Chart Of The Day: "It's Not About Earnings" Edition

Tyler Durden's picture

During the month of October, three things happened that destroy any credibility that 'believers' had about the stock 'market' being an efficient discounter of fundamental earnings. Stocks began the month weak on geopolitical fears, concerns about the end of QE, and falling earnings; then Bullard unleashed his "but but but we might do QE4" words and stocks exploded higher. But a funny third thing happened as this malarkey occurred... analysts kept on slashing EPS estimates - in fact they slashed them by more than double the average EPS downgrade of any quarter in the last 10 years... So, if earnings are the mother's milk of the market, central bank promises are the Human Growth Hormone, EPO, Steroid cycle of all-time highs.

Fundamentals or Central Bank liquidity!


As Factset reports,

During the month of October, analysts lowered earnings estimates for companies in the S&P 500 for the fourth quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the estimates for all the companies in the index) dropped by 2.7% (to $30.96 from $31.82) during the month. How significant is a 2.7% decline in the bottom-up EPS estimate during the first month of the quarter? How does this  decrease compare to recent quarters?

During the past year (4 quarters), the average decline in the bottom-up EPS estimate during the first  month of the quarter has been 1.3%. During the past five years (20 quarters), the average decline in the  bottom-up EPS estimate during the first month of the quarter has been 0.6%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first month of the quarter has been 1.8%. Thus, the decline in the bottom-up EPS estimate recorded during the course of the first month (October) of the fourth quarter was higher than the 1-year, 5-year, and 10-year averages.

However, most of the reductions to earnings estimates have occurred in the commodity-based sectors. As noted in last week’s report, the Energy sector (-10.8%) has recorded the largest decline of all ten sectors in terms of bottom-up EPS, followed by the Materials sector (-7.5%). No other sector has recorded a decrease in bottom-up EPS of greater than 3.3% through the first month of the quarter.

In terms of price, the value of the S&P 500 has increased by 1.1% (to 1994.65 from 1972.29) during the month of October. This marks the 7th time in the past 12 quarters that the bottom-up EPS estimate has  decreased while the price of the index has increased during the first month of the quarter.

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manofthenorth's picture

Looks about right.

Yen Cross's picture

  Great synopsis.

 Here's a no~brainer chart. I laughed my literal ass off, when traders said Es and Dow were oversold on a "dialy basis", a few weeks ago.

 Here's the monthly chart.   Look at the RSI! Manipulated much? The fucking trade has been gravitated every time the ~zero line~ line gets touched.

 Look at the macd diverence. I'm running "zerolag" MACD. I use these metrics on my (5 minute) forex charts.

WTFUD's picture

That's all Japanese to me Yen.

Yen Cross's picture

  We all have to start somewhere. Please feel free to ask me about my post. I'd love to clarify.

duncecap rack's picture

I'd like to know enough to ask a good question but I don't. I'm going to look some stuff up though, starting with macd divergence. I really would like to know about the mechanics of the manipulation methods. I have a general question for you as a currency trader though. As a non financial person I have been amazed at the persistence of low interest rates. As I understand it rate levels are supposed to reflect risk. Many coutries, but most glaringly Japan which I'm guessing you know something about, do not and will not have the capacity to pay back what they owe in real terms. Japan obviously has it's famous printing press but we all know the purchasing power they have borrowed will never be returned to all lenders. Eleven basis points on the five year clearly doesn't reflect the risk involved of lending to an insolvent borrower. Yada yada yada this stuff is talked about all the time on zero hedge but my question is about the end game. I have been telling freinds and family that I am concerned about the complete destruction of money. I can't imagine the world economy with all it's interconnections surviving without a medium of exchange. Do you hear anything of this? Do countries (other than Russia) grumble about trading their resources for dollars when the US can print a trillion of them a year? Do the emerging market economies resent the destructive ebb and flow of QE dollars that rush through on the whim of central bankers halfway around the world? So I guess to summarize it is becoming more and more obvious to all that the worlds' medium of exchange is the iou's of certain privileged countries and those iou's cannot be honoured in real terms. Can this system just plain break? Do you see evidence of it happening?

Yen Cross's picture

 11 basis points?

 You should be concerned, and sharing your concerns.

 Other countries are concerned with currency valuations. Russia is rich in natural resources, and is immune to sanctions, for the most part.

 Emerging(Asian) economies are attached to stronger Asian currencies. The move by the BoJ on Friday is going to be highly disruptive for China and South Korea.

   In order to have a medium of exchange, you need a collective to value the commodity. That isn't the direction we're headed in

  Propper valuation is based on demand, not geographics, demographics. If I want a Ferrari, It should be the same price in New Zealand as Equador. Tariffs are added.  If

  If I want Avacadoes in California vs Riyadh Saudi Arabia, the price will be higher.

Spine01's picture

The end game you ask about can only be studied and predicted using chaos theory and fractal methematics. 

In a nutshell, very simple automata systems with extremely simple rules, show a behavior that is so complex that human minds find it hard to believe could be coming from a set of simple rules. The economic system of the world is something much more complex. Its a combination of complex elaborated automata systems with extremely complex rules, interacting with a multitude of feedback loop systems with human behavior and moods at its center with regard to decision making. In short, the most complex system ever built by humanity. 

When you start injecting QE in the most relevant currencies, you are steadily increasing the amplification of the system, for instance, smaller and smaller errors or reaction time will create progressively larger losses or gains. Thus driving you to react faster and faster only to survive. 


There is a point at which the system becomes so unstable that it becomes impossible to keep it running. The way the math works makes it clear that you can not predict when that will happen. You can only know that you have reached the stability boundary.  We already are there and that is the only reason QE3 was stopped.

Where will we end? In chaos theory you know that you can't predict where, so what you do is to find the states at which the system can possibly exist, each of these points is called an attractor.  For instance, feudalism, medioevalism, califate, etc. Take your pick. If we move from our current state we can move to any other attractor or a combination of them in different regions. Of course a new attractor may arise, although that is speculative. The other attractor are proven stable points.

Is ISIS a sign that the system is already evklving? EBOLA. Your guess is as good as anybodies...

Racer's picture

Forget earnings, the Japanese pension funds will be buying into junk no earnings stock so relax and offload at your leisure

HoleIn1's picture

The last couple months in the markets have been utter madness. MSM was was spewing the whole "we've had no 10% correction in X months" BS. So what do we get? A damn near perfectly executed 10% correction and then to the moon. Bullard hit his cue almost on the money. The S&P close of 2014.4 on Sept 18 to the low of 1822.4 on Oct 16 was a 9.54% correction. Nobody's perfect. And here we are at another ATH. My only question is how can hawkish and doveish both be bullish?

poor fella's picture

Exactly. All of this is hindsight. remember when the DOW first started approaching and then repeatedly hitting new highs, people talked about the fact that the transports were in the toilet when they would NORMALLY be leading. And like that, voila, they magically start rising and here we are at record high transports. Look at the Baltic! Every single day is a new - W T F?   Normally weak months end up being the strongest of the year, cyclically weak stocks are strong, etc. on and aon.

Makes me think when I was younger. I would play video games and struggle through them. Pretty hardcore for awhile - completely immersed and determined to finish them. I always did finish them and they had staying power as far as replaying them in different ways or just seeing how I imporoved.

Then along comes a cheat code - say, 'GOD MODE' and it's amazing. taking no damage from enemies, walking through walls, flying outside the known playfield, etc. But after doing that even one time, when the novelty wears off (which is quickly for most people), the games entirely collapse. There was no point in anything. You could effortlessly do whatever you liked. This is how I feel the fed looks at the financial system. They are stuck in God Mode, pushing, pulling, and stretching - and never realizing these ARE REAL PEOPLE'S LIVES THEY ARE F^&*ING WITH! They refuse to acknowlege their formulas DO NOT represent the complexity of reality in any way. I have no sympathies if the SHTF and things get ugly for these MOFOS - and I'm sympathetic by nature. Not to make light of confused children and guns but cot-damned I wish some of them would find a bus ticket to NY or D.C. and take out their aggressions closer to the source of their problems.

We are all insane now - equity bulls are insane for not admitting the truth and bears just sound insane to everyone since they have been broken records for half a decade now - "there is NO WAY 'they' can keep this thing going another 6 months!!!!!" 

yet, there's never lack of a bid to btfath.....   


lasvegaspersona's picture

we are turning Japanese with a Zimbabwe beat...soon will be bigger than Psi and the Makarena put together...

stand back folks...this is going to be big

Wild Theories's picture

I'm in good stead, I know how to dance both the 'pony dance' and the macarena

not that I'm proud of any of it, but I have been told my macarenna is totally pro

Yen Cross's picture

 The monthly charts are insanely overbought!

q99x2's picture

You don't need no stinkin information about EPS. You need to contact the programmers for the FEDs software bitchez.

ReactionToClosedMinds's picture

Great  posts Poor  Fella & Yen Cross 

ReactionToClosedMinds's picture

And Holein1.....good stuff.

It seems so surreal.

orangegeek's picture

after barry gets shellacked on the 4th, markets should start to normalize once again


barry's flunky - yes, that's yellen - is working the markets hard to barry can tell the world that he saved the economy


the day after this bullshit doesn't matter is the day we roll and trend lower - much lower than 10%

mastersnark's picture

Thankfully I don't care about that bourgeoisie construct called "profits." I base all my trades on accomplishing social justice, Facebook likes, and continuous and unending central bank intervention.

Ewtman's picture

Weekly Dow Jones Industrials Elliott Wave update... last week's new high will be muted and short-lived as IIAS reports record extreme in bearish sentiment among economic advisers.


starman's picture

If you have doubts about what's to come just look around you.

Empty buildings once filled with retailers,  large corporations laying off thousends.

Seven year 0%  auto finance, mortgage originations all time low food and gas prices all time high. 

Even Holloween was slower this year!  

Hedge accordingly. 


LooseLee's picture

I'm sure that Pinko Commie Larry Kudlow is against this levitation of the equity markets. After all, according to Kudlow, earnings are the mother's milk of stock valuation. What say Krudlow? Are you rallying against this nonsense or cheering the status quo onwards and upwards in their fleecing of America? Be careful. You may have to one day defend your position....

polo007's picture

According to Barron's Online:

What markets didn’t know and didn’t expect was that Japanese officials would move so dramatically to try to spur that nation’s flagging recovery. Specifically, the BOJ upped its goal for the expansion of its monetary base, to 80 trillion yen ($720 billion) from ¥60 trillion to ¥70 trillion, a move the central bank’s governor, Haruhiko Kuroda, said is aimed at ending Japan’s “deflationary mind-set.” As a result of the plan to print more yen, the Japanese currency weakened to nearly 112 to the dollar from just under 108.

Meanwhile, Japan’s $1.1 trillion pension fund said it would shift its portfolio strongly toward equities—allocating 25% each to domestic and foreign stocks, up from 12% each—while trimming domestic bonds to 35% from 60%. In gambling terms, this is going all in on Abenomics, as the stimulus plan is called, after Shinzo Abe, Japan’s prime minister.

This is truly a dazzling example of 21st century government finance. The government runs a deficit covered by IOUs, or bond borrowings. The central bank buys those bonds to fund the budget shortfall and also purchases bonds sold by the pension plan, all with reserves it creates out of thin air. The pension fund uses the newly printed yen it receives from the BOJ for its bonds to buy claims against the future earnings of private industry—that is, common stocks.

Those are the financial impacts. In the real world, the effect is to make Japanese exports cheaper and to export deflation to Japan’s trade partners.