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The New Tapering Normal Optimism In Charts
That all the increase in risk assets has been on the back of multiple expansion for the past year is by now not news to anyone. What may come as a surprise to some who have not been paying attention, as Morgan Stanley conveniently reminds us, is that corporate profits have been declining not for one or two quarters, but for two full years now. "For net margins, March 2013 quarter-end results showed the top 1500 US equities at 7.15%, below the peak achieved in the June quarter of 2011. In fact, net margins have declined for the top 1500 companies every quarter since June 2011."
This is to be expected in a world in which underlying fundamentals continue to deteriorate and where the bulk of corporate activity focuses not on growth and expansion but on masking earning declines through the use of stock buybacks and levered dividends. Yet what has remained the same throughout this Fed-driven recovery (of the stock market, if not the economy), is the optimism surrounding the future. After all, if the the present is ugly, one has to at least project confidence and hope.
So how does the future look? The following several charts should summarize it quickly and painlessly.
First: the consensus forward EPS for the S&P - down, down, down.
But the constant "tapering" of optimism when it comes to fundamentals is only half the story. The other half is that these numbers would be even worse if the impact of stock buybacks was eliminated. From JPM:
The Divisor of the S&P500 Index is shown in Figure 5. This Divisor experienced a massive increase in the 1990s but started falling in 2004 due to strong buyback activity. Between 2004 and 2008 it fell by 7% or almost 2% per annual decline pace. It rose after Lehman due to large share issuance especially by financials and a drying up of share buyback activity. It started declining again in 2011 as share buybacks picked up. Since September 2011 the S&P500 Index Divisor is down by more than 2%.
The fall in the S&P500 Index Divisor has helped the earnings picture in the US. Had the Divisor remained constant since Q3 2011, the 4-quarter rolling S&P500 Operating Earnings-Per-Share would have only risen by $1.50 instead of the reported $3.70 increase. The S&P500 Operating EPS has risen from $94.60 in Q3 2011 to $98.30 in Q1 2013. Indeed studies have found that managers tend to increase share buybacks in periods of slow earnings growth to boost EPS via shrinking the denominator, i.e. the number of shares.
In other words, applying a 16x multiple to the $2.20 EPS boost from buybacks alone, means 35 S&P points comes from balance sheet jiggering alone.
But while optimism when it comes to corporate profitability has tapered to say the least, it remains just as buyoant in other areas. Such as profit margins where there is hope the recent two year reversal will finally, well, reverse again.
So a wholesale margin renaissance according to Wall Street desperate to justify bubble valuations: nothing new there either.
Ok we'll bite - how do companies feel about the future. Apparently, not so hot:
Confused? Don't be: negative guidance preannouncements are at post Lehman highs. But why listen to companies when sellside research is always right.
But maybe we are missing something, and it is really a top-line growth story, with revenues poised to surprise to the upside. Well, no.
Sadly, there is no hope of a pick up in revenues either, which is perfectly logical: when companies don't invest in capital spending and future growth, this is the direct result.
Morgan Stanley admits as much: "If companies don’t invest in capital spending and research and development, they may maintain higher margins, but this lack of spending will not be a good catalyst for economic growth."
Alas, there is no economic growth, and in fact when stripping away buybacks, there would have been no EPS growth in Q1 either.
Which means that the only deus ex will have to be multiple expansion. The same forward multiple, by the way, which as we noted, is now higher than it was at the market's last all time highs back in 2007.
But why worry: it's Tuesday, there is a POMO, the Yen is getting crushed again, and central bankers have everything under control. Just like they did back in 2007 when subprime and everything else was also "contained."
So best to just ignore reality and BTFD: because the Chairpriest said so.
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Stalingrad & Propaganda 500 index say's so too.
Bitchezz.
Any word as to what Pravda has to say about it?
Taper that paper and don't forget to flush.
Beats reading the Times these days......just sayin.
"Any word as to what Pravda has to say about it?"
Sure....CNBC along with Cramernov and Money Honeyeska say..."BUY...BUY...BUY !!! "
"Money Honey" Elvis Presley
http://www.youtube.com/watch?v=dOZSK4aTjrE
The only thing that matters is how much the Bernank is willing to print, everything else is just noise. We could have companies giving their products away, and the market will be pushing new highs. They will do whatever it takes to keep the game rolling a little while longer.
sad but true. Now that housing has "recovered" they will switch the 85 billion dollar per month effort to buying sovereign debt. Fucking criminal.
It is criminal, unfortunately the masses are too stupid to understand or even take time to figure out how they are being fucked. The criminals will continue their in your face corruption until the whole thing falls apart and they have been dragged through the street. I don't admire or support Lenin's policies ,but the more I think about it the more this quote rings true:
The Capitalists will sell us the rope with which we will hang them.
Lenin
Thanks for being so optimistic.
Too bad, the rope was defective. And he bought it from the Lords, not the Capitalists.
But these are just details.
For the last time, there is no "market". Will the management of these "private" companies be paying back the creditors with their own private wealth or will they simply get more free money? Who will fund the budgets and buy all these sovereign bonds? There are important questions to be answer, but this is not one, especially considering all the "mark to fantasy" valuations out there. Tick tock motherfuckers, as the yield on the ten year bond sits nicely above 2.0 %...
Get those mortgage rates over 4% and rising and kiss real estate good bye all over again.
I'm starting to wonder if that's true fonz....I thought hints of tapering would be the death of the market....now money managers take this as a sign the economy is really improving....which may flood even more money into the Almighty Dow....nobody wants to be the pessimist riding the bench....play ball!!!
The Dow is all fine and good, but unless you instate a new tax on financial transactions it won't help Uncle SAM. Someone has to buy those bonds and fund the deficit spending or the ponzi dies, and more importantly the "elite" lose control. Money has always been a means to maintain power and control, period.
Speaking of deficit spending....its been cut in half in the past several years....I also thought these sequester cuts would be the death of the Almighty Dow because I gauged deficit spending as the prosthetic legs keeping the economy afloat....and yet here we are...cuts came and went....and nary a trickle of fallout....as long as the deficit drops, it seems bernanks doesnt need to open his wallet as wide to uncle sam......perhaps the red pill was more of a hallucinogen.......nothing makes sense anymore....
The "cuts" were not even the equivalent of one month's monetization. Look at velocity, none of this free money is making it to the real economy, it's just sitting on the bank's balance sheets and being used by insiders to exponential increase thier own wealth and influence. Then there is the interest payments to the banking families of course.
"Speaking of deficit spending....its been cut in half in the past several years."
Kito the deficit was doubled from 2008-2012. Now this year it is down 20% off the DOUBLE.
You look at deficits the same way you look at inflation. You have to zoom out.
Listen to me, it's going to be okay. Your rich friends are wrong and stupid. So are mine. Everything will fall apart and we will have the zombie armageddon. Tust me it's going to be okay in that it will be awful.
LOL!! thanks for the reassuring words.....i think........
You, like me, live in two worlds, is my guess anyway. We live day to day in this euphoric Northeastern mecca of finance and paper wealth. Somehow we wandered on here and are now forced to see the inescapable fact that while we are sitting om the beach, the water is slowly receeding. As you and I prepare for the tsunami we are not enjoying the beautiful son and the people around us are having a fantastic time. It's maddening.
They don't take it as a sign of improvement, they are simply challenging the Fed's bluff, they know when push comes to shove the Fed is all in and will never remove their printing support. This is the last epic bubble in crack-up boom phase. But it's a market bubble, not an economic bubble. The economy is only bubbling in areas patronized by the market-connected plutocrats. Otherwise the economy is flatlining. And that makes no difference to the speculating community. It's nothing but a confidence game of chicken now, and everyone is going to lose.
Your logic is flawed, the mkt will inherit the Feds balance sheet and the problems which are inherent in the Fed. Such as people like you.
There is no market, there is only the Fed. Bring it. My tribe and I are quite productive and prepared. It's about time for compensation to find it's way back to people who provide real products of real value. Sounds good to me (and anyone else holding physical assets of real value). You sound like a scared paper-pusher.
who leaked this mornings data?
"The U.S. mortgage bonds that were exported around the globe and triggered the worst financial crisis since the Great Depression are now helping Europe’s banks and governments repair balance sheets after jumping in value."
This shit is just astonishing.
http://www.bloomberg.com/news/2013-05-27/europe-s-banks-turn-to-u-s-subprime-for-salvation.html
Mark to fantasy forever! It's criminal, plain and simple.
It's not, but it is a pain in the neck to figure out.
The pundits try to convince the masses that their investment strategies are "complex" and that they are "experts." Meantime, they are masking reality with fourth grade mathematics: decrease the denominator in the first term (share buybacks) and increase the multiplier of the second term (earnings multiple). So simple even a Liesman might be able to understand.
It's called fiat monetary expansion, and it's the new in.
Are you a troll or in-training?
He's a tit?
Yes, he is. Point him in the right direct mayhem.
Did we not learn anything from 2008?
levered buybacks and cost cutting, i.e. layoffs.
BONUS TIME AGAIN BITCHEZ!
Double Bonus time Buzz...
"one group has been actively selling into the rally: corporate executives in the best position to know about their companies' prospects. In February, officers and directors sold $35.30 worth of shares in their own companies for every dollar they put into stocks.
That is the highest monthly ratio since TrimTabs Investment Research began tracking the data in 2004, says David Santschi, chief executive of TrimTabs, based in Sausalito, California. A more typical ratio is around 8 to 1 of selling over buying."
http://www.reuters.com/article/2013/04/11/usa-stocks-insiders-idUSL2N0CS1G820130411
the bernank approves this message
This is why nobody has been going away in May. All hail the Bernank and his wisdom ! He will utter no more about tapering through June quarterly bonus season.
"If companies don’t invest in capital spending and research and development, they may maintain higher margins, but this lack of spending will not be a good catalyst for economic growth."
Why would a business increase CAPEX when demand is weak and largely driven by stimulus? That is where the uncertainty is coming from and it sounds like reasonable judgment to me.
Bingo, if you are able to stay in business with a leaner staff and leaner business model with the Central banks printing like crazy, why in the fuck would you take such risk? Unless you have an explicit bailout card from you local congressional puppet, and the last time I looked, those are expensive. The capital mis-allocation and rewarding of bad behavior continues...
Uh oh. If the Federal Reserve stops printing free money for lazy rich people dependent on mommy government (ahem, sorry, "entrepeneurs"), those entitled brats are just going to squeeze productive people who actually work for a living even harder...
...then the guillotines roll. The rock and hard place from 2008, just got rockier and harder.
CEOs can just layoff more people this summer before they go off to the Cape, Hamptons, Myrtle Beach, etc.
This too shall pass.
Off with their heads!