Where The Consensus Is... Wrong
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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