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Earnings Recovery? Europe Would Love Some Of That
One of the bullish themes this earnings season is that of the 223 or so companies reporting so far, a whopping 78% of them have beat EPS and 66% have beat revenue expectations. It remains to be seen just how much of this improvement is merely due to record stock buybacks to goose EPS as well as accounting gimmicks: we will conduct a full breakdown once we know the GAAP vs Non-GAAP data: recall that Q1 Non-GAAP EPS was a 4.6% improvement while GAAP EPS was in fact a 2.2% decline.
It also remains to be seen how much of the beats are due to companies taking guidance to the woodshed and slashing forecasts as they did back in Q1, when one after another company rushed to lower expectations.
But for now, let's give US EPS the benefit of the doubt. The result from the earnings season to date is shown on the Deutsche Bank table below:
Yet what is maybe even more interesting than US earnings, are those of Europe. Recall that it is in Europe where unlike the US (massaged or not), EPS has been on a clear, secular decline for the past two years...
... something we and others attributed to a painfully strong Euro currency.
And yet, in a curious turn of events, now that the EUR has been sliding and recently hit 2014 lows, one would expect at least some pick up in Europe's earnings, especially since 52% of the corporations have allegedly beat revenue and 55% have beat EPS expectations. Goldman itself said as much: "we expect both a slight improvement in European economic growth for the rest of the year as well as the currency depreciation to lead to a stabilisation of earnings."
One would be wrong.
As the following just released chart from Goldman shows that while non-GAAP EPS in the US have stabilized (and Japan is clearly the upside surprise even as its economy is once again teetering on the edge of recession), and Asia ex Japan is slowly rolling over once more, it is Europe that is the big shocker: as of July, European 2014 EPS forecasts are now the lowest they have been for the entire year, and are down 8% from where they were at the beginning of the year!
Goldman explains: "Whereas earnings were revised down across all markets except Japan at the beginning of the year, they have now stabilised in all regions except Europe, where the downward revisions have continued.... We are concerned about the continued downward revisions in Europe and see this as a key risk to our overweight here."
Visually:
One wonders how much longer the European corporate lobby will be so focused on whether or not to implement sanctions on Russia (which would further pressure their earnings), instead of realizing that its true foe at this moment is not east, but west, in the form of US corporations who are gaining at Europes' expense?
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Beating EPS is about reducing the number of S in the equation via buy backs. It's so easy, even CEOs can do it.
Sure, borrow money and buy back shares, then do not count the interest (or the cost of the new shares that you issue to yourself and your cronies) in your non-GAAP earnings.
Every moron CEO is doing it with Goldman's guidance.
Why wouldn't they? Less accountability, more assets, every CFO's dream. Once that debt is issued at those low rates, the bondholder can't do shit about it. Best outcome for the bondholder is that if they're lucky, they get paid piddly interest at the end.
GAAP vs Non-GAAP = Truth vs Giant Fudge Stick.
2014 US consensus - a bunch of idiots and government economists in the same room.
Ignore all the stock buybacks and that US 'consensus' turns into Europe
Who the hell needs earnings when insiders can get record bonuses and stock options courtesy of the central banksters?
Well, in an idealized world...
Well, we gave it our best shot...
Let's do what we've don't the last 7 years, like nothing at all, and see what happens next...
"Ye olde trend line." Can do that too.
Hmm... now what's the best way to increase the nominal earnings while not actually improving or fixing anything real? Whatever it is, give Euro boy a double shot of that... and keep 'em coming
Well...one theory is to target actual growth as your monetary policy. They do have "negative rates" in Europe (meaning you can't keep your trillion at the ECB and collect a profit that way.)
The problem is the huge energy and production boom inside North America.
The COST of energy has collapsed (coal...one BILLION short tons a year!) so based on the laws of comparative advantage "those who can sustain pricing will win."
So let's start with say....an Abrams Tank and go from there.
Non GAAP, non GAAP, non GAAP! Make your own accounting rules...results are awesome!