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When Scary Headlines Don't Scare - Climbing The Wall Of Complacency
The U.S. economy is growing at a painfully slow pace. Greece still threatens the euro. Chinese stocks have just pulled out of a frightening free-fall. Big companies in the U.S. are struggling to boost profits.
You might think it's been a rough year for investors, but it's mostly been a smooth ride - and a profitable one.
Money is flowing into bonds issued by the riskiest of companies, home prices in some big U.S. cities are soaring, shares of technology companies are still near all-time highs - even after a drop this week - and auction houses are enjoying record sales of art. A Picasso painting sold at Christie's for $179 million in May, the highest ever for an artwork at auction, prompting one dealer to exclaim, "I don't really see an end to it."
...
Jack Ablin, chief investment officer of BMO Private Bank, thinks people have faced so many crises that they have become numb to fear. "Things have worked out," he says, "and that has emboldened investors."
Maybe too much.
For years, U.S. companies have kept profits rising by cutting costs to overcome slow sales. But they're lean now and it's getting harder to do that. In the past week, IBM, United Technologies, Caterpillar and Union Pacific fell after posting disappointing earnings or revenue for the latest quarter.
"Ultimately, there comes a point where you can't cut more," says Kevin Dorwin, managing principal of San Francisco-based financial planner Bingham, Osborn & Scarborough. "You've got to grow the top line."
After all results for the April-June period are tallied, analysts expect earnings per share for companies in the Standard and Poor's 500 index to drop from a year earlier, the first decline since 2009, according to financial data provider S&P Capital IQ. Revenue is forecast to fall for a second quarter in a row, nearly unheard of outside a recession, as Americans still hold back on spending six years after the financial crisis.
It's gotten to the point that even the biggest bulls are conceding that, yes, after a tripling of prices since 2009, stocks are getting a tad expensive or, to use their delicate phrase, "fully valued."
Homes in hot markets like Miami and Seattle are looking pricey, too. In San Francisco, prices have jumped 61 percent in just three years, according to the Standard & Poor's/Case-Shiller index.
People are also putting money into "high yield" bonds, so called because the iffy companies that sell them must offer fat interest payments to get you to open your wallet. Or at least they used to. So heavy has been demand for the bonds, that these companies are paying interest of 6.6 percent, versus 10 percent four years ago.
James Abate, chief investment officer of Centre Funds, thinks investors are too confident, and maybe a little blind.
Earnings per share jumped in previous quarters, he notes, partly because earnings were spread over fewer shares after companies bought back billions of dollars of them. He also complains that financial analysts have focused too much on "adjusted" earnings that leave out all types of one-time costs. That makes companies look more profitable than they are.
He's bracing himself for disappointing earnings from many companies. "I think we're on the verge of an earnings recession," he says.
Or maybe just a recession.
Most economists scoff at the idea, but David Levy, one of the few who called the last global recession in 2007-2009, thinks another one is likely. Since he made that prediction, China has slowed dramatically, Brazil has fallen into recession, and five of the 10 biggest global economies are either in one or teetering on the edge. The economy of Canada, America's biggest trading partner, has shrunk for four straight months.
Financial analysts are largely shrugging off the fears. They like that stocks in the S&P 500 index are trading at 17.6 times their expected earnings for the next 12 months, according to S&P Capital IQ. That earnings multiple, as it's called, is only slightly higher - meaning more expensive - than the 15-year average of 16 times.
But that assumes the analysts are correct and profits will start growing again this year, then leap by double-digit percentages the next. It also assumes that the companies' versions of earnings, the "adjusted" ones that Abate so distrusts, are reliable.
Of course, it might all work out in the end.
U.S. employers are hiring at a solid pace, so it's possible all those extra paychecks will spark more spending and higher revenue and profits.
History also suggests it's unwise to bet against a bull market that has stretched into a seventh year. Prices have kept rising despite two Greek debt crises, a near debt default by the U.S. government, and, recently, Beijing's failed efforts to avert a crash in its stock market.
"You can always tick off a list of worries," says one optimist, Mike Ryan, chief investment strategist at UBS Wealth Management Americas, "but markets tend to climb a wall of worry."
Or is it a wall of complacency?
You'd have to go back 3 1/2 years to find the last time investors got really scared, selling enough to push the S&P 500 index into a "correction," or drop of at least 10 percent.
Abate, of Centre Funds, thinks stocks will soon fall by that much, possibly more, and so he's bought an insurance contract for his fund that will pay off when they do. "We're not complacent," he says, "about the complacency."
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Source: @BernardFCondon
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meh
Normalcy Bias. Its rampant.
"The U.S. economy is growing at a painfully slow pace."
I stopped reading there.
How about this headline...
Canada's economy on the verge of collapse?
http://www.planbeconomics.com/2015/07/is-canadian-economy-onthe-edge-of....
Good link. I like Christine Hughes at Otterwood. She's always clear and well researched. This video is no exception.
When she links a 'puzzling' tightening credit environment with the rate cut, explaining that despite central banks' loosening, banks are lending less, she hits the nail on the head for why there is no recovery despite central banks' insistence on this myth. She then goes on from the lack of bank lending to productivity flight and the unemployment problem, something that most have been afraid to admit, and then takes the next logical step to a housing rollover to come next. Again, this is clear and obvious but most have been afraid to say so.
She's a good analyst. We don't hear from her enough on the alt financial blogs. Thanks for the link, which was the only thing that made it worthwhile for me to click on this stupid article.
Exce,,ent video. Thanks for the link.
" i see Q.E.... "
no shit darling....
So there is not going to be any Black Swan.. that will sure Surprise a lot of people..
Everyone is so busy looking for a black swan and missing the great black albatros wrapped around
their necks.
No my friend you are mistaken your eyes deceive you that is a flock of vultures. Carrion call.
Dear Lord in Heaven...Please let me awake tomorrow to a stock market freefall that continues for a week or more. Bank closures, Total economic doom where I am totally assurred...this is it.... Grocery stores wiped out...neighbors speaking to one another in fear and trepidation. Total panic...Thank you Lord
Amen
What prosperity America now enjoys is a false prosperity, an illusion brought on by the Fed’s low interest rates. Costless? It is a charade, risking hyperinflation and the destruction of the currency, awaiting the next devastating “correction” – adding again to the countless, voiceless Americans ruined by the Fed’s financial “bubbles.”
In short, what about The Forgotten Man?
The group hardest hit in this “painfully slow growing U.S. economy” is, Number One, young white and black men without college educations…followed by all the rest...
College grads who can’t find work in their field, many working at Home Depots, etc.
Computer science employees displaced by H-1Bs.
Devastated homeowners thrown out in the street by the Fed’s “busted” housing bubble.
Savers ruined and looted by inflation to prop up Wall Street.
Wage earners mired in an eroding standard of living brought on by the ravages of a boom-bust monetary system.
Small businesses shuttered by Fed-financed monopolies that have destroyed competition.
Vast numbers of the underemployed and the unemployed, displaced by foreign workers.
Retirees on fixed incomes without cost of living adjustments or with COLAs based on the CPI lie.
“If you want a true assessment of the economy, you must remember what William Graham Sumner called “the forgotten man” whose labor is exploited in order to benefit whatever strikes the government’s or the Fed’s fancy:
“The type and formula of most schemes of philanthropy or humanitarianism is this: A and B put their heads together to decide what C shall be made to do for D. The radical vice of all these schemes, from a sociological point of view, is that C is not allowed a voice in the matter, and his position, character, and interests, as well as the ultimate effects on society through C's interests, are entirely overlooked. I call C the Forgotten Man.
“For once let us look him up and consider his case, for the characteristic of all social doctors is, that they fix their minds on some man or group of men whose case appeals to the sympathies and the imagination, and they plan remedies addressed to the particular trouble; they do not understand that all the parts of society hold together, and that forces which are set in action act and react throughout the whole organism, until an equilibrium is produced by a re-adjustment of all interests and rights.
“They therefore ignore entirely the source from which they must draw all the energy which they employ in their remedies, and they ignore all the effects on other members of society than the ones they have in view. They are always under the dominion of the superstition of government, and, forgetting that a government produces nothing at all, they leave out of sight the first fact to be remembered in all social discussion - that the State cannot get a cent for any man without taking it from some other man, and this latter must be a man who has produced and saved it. This latter is the Forgotten Man.”
http://www.blupete.com/Literature/Essays/Best/SumnerForgotten.htm
I got 640 lbs. of Spam.
Ain't worried bout a thing.
Gonna be worth a fortune on the Big Island.
Corned Beef, by the case, good thing there is no inflation. man the prices have sky-rocked
For all that Corned Beef, make sure you get plenty of pickles.. Wouldn't want you to get scuvy.
SPAM is full of MSG, which is extremely BAD for you (I get severe migraines from it).
Unless you're talking about e-mail SPAM, in which case, might I suggest that you stop printing it out?!
@After all results for the April-June period are tallied, analysts expect earnings per share for companies in the Standard and Poor's 500 index to drop from a year earlier…
And how about last year? Here’s SIGFIG:
A Rising Market Does Not Lift All Investors’ Boats
First, let’s get the bad news out of the way:
For everyday investors,
the year [2014] hasn’t been so great.
As of mid-December [2014], the median
investor has a 4.5% portfolio return
(12-month trailing).
Notes: median SigFig investor is 41 years old. Returns include dividends. Time period for this analysis is the 12 months ending...
http://blog.sigfig.com/wp-content/uploads/2015/01/SigFig-Year-in-Review-1219.pdf
..U.S. employers are hiring at a solid pace, so it's possible all those extra paychecks will spark more spending and higher revenue and profits.
Huh ? What is this guy smoking ? What US employers is he talking about ?
"Scary Headlines Don't Deter Investors"
Really?
"Chinese stocks have just pulled out of a frightening free-fall."
8+% down yesterday, flat today. The only Chinese stocks that "just pulled out of a frightening free-fall" are the ones that aren't trading.
S&P 500 is down 5 days straight, and may again threaten its 200-day moving average.
Is he actually looking at the markets? This guy is a joke.
I wonder what cabalist propaganda mill pays his salary?