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A Return To Reality (In Charts)
Submitted by Lance Roberts via STA Wealth Management,
While I am playing "catch-up" after being out of the office last week, I thought I would share a few of the charts I am reviewing this morning on the markets and the economy with some brief commentary.
Market Momentum
There is a fairly deep body of research that suggests that the momentum of an index, sector, or stock, over the last 12-months is indicative of performance over the next month. We can model this out fairly easily by look at the S&P 500 versus its 12-month moving average as shown below.
Currently, the trend of the market remains positive with the 12-month moving average currently at 1970ish. The average will, of course, rise over the next month but it currently suggests that momentum is still favorable for the S&P 500 index as a whole. The blue highlighted area denotes the ongoing Central Bank interventions which quickly reversed momentum sell signals that occurred after previous programs ended.
Currently, momentum has begun to weaken following the end of the Federal Reserve's last QE program. The question remains whether the bullish trend can remain intact given the threat of higher interest rates in the near future. Historically speaking, a tightening of monetary policy has eventually not good for either stocks or the economy. However, previously the economy was growing at 4% or greater, not 2%.
Earnings
Speaking of a weaker backdrop for stocks, the deterioration in earnings is quite another factor all-together. I have not been able to do my quarterly earnings analysis as S&P had "pulled all estimates for review" just after the beginning of the year. They have now reposted earnings with forward estimates which contain a significant downward revision.
The chart below shows where earnings were tracking in September and December of last year (blue and black lines) and where they are now after "review" by S&P.
Here is the problem with forward estimates. It is almost laughable that analysts use forward estimates to prognosticate anything. The reason is that, as clearly shown, whatever analysis was used to justify valuations four months ago, is no longer relevant. Furthermore, the continued realignment of estimates to eventual reality is the equivalent of moving the target to arrow.
You can see the difference between what 2015 earnings estimates were in September of 2014 and where they are today. The degradation in earnings suggests that the economy is substantially weaker than market prices currently suggest. The chart below shows the deterioration in earnings estimates since June of 2014.
With valuations already pushing some of the highest levels in history, it is easy to suggest that forward portfolio returns will be substantially lower in the future than they have been over the past 6-years.
Oil Prices, Rig Counts and Energy Exposure
Retail investors have been piling into energy-related positions over the last couple of months hoping that the sell-off in oil prices was over. This is not likely the case as of yet particularly as the energy complex approaches their next major hurdle which is insufficient storage capacity.
The chart below shows the decline in rig counts versus oil prices and energy-related exposure as represented by XLE (refiners) and XOP (drillers.)
The decline in rig count is likely to continue as production slows particularly as the ability to store oil becomes an issue. This will lead to a further deterioration in earnings in the energy space, reduce CAPEX spending and increased employment reductions.
The negative impacts to economic growth will also be felt as employment is reduced in other "related" areas of the economy particularly in the service and transportation sectors.
The recent bounce in oil prices, and chase by investors, is likely over for now. There is still a fairly large amount of unwinding that needs to occur before the energy completed its reversion to more normal operating metrics.
Employment Not What It Seems
The recent "blowout" employment report sent speculation running wild that the economy was clearly so strong that wages would now have to rise, consumer spending would surge, and the Fed would clearly have to raise interest rates.
However, as shown by the recent retail sales report, spending isn't rising (even with low gas prices) as wage growth remains stagnant overall. The primary issue with the employment report remains that the employment-to-population ratio of those between the ages of 16-54 has barely recovered from its lows and remains at a level lower than during the financial crisis.
Since this group excludes all those of "baby-boomer" and "retirement" age, it gives a clearer picture about what is actually happening within the economy.
While there has clearly been some modest improvement in the overall ratio, it is still a long way from suggesting that the economy is creating the kinds of jobs necessary to facilitate strong wage gains and consumptive spending. This is particulary the case for the group of individuals that are already heavily indebted with little or no savings.
Margin Debt, High Yield Bonds and Stocks
The recent spike in high-yield (aka junk) bonds looks to be over as investors are once again speculating that the current "bull market" will continue on the back of the ECB's ongoing QE program.
As shown below, the yield on "junk bonds" has once again turned down suggesting that "risk mode" has been turned back on after the recent liquidation earlier this year.
Importantly, however, is to note that margin debt has started to decline. Rising levels of margin debt are a beneficial support to rising asset prices as it increases overall liquidity. Falling levels of margin debt extract liquidity from the markets and have typically been associated with markets near intermediate or longer term peaks.
What this suggests is that while "retail" investors are loading up on "junk bonds" and "more risky stocks," small and mid-capitalization, it is the professionals that are gladly unloading positions to them.
Conclusion
The overall economic data has been significantly weaker than expected as of late, and it now looks like Q1-GDP will print somewhere below 2%. The strong dollar is negatively impacting corporate earnings as exports are hit, and there is early evidence that the ECB's QE program will not likely be the success that many had hoped for.
As stated previously, with market momentum now waning a bit of caution in relation to portfolio exposure seems prudent. But then again, being prudent seems a bit ridiculous in a market that has been quoted as one that "can't go down." Of course, that has always been the case, just before it has.
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So....BTFD
Yeah .. Be The Fucking Dope!
The Chinese Plunge Protection team
??????
my roomate's step-mother makes $79 hourly on the laptop . She has been fired for 10 months but last month her pay was $18694 just working on the laptop for a few hours. see here... www.globe-report.com
GPD is a meaningless measurement like the BLS unemployment number, the CBO deficit numbers, the inflation index. All of it is bullshit...just like the promises at the wedding altar. All bullshit.
i got a kick out of the cartoon with couple at the altar with thought balloon over them
her: thank goodness. don't have to do "it" that often anymore
him: sweet. sex anytime i want now
Barry says everything is fine, there is nothing to see here people move on and continue buying everything.
Bad economy is good for stocks.
hell no.....these criminals will chew off an arm before they post a sub 2% GDP .
Indeed. It would be game over if they did so they will just keep getting all in untill the end.
It’s just crazy that people still believe that they’ll just flip over and surrender while they can still fix it for at least 5 to 8 more years.
And in the "real" world people just don’t give a fuck and nobody really cares anymore. Apathy rules the world!
The global economy only needs a fraudulent GDP of 2% to sustain the existing level of banking FRAUD.
We're in good shape.
Today, somebod tried to tell me something.
He started with "I read in the newspaper that now that the economy has recovered..."
I just looked at him and said "REALLY!? WHERE WAS THAT? THE FUNNY PAPERS!!
He ne er told me what he actually read but people are starting to believe the recovery BS.
I also met a guy who was 38 and who just got a new just after being unemployed for 4 years. He didn’t give a rats ass about anything anmore. He was just happy to be working again.
4 years... how do you survive that!?!?
weak starts to year 3 years in a row
2013 - taxes went up january 1st that year. A LOT of income pulled forward (in some cases YEARS) to avoid tax increase. Increased helped economy kick the can a bit further
2014 - ACA took effect and lot of new health spending helped economy survive polar vortex another kick of can
2015 - no drivers for "recovery". Sticking to my US enters a recession no later than Q1 2015 call
The question as to whether Inflation or Deflation will be the culprit to bring down the global economy has been effectively answered. It is deflation, hands down, and the evidence is overwhelming...
http://www.globaldeflationnews.com/inflation-vs-deflation-part-1which-on...
still waiting for Lance's calls of 5, 6 months ago ... usd weaken and 10yr yield @ 4% in 2015 ... turning a bit blue ...
"...historically speaking..." That's your outlier right there, never before has the U.S. been so levered, in debt, and lacking productive capacity and sane leadership.
Looks like the year 2000 was peak employment, and that was after some 30 years of: unhinging from the Gold standard, off-shoring production (selling out to Asia), repeal of Glass-Steagall, and giving the Robber Barrons (sorry, Banks/Corporations/Insurers) free reign to loot, pillage, and rape the average citizen and the public Treasury.
According to Natixis:
http://www.ge.tt/5osnEOC2/v/0?c
March 13, 2015
What are the differences in economies where debt ratios are very high?
Debt ratios (public, private and total) are at present extremely high in a vast majority of OECD countries. How does this change the functioning of these countries' economies?
• Fiscal policy becomes more restrictive and can hardly become very counter-cyclical due to high public debt ratios;
• The private sector deleverages, and monetary policy can no longer use the credit channel;
• Central banks have an incentive to conduct expansionary monetary policies to facilitate deleveraging.
In countries where debt ratios are very high, we can therefore expect to see:
• Weaker growth (a restrictive fiscal policy, private-sector deleveraging);
• Deeper recessions (lack of counter-cyclical capacity of fiscal and monetary policies);
• And yet a sharp rise in asset prices (equities, real estate), due to expansionary monetary policies and long-term interest rates that are lower than growth rates.
Paradoxically, excessive debt ratios can be positive for equities and real estate.