so many at my former home at Merrill by warning against the perils of asymptotic price movements not premised on fundamentals as much as on leverage and financial engineering...

Whether you are a trend-follower or contrarian, take note that the overwhelming consensus right now seems to be:

  • Bearish on long-duration government bonds
  • Bullish on shorter-term emerging market debt
  • Bullish on the euro
  • Bearish on commodities
  • Bearish on the yen
  • Bullish on the Nikkei
  • Bullish on US financials and consumer cyclicals
  • Bearish on gold
  • Bearish on high-yield bonds
  • Bullish on US housing
  • Bullish on transports
  • Bullish on US manufacturing renaissance
  • Bearish on Canadian housing
  • Bullish on equities, the riskier the better
  • Bearish on REITS
  • Bullish on the auto sector
  • Bullish on household re-leveraging bets

Of course, the Dow Theory advocates have been doing high-fives all year long as the S&P Industrials and the Dow Transports actually have managed to make new all-time highs, reinforcing the notion (mirage is more like it, but this is what is being discounted) of economic escape velocity.


One would think we have a global boom on our hands and yet every measure of economic activity related to what gets shipped from air cargo to port activity to truck tonnage to actual real export volumes are either stagnating or in most cases, contracting outright.



This is what I love to do - point out anomalies. Something here doesn't pass the sniff test.

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Motorhead's picture

Charts, bitchez!

ghostfaceinvestah's picture

Poor Rosie, is he ever right?  Of course this is about multiple expansion, that's what happens when a currency is destroyed.  

John Law Lives's picture

"Whole Lotta Rosie!"

Here is an earlier version of that song by AC/DC with different lyrics.  AC/DC fans will recognize the familiar chord progression in this song.  "Whole Lotta Rosie" is an offshoot of this earlier song.

Crank up the voume on this one!


FL_Conservative's picture

PE's are not elastic and so won't correlate to increase in money supply.  Most companies have squeezed all the fat they can from their organizations without impairing their ability to maintain volumes. Inflation has been "managed" through means other than direct pass-through to the consumer, but that wall has been hit.  Costs will increase and margins will contract and volumes will decrease because consumers have to contend with tax increases reducing their take-home.  This shit ends pretty quickly during the first half of 2013 and with it, equity prices are going down.  Disregard if you want, but you will see this as true soon enough.

Racer's picture

Fundamentals are all well and good when they matter, but in a fake 'market' they have no connection because it is just driven by computer churn

mudpuppet's picture

Well if the lead story means anything than who cares what Rosey thinks?  The DOW is going to do a Ron Barron and go to 50K in 20 years.  Who, What, When or Why is going to stop the FED? Sucks because I feel like Im insaine reading and believe in anything that is posted on zero.

bobthehorse's picture

The consensus is never wrong.

They just view the opposition as broken clocks.

We get lucky sometimes--according to them.

When's the last time you've seen Peter Schiff on the Cavuto Show?


El Oregonian's picture

Who is Cavuto? Dare say another talking head saying the same thing just from the other side???

Everybodys All American's picture

Add in real inflation to the equation on earnings and revenue and you'll see we are in a depression. But no company or government actually will and that's why it feels like a depression even though the numbers reported say we're not. Inflation is like a thief in the night and it's only just begun.

ghostfaceinvestah's picture

Yup, again, look at Zimbabwe's stock market, nominal increased looked great...

Hedgetard55's picture

Rosie has never been able to just come out and say the market has been juiced by Ben's money printing, thus I have no respect for him.

Muppet Pimp's picture

This is the big one!


On the positive side, everyone should probably go all in to equities when we bottom this time, as the real recovery should follow.  Chasing stawk prices higher on the backs of all this puny data will only result in more severely burned fingers particularly in the retail side.  It certainly feels like we are cresting the top of the big hill on the equity roller coaster.  Fasten all seat belts and keep your hands inside the car.  When this sucker hits the bottom of the hill, the great rotation should begin in earnest.  (one last hurrah in bonds and PM's?) We shall see.  This may be the recouple we have all been waiting for.  Maybe if the Berananke will let economic forces run equities up this time (instead of money printing) we can actually invest based on fundamentals and stop overshooting the top by so far.  Weeeee!

El Oregonian's picture

"Maybe if the Berananke will let economic forces run equities up this time"

You just don't get it do you? It is by DESIGN!

These banksters and elitists want it that way. They figure you can't bring everyone's artificial standard of living up so you take everybody's standard of living down. You know, well-fed slaves bitch too much and starving slaves are just grateful for the simple hand-outs they are given...

Sabe, Kemo Sabe?


q99x2's picture

Oligarchs Bitchez.

The central banks take and make the money. The Mega Banks and the central banks then determine what they are going to fund to maintain control of the planet.


John Law Lives's picture

This is the bottom line in this sham economy:

Fed Has Bought More U.S. Gov’t Debt This Year Than Treasury Has Issued
February 7, 2013
By Terence P. Jeffrey



chump666's picture

Doomers and bears should only be interested in two charts at this point in time, one, the oil price, the other the amount of times fighter jets have been scrambled out of Japan over disrupted Islands.

Everyone knows the ecomomy is an artificial basket-case pumped by Obama credit madness and the Fed allowing Wall Street to create an illusion out of the stock market.

*just in* Japanese jets scrambled after Russian jets http://news.blogs.cnn.com/2013/02/07/japanese-jets-scramble-after-russia...

groundedkiwi's picture

Its more likely that the Russians are using the jets for survellience of Fukushima. Who knows what is happening there? Lots of earthquakes in the Pacific recently.

Grand Supercycle's picture

DOW monthly chart update shows impending Wile E. Coyote drop.

It doesn't take a genius to realise this chart will end in tears.


Phat Stax's picture

Um... does this mean you can never be wrong, only early?  Right.



Lord Of Finance's picture

Its so simple and obvious even a cave man can do it. Better yet, see it.


UNGA BUNGA, Krugman!


The Keynes disciples are unable to see because they are still in the primal stage of developement.