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Not All That It Seems

Tyler Durden's picture




 

Submitted by Lance Roberts of STA Wealth Management,

Once again the world awaits the Janet Yellen’s post-FOMC meeting press conference. It is almost like the old “Batman” series with Adam West when they would get to the end of the show and leave you with a “cliffhanger:”

“It’s a questionably unquestionable situation…
Are the markets prepared for a shocking answer…
Will Janet Yellen announce the final end to QE? Or electrify the bulls with more accommodation?
Can Yellen’s eloquent elocution energize the markets…or will she magnetize the bears?
Tune in next time Fed fans…Same Fed time…Same Fed channel”

While we wait in breathless anticipation for the next clue, I do find it interesting there is a rising belief that things have returned to some level of normalcy. As I noted yesterday, the bullish mantra is alive and well, and analysts have all turned their eyes skyward with price targets reaching as high as 2800 for the S&P 500 as noted by Jeffrey Saut at Raymond James:

Since 1989 the S&P 500’s earnings have grown by 6.15% annually. Extrapolating that into 2020 implies earnings of $183.36 (see chart on the next page). Using the historical median P/E ratio of 15.5x yields a price target of 2842 in 2020.

Estimated-Earnings-Growth-091514

While the technical trends remain firmly intact, which confirms the bullish trend and encourages portfolios to be more heavily tilted towards equities at the current time, there are certainly some underlying issues that are concerning. Here are a couple worth noting.

Artificial Drivers

According to the Wall Street Journal:

“Companies are buying their own shares at the briskest clip since the financial crisis, helping fuel a stock rally amid a broad trading slowdown. Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008."

Stock-Buybacks-091614

"The growth in buybacks comes as overall stock-market volume has slumped, helping magnify the impact of repurchases. In mid-August, about 25% of non-electronic trades executed at Goldman Sachs Group Inc., excluding the small, automated, rapid-fire trades that have come to dominate the market, involved companies buying back shares. That is more than twice the long-run trend, according to a person familiar with the matter.

 

Companies with the largest buyback programs by dollar value have outperformed the broader market by 20% since 2008, according to an analysis by Barclays.”

This is something that I addressed a while back in “4 Tools Of Corporate Profitability.” While analysts have ballyhooed over surging corporate profits, they have come at a great expense to the average worker. Those profits, driven initially by massive cost cutting and then stock buy backs, are artificial in nature and why prosperity for the bottom 80% of the economy has remained elusive.

Wages-Profits-Ratio-091614

[Note: While corporate profit “margins” rose in the second quarter to new all-time highs, it is interesting to note that corporate profits did NOT.]

The primary issue with both cost cutting and share repurchases is that they are both “finite” in nature. With the ability to cut costs primarily exhausted and share repurchases showing signs of slowing; the primary question for market bulls will be the driver for profit margins in the months ahead? If you were hoping for global growth, you might be a disappointed.

China and Europe Stumble

It is important to note that roughly 40% of domestic corporate profits are derived from the major global trading partners of Japan, China and the Eurozone. It should not be surprising, particularly in today’s globally interlinked economies, that no country can remain an “island” indefinitely. Yet, it is currently believed the the U.S. can remain "decoupled" from the rest of the world.

From Business Insider:

China-Economy-091614-2

“Let's do a quick fly-around of all the disappointing metrics.

  • Analysts expected industrial production to rise 8.8%, but it came in at 6.9%. That's down from 9.0% print in July.
  • Retail sales rose 11.9% instead of 12.1% as expected and 12.2% in July.
  • Fixed-asset investment was up 16.5% versus 16.9% expected and 17.0% previously.

All of this spells trouble, and here's some more: Housing sales were 11% year over year through January to August, versus a 10.5% drop in the first seven months of the year. According to Bloomberg economist Tom Orlik, that slowing in the housing market has been the main driver of all of this discontent.”

More importantly, according to Reuters:

“China's foreign direct investment fell to a low not seen in at least 2-1/2 years in August, underscoring the challenges to growth facing the world's second-biggest economy.

 

The weak investment data came as China's economic growth appears to be hitting a soft patch after a bounce in June, with indicators ranging from imports to industrial output and investment all pointing to sluggish activity.”

Considering that China is a large user of domestic exports, and a large provider of imports (particularly for you Apple product iFans), the weakness underscores real global economic activity.

However, it is not just China that is struggling but the Eurozone as well. The Eurozone is the single largest trading partner of the U.S., so it is very important to keep an eye on what is happening there. France, Italy and Spain, among others, have been struggling ever since the financial crisis, however, Germany has been a strong leader and the primary support to Eurozone’s stability.

It now appears that Germany’s “Wirtschaftswunder,” or economic miracle, is coming to an end, via Reuters:

“In recent weeks, the economy that proud German politicians have taken to describing as a ‘growth locomotive’ and ‘stability anchor’ for Europe, has been hit by a barrage of bad news that has surprised even the most ardent Germany skeptics.

 

The big shocker came on Thursday, when the Federal Statistics Office revealed that gross domestic product (GDP) had contracted by 0.2 percent in the second quarter.”

Dislocations between the U.S. economy and that of the Eurozone have occurred in the past but did not last long.

GDP-US-EuroZone-081414

Therefore, either the Eurozone will find the source of a strong economic rebound or the U.S. is going to see slower growth in the months ahead. Currently, it is the latter that is most probable.

The Extinction Of Bears

Despite evidence that global weakness is mounting, the bullishness on Wall Street is at record levels.

As I wrote last week:

"It is a bad sign for the market when all the bears give up. If no-one is left to be converted, it usually means no-one is left to buy.” - Pater Tenebrarum

That quote got me thinking about the dearth of bearish views that are currently prevalent in the market. The chart below shows the monthly level of bearish outlooks according to the Investors Intelligence survey.

Bearish-Sentiment

The extraordinarily low level of "bearish" outlooks combined with extreme levels of complacency within the financial markets has historically been a "poor cocktail" for future investment success. 

It is an interesting time in which we live. The financial media has no concern of negative outcomes, Wall Street has growth priced in that has never occurred in history, and there is NO expectation of a recession built into any forward assumptions. We have indeed discovered financial “Utopia,” or at least that is what is currently believed. I can only conclude with quote from Benjamin Graham via John Hussman:

“During the latter stage of the bull market culminating in 1929, the public acquired a completely different attitude towards the investment merits of common stocks… The answer was, first, that the records of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring.

 

An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy ‘good’ stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic.”  -  Benjamin Graham & David L. Dodd, Security Analysis, 1934

 

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Wed, 09/17/2014 - 10:03 | 5226009 Hippocratic Oaf
Hippocratic Oaf's picture

She will dovishly accomodate.

END THE FUCKIN FED

MARK TO MARKET

KEEP UP WITH INFLATION

Yes bitch, inflation is real. Ever buy groceries?

Wed, 09/17/2014 - 10:45 | 5226181 tempo
tempo's picture

Its created by worthless subprime debt purchased at par by central banks. Few work, everyone is given free food, housing, medical care, citizens and illegals are treated equally by a corrupt govt., that's a perfect world. The only reason it works now is that the world's developed great powers are doing it, third world countries get screwed. When it ends, there will be a new world order. Many debt slaves.

Wed, 09/17/2014 - 11:18 | 5226297 DavidC
DavidC's picture

5 to 7 years of this shit and NOTHING is getting any better. And she's probably going to help it along today.

DavidC

Wed, 09/17/2014 - 12:15 | 5226531 KnuckleDragger-X
KnuckleDragger-X's picture

The Fed will only be dealt with ex post facto the disaster and until then it's full speed ahead and ignore the icebergs. I wish it were different but we live in a world where the stupid, short sighted and vain rule.

Wed, 09/17/2014 - 10:00 | 5226011 Last of the Mid...
Last of the Middle Class's picture

I'm sure they do all this on their own, with no input from the FED. When this over bloated constipated stock market finally takes a crap it's gong to be massive.

Wed, 09/17/2014 - 10:03 | 5226014 Cognitive Dissonance
Cognitive Dissonance's picture

Wednesday morning chart porn.

"Where have all the flowers bears gone, long time passing."

Wed, 09/17/2014 - 10:02 | 5226015 ekm1
ekm1's picture

EAT STOCKS

EAT BONDS

 

No need to produce output.

 

Wed, 09/17/2014 - 10:04 | 5226019 Cognitive Dissonance
Cognitive Dissonance's picture

Your 'securities' eating will produce output. Just not the kind you're looking for.

<Makes for good compost thought.>

Wed, 09/17/2014 - 10:10 | 5226035 LawsofPhysics
LawsofPhysics's picture

Yes, cellulose (paper promises) are edible...

although now I am left to wonder what "compost thought" is...

Wed, 09/17/2014 - 10:33 | 5226136 Cognitive Dissonance
Cognitive Dissonance's picture

LOL! Typos are us.

<Though after our second summer up here on the mountain my thoughts often turn to compost. Wait.........my thoughts don't actually 'turn' to compost.........never mind.>  :-)

Wed, 09/17/2014 - 11:15 | 5226285 Boscovius
Boscovius's picture

"Compost Thought"

When your head is filled with shit (MSM) and been left to rot.

Wed, 09/17/2014 - 12:18 | 5226545 KnuckleDragger-X
KnuckleDragger-X's picture

Paper... a part of your low calorie, high fiber diet....

Wed, 09/17/2014 - 14:12 | 5226981 Professorlocknload
Professorlocknload's picture

Eat EBT.

Wed, 09/17/2014 - 10:06 | 5226022 Dr. Engali
Dr. Engali's picture

Is government spending decreasing? Do we have less or moar derivatives since the last crash? Is the finacial system on a moar stable footing? Are people earning moar? Is housing on sure footing? No,no,no,no,no.... therefore rates are NOT going up..... unless of course they have everything in place and they are ready to crash the system.

Wed, 09/17/2014 - 10:10 | 5226040 ekm1
ekm1's picture

Government can spend only what the real economy can produce or whatever world exports to USA

 

Government only REDISTRIBUTES what is produced. Gov cannot redistribute what is NOT produced

Wed, 09/17/2014 - 10:13 | 5226050 ekm1
ekm1's picture

Government spending = REDISTRIBUTION of real output.

Money is not edible

Wed, 09/17/2014 - 10:06 | 5226025 Devils Advocate
Devils Advocate's picture

The first chart says it all!!!!  extapolating linear to hyperbolic trends!!!!  To the moon alice S&P 4000 by 2020!!!

Wed, 09/17/2014 - 10:07 | 5226030 LawsofPhysics
LawsofPhysics's picture

The world will once again re-learn precisely what real wealth and value is.

hedge accordingly.

Wed, 09/17/2014 - 12:21 | 5226557 KnuckleDragger-X
KnuckleDragger-X's picture

They NEVER learn until too late and then forget quickly...

http://kiplingsociety.co.uk/poems_copybook.htm

Wed, 09/17/2014 - 10:08 | 5226034 Boondocker
Boondocker's picture

Like watching a train wreck. ...

Wed, 09/17/2014 - 10:10 | 5226045 Dungholio
Dungholio's picture

Ignore the dream stealers...  DOW 35k is within reach

Wed, 09/17/2014 - 10:13 | 5226047 RattNRoll
RattNRoll's picture

Follow the money.

Wed, 09/17/2014 - 10:24 | 5226104 LawsofPhysics
LawsofPhysics's picture

Define "money" first...

Wed, 09/17/2014 - 13:33 | 5226777 Tall Tom
Tall Tom's picture

The least common and/or most desirable barter good.

 

Some will say US Currency but it is too plentiful and new supplies are created by the Trillions in order to satiate demand.

 

Personally Gold, I believe, is the best followed by Silver.

 

Unfortunately the Gold has headed to East Asian locales.

 

Sell your Comex Paper promises of delivery for Gold which they do not have and buy Physical Gold on the new Shanghai exchange which they do have.

 

Allow the paper price to find its real value...ZERO. A non performing contract is worth ABSOLUTELY NOTHING.

 

Fuck you Jeffery Christian.

Wed, 09/17/2014 - 10:11 | 5226048 Seasmoke
Seasmoke's picture

How many days until supply chain collapses ??

Wed, 09/17/2014 - 14:14 | 5226992 Professorlocknload
Professorlocknload's picture

How long did it take the Soviet Union to run out of seed corn and collapse?

Wed, 09/17/2014 - 10:14 | 5226060 Raoul_Luke
Raoul_Luke's picture

No one believes the Fed will let the markets actually go down, so it doesn't matter what Yellen SAYS.

Wed, 09/17/2014 - 10:17 | 5226077 rejected
rejected's picture

Shows the stupidity of it all. No matter what games the oligarchs play, the people play with them, cute little charts, commentaries and other BS in the hopes of getting a piece of the pie. What they don't understand is,,, they are the pie about to be eaten... again.

Wed, 09/17/2014 - 10:22 | 5226098 yogibear
yogibear's picture

Janet and the Federal Reserve keep pushing infinite debt in a finite system.

The deficit will double again. Shoot for $35 trillion to keep this Ponzi game going.

Wed, 09/17/2014 - 10:30 | 5226113 RaceToTheBottom
RaceToTheBottom's picture

"I don't think the heavy stuff is going to come down for quite some time now".

Wed, 09/17/2014 - 10:28 | 5226117 Bell's 2 hearted
Bell&#039;s 2 hearted's picture

whatever, Lance

 

Looking forward to you eating your recent comment that 10yr would be @ 4% in 2015

Wed, 09/17/2014 - 10:31 | 5226128 Consuelo
Consuelo's picture

Good 'ole Jeffrey Saut...   You do realize, he was a 'regular' on Kingworld a few years back, until he got religion and joined the consensus?   Right along with Poop-lava and his gang at Financial Sense - which makes perfect 'sense', since Saut is a regular over there now, what with FSN's 'new & improved' Bull format where nothing 'negative' is allowed...

Wed, 09/17/2014 - 10:35 | 5226149 saveUSsavers
saveUSsavers's picture

yep ! Financial Sense all buy-side, even Harding drinking koolaid

Wed, 09/17/2014 - 10:31 | 5226130 eddiebe
eddiebe's picture

Central banks now control all markets and all governments along with their immense military power. Charts and the old demand and supply metrics don't matter anymore. The big question in my mind is to what degree the Brics are playing along. I can't seem to shake the belief that they are captured and are just acting like they are not.  Sucks.

 

Wed, 09/17/2014 - 11:47 | 5226392 LawsofPhysics
LawsofPhysics's picture

The feeling I get from my customers in Brazil is that the people are not playing along while governments try to "save face".  The underground (black market if you will) economy is insane.  Certain areas of South America could become no different than Afghanistan overnight.

Wed, 09/17/2014 - 10:32 | 5226132 saveUSsavers
saveUSsavers's picture

GAAP earnings are 30% lower ! S&P GAAP p/e= 21 (ZH post yesterdy)

Wed, 09/17/2014 - 10:46 | 5226187 StupidEarthlings
StupidEarthlings's picture

I don't know. .the charts seem pretty normal to me. What could possibly go wrong? 

Wed, 09/17/2014 - 12:56 | 5226630 smcapmachine
smcapmachine's picture

less shares = more earnings per share = higher stock price (assuming a constant multiple).  

Cash earns virtually nothing, so using free cash flow to buy back shares is a great move to drive increases in shareholder value.

Not that hard to understand.

All these articles about the negatives of stock buyback are retarded.

 

Wed, 09/17/2014 - 13:07 | 5226677 Felix da Kat
Felix da Kat's picture

Janet will wish she had called in sick today if the Scots vote "Yes" tomorrow. A vote to secede, might be the trigger the perma-bears have, for five long years, been waiting. There's a perfect storm brewing... a trinity of market souring events (Damaging consequences of Scottish secession, Fed tightening, new revelations of "X"). And historically, Septembers are the worst performing month. At this point, bulls should be dancing near the door.  

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