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This Is Not A Retest - It's A Live Bear!

Tyler Durden's picture




 

Submitted by David Stockman via Contra Corner blog,

By the lights of bubblevision, Tuesday’s plunge was just a bull market “retest” of last week’s lows, which posted at 1867 on the S&P 500. As is evident below, the test was passed with 80 points to spare at today’s close.

So according to the talking bull heads - CNBC had three of them on the screen at once about 2pm—–its time to start nibbling on all the bargains. Soon you may even want to just back up the truck.

You can supposedly see it right here in the charts. The market hit the October 15 Bullard Rip low last week, and has gone careening upwards where it is now allegedly forming a new bottom around 1950. Remember, its a process. Be patient.

^SPX Chart

^SPX data by YCharts

Not on your life! The world is heading into an unprecedented monetary deflation - with output and trade falling nearly everywhere. That implosion is already rumbling through Canada, Mexico, Brazil, Australia, South Korea, Malaysia, Indonesia, Russia, Japan, the Persian Gulf oil states and countless lesser economies in between. And at the center, of course, is the unraveling of the Great Red Ponzi of China.

In the face of this on-coming economic storm, honest financial markets would have been selling off long ago, and, in fact, would never have approached today’s absurd levels of over-valuation. But financial markets have been hopelessly corrupted by two decades of massive central bank intrusion and falsification of asset prices. Consequently, Wall Street punters and their retainers and cheerleaders cannot see the forest for the trees.

Thus, one of today’s CNBC permabull threesome reassured viewers that the US economy is chugging along in fine fashion and that China is a big problem——but for the policymakers in Beijing, not the S&P 500.

The “1000 points of fright” last Monday is actually a gift. You can now buy the market at 15X, which is tantamount to a steal. So he said, and with no inconsiderable air of annoyance that anyone would think otherwise, let alone succumb to panic.

Well, let’s see. The implied “E” in that proposition is $130 per share on the S&P 500 for 2016. But that’s the Wall Street sell-side’s version of earnings ex-items.

So let’s start with where we are at the end of Q2 2015 in the real world of GAAP profits. That is, the kind of earnings that CEOs and CFOs certify to the SEC upon penalty of jail as fair, accurate and complete, according to well settled general accounting principles.

It turns out that the reported LTM net income (latest 12 months as of June 2015) of the 500 largest US companies in the index came in at $97.32 per share. But that’s down considerably from the LTM figure of $103.12 per share in the June quarter of last year, and was off by 8% from peak LTM earnings of $106 per share in the September quarter last fall.

What this means is that the market is not really trading at 15X at all, but closed today at 20X—–which is an altogether different kettle of fish. By the lights of permabulls like CNBCs 2pm trio, of course, the market is always trading at 15X and is always cheap. You might even think that Wall Street’s ex-items year-ahead EPS estimates are goal-seeked—-and you might well be on to something.

In any event, how do we leap the chasm from $97 per share and falling to $130 per share and soaring?  Well, you mount a Wall Street hockey stick, close your eyes to the rest of the world and hope for a swell ride.

In the alternative, you might want to scroll back to nearly an identical inflection point in mid-2007 when the Greenspan housing and credit bubble was nearing its apogee. To be specific, LTM GAAP earnings at the time were about $85 per share and the June 2007 quarter closed with the index at about 1500 or just 4% below its October peak of 1565.

So the market was positioned at 17.6X honest-to-goodness GAAP earnings in the eve of the Greenspan Bubble’s collapse. Needless to say, that was a pretty sporty multiple under the circumstances—–the rot in the Bear Stearns mortgage funds had already been exposed and the sub-prime market had gone stone cold in the spring. Yet it was well below today’s 20X.

Naturally, Wall Street didn’t see it that way at the time. The ex-items consensus for 2008 was $120 per share of S&P 500 earnings, meaning that it was indeed time to back-up the truck. You could buy the broad market for less than 13X, said the talking heads, or more specifically the very same trio that made its appearance today.

Indeed, the chasm between reported GAAP and the forward hockey stick ex-items was $35 per share at that point in time. Ironically, today’s spread between the reported actual and the Wall Street hopium is the exact same $35 per share.

Here’s what happened next. By the June 2008 LTM period, GAAP earnings had fallen to $51 per share and by June 2009, after the meltdown, S&P 500 earnings for the previous four quarters were, well, $8 per share!

That’s right. The great Greenspan financial bubble collapsed; the global economy buckled; and corporate balance sheets were purged of 7-years worth of failed investments and financial engineering maneuvers gone astray, among sundry other losses. In the end, Wall Street’s $120 per share hockey stick got smashed into smithereens.

Eight years later we are at an even more fraught inflection point. The post-crisis money-printing binge was orders of magnitude larger and more radical, and was universally embraced by every significant central bank on the planet. As a consequence, the resulting financial bubble has become far more incendiary than the one which burst in September 2008, and the distortions, deformations and malinvestments in the global economy dramatically more insidious.

Obviously the onrushing collapse of China’s purported miracle of red capitalism is the epicenter of this great global deflation, but every nook and cranny of the world economy is implicated; and its shock waves are already wreaking havoc in areas that were especially swollen by the China trade.

On a nearby page, for example, we outlined the unfolding disaster in Brazil. This chart on the trend in year-over-year retail trade is stunning because Brazil’s inflation rate is above 5%.  So when nominal sales plunge from the boom time rate of 11% to negative 1% in June, it means that real sales are shrinking at nearly a depressionary pace.

 

 

By all accounts, in fact, Brazil is plunging into its worst recession in the last half century. After years of booming jobs growth fueled by exports and a massive internal dose of monetary and fiscal profligacy, for example, its economy is now shedding workers at an unprecedented pace.

 

 

The point here is that Brazil is just the leading edge of the  epochal worldwide monetary reversal now underway. During the last 15 years its central bank balance sheet literally exploded, rising by more than 10X, while loans to the private sector more than quadrupled in the last seven years alone.

Brazil Central Bank Balance Sheet

Brazil Loans to Private Sector

The consequence was a frenzy of government and household spending and business investment, expansion and speculation that bloated, deformed and destabilized the Brazilian economy beyond recognition. And those distortions were not contained to the Amazon economic basin alone, but where connected by a two-way highway of financial and trade flows that penetrated right into the heart of the US economy.

In the first instance, the massive but artificial and unsustainable export boom to China and its EM satellites generated enormous capital inflows to Brazil which caused its exchange rate to soar, even as its government frantically attempted to contain its rise. During that pre-2012 period, its finance minister even coined the terms “currency wars”.

The effect of the China export boom and the massive capital inflow, however, was to create an economy with apparent dollar purchasing power far greater than its sustainable real wealth and output capacity. This immense distortion is best measured by the US dollar value of its GDP. As shown below, during the six years between 2006 and 2012, Brazil’s dollarized GDP grew at a fantastic 20% annual rate!

Brazil GDP

It is no wonder Miami became a boom town. Giddy Brazilians who had enough sense to realize its socialist government had not performed an economic miracle of fishes and loaves exchanged their red hot real’s for dollars and trucked northward to condo land in south Florida.

At the same time, its booming economy was a magnet for US money managers parched for yield in Bernanke’s ZIRP repressed market and for US exporters temporarily benefited by a dollar/BRL exchange rate that made them suddenly far more competitive. Accordingly, hundreds of billions of hot dollar capital flowed into Brazilian equity and corporate bond markets, while US exports nearly quadrupled in eight years.
US Exports of Goods to Brazil Chart

US Exports of Goods to Brazil data by YCharts

Here’s the point. The US economy was not “decoupled” from Brazil in the slightest during the expansion of the great global monetary boom that has now crested. Nor will it uncouple during the deflationary bust that must necessarily ensue.

The ultimate worldwide hit to US exports is evident in the 20% drop in shipments to Brazil shown in the chart above, and that’s just for starters because its economic depression is just getting underway. Likewise, the panicked flight of hot dollars from Brazil now besetting the global financial markets is only indicative of the turmoil to come as the massive “dollar short” unwinds on a global basis.

So this is not a retest. We are in the midst of an unprecedented global deflation. A real live bear market is once again at hand.

 

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Thu, 09/03/2015 - 12:14 | 6504724 venturen
venturen's picture

can't they just print money...working everywhere else

Thu, 09/03/2015 - 12:47 | 6504846 cnmcdee
cnmcdee's picture

15X Earnings? How about I load this boat so full of put options it can barely float a positive balance.. The people at the back of the USS Titanic are about to face plant their dinner plates..

Thu, 09/03/2015 - 13:11 | 6505027 walküre
walküre's picture

nobody is buying the surge in oil except for paper pushers who are as we speak putting in their short calls for the next big leg down

there's a glut of oil and with China collapsing (letting go of 300,000 military personnel is a sign of economic Depression and not growth) the global economy will not support $48 let alone North of $50 oil

and Janet, I'm saying this again...

RTFR - RAISE THE FUCKING RATES

Thu, 09/03/2015 - 14:47 | 6505529 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

The only thing the Chinese fear is social unrest. As they said "when you have a billion people you can't have everyone running to one side of the boat". So 300,000 told to go back to the village and the house with the dirt floor is an important tell. And whatever strategy keeps the people out of Tienanmen Square will be the one they pursue. If they can...their PPT seems to have run out of puff. But they have a shadow-shadow banking system and maybe new third-order shadow credit creation can be conjured.

Thu, 09/03/2015 - 14:50 | 6505544 3rdWorldTrillionaire
3rdWorldTrillionaire's picture

I'm patiently all-in with YE2015 and 2016 S&P puts at various levels from 1,500-1,900 that I started buying Sept 2014 through YE2014... fucking bring it. Let's get this show on the road.

Fri, 09/04/2015 - 06:09 | 6508107 jeff montanye
jeff montanye's picture

you are not alone.

sentiment trader reported here that the movement from bullish to bearish equity etfs in the last week or something was the greatest since records were kept. stocks may not go down instantly. possibly rally up to the 50 or the 200 day moving average to move that ratio to something less historical. then possibly fundamentals will tell, at long, long last.

Thu, 09/03/2015 - 15:20 | 6505708 cougar_w
cougar_w's picture

"The future appears brilliant. Our securities are the most desirable in the world."

-- Thomas Lamont, Morgan Bank, writing to President Hoover in October of 1929

Thu, 09/03/2015 - 12:27 | 6504741 JustObserving
JustObserving's picture

Thus, one of today’s CNBC permabull threesome reassured viewers that the US economy is chugging along in fine fashion

To believe the fair and free financial presstitutes in the land of the free is to believe a prostitute who whispers "I love you."  That is the height of self-deception.

Thu, 09/03/2015 - 12:49 | 6504910 cnmcdee
cnmcdee's picture

Wait  wut?! I'm sure she loved me?!

Thu, 09/03/2015 - 13:27 | 6505110 Bezukhov
Bezukhov's picture

Getting accurate information on the economy from CNBC is like asking for accurate information on crime from the Mafia.

Thu, 09/03/2015 - 17:09 | 6506136 SeattleBruce
SeattleBruce's picture

Queue the earlier story today about American's stupidity.  Stupidity and self-deception are two sides of the same coin...

Thu, 09/03/2015 - 12:18 | 6504745 Lumberjack
Lumberjack's picture

Party on! No hibernation this year!

Thu, 09/03/2015 - 12:54 | 6504941 Zirpedge
Zirpedge's picture

Any self respecting bear will be cashing out of equities and speculating in wheat futures this winter. It's an El Nino and the monsoon is not coming to India.

Thu, 09/03/2015 - 12:20 | 6504762 Two Theives and...
Two Theives and a Liar's picture

But...but..the dow going up is good right? Here on sesame street they tell us it's all good and to buy moar!

Thu, 09/03/2015 - 12:26 | 6504784 CaptainObvious
CaptainObvious's picture

I take that advice, but not in the manner intended.  When they say "BUY MOAR" I go out and buy some more of the shiny stuff.  Soon it will be time for another unfortunate boating mishap.

Thu, 09/03/2015 - 13:14 | 6505043 walküre
walküre's picture

it's good alright.. good for anyone with shares looking for a buyer

 

Thu, 09/03/2015 - 12:21 | 6504766 corporatewhore
corporatewhore's picture

Can I buy this poetry somewhere in some anthology?

Thu, 09/03/2015 - 12:22 | 6504771 KnuckleDragger-X
KnuckleDragger-X's picture

As I've said before, we won't see 1929 again. With computers, the media and the FED all bending up reality to serve their needs, what we'll get will be much longer, deeper and more painful and we've got all the other CB's to help us entirely destroy the world economy.......

Thu, 09/03/2015 - 12:29 | 6504791 Bill of Rights
Bill of Rights's picture

Isn't that the plan? What can be paid will be and what can't be paid will be burnt to the ground.

Thu, 09/03/2015 - 12:42 | 6504865 KnuckleDragger-X
KnuckleDragger-X's picture

Plans are not the same thing as outcomes, no matter what they may think. They've created the free shit army and the special snowflakes, but they've also radicalized them. I think that it's quite funny that everybody was worried about the Jade Helm exercise this Summer. The military will be dealing with the implosion of the major cities and they aren't anywhere near being large enough to have any effect except to make things worse. Plus we've got the bureaucrats with guns, which will be absolutely hilarious if they do anything. Models, plans, it doesn't matter, what happens out on the streets will matter......

Thu, 09/03/2015 - 12:30 | 6504789 mtndds
mtndds's picture

How is this going to effect housing?  I will believe it when I see the banksters jumping out windows AND housing drop by 50%.

 

In the mean time, GO HAWKS!!

Thu, 09/03/2015 - 12:41 | 6504853 khnum
khnum's picture

the last time housing dropped 50 per cent the Fed ended up with 1.5 trillions worth of it,when shit collapses they jump for joy not out of windows

Thu, 09/03/2015 - 12:32 | 6504806 Tyrone Shoelaces
Tyrone Shoelaces's picture

If the numbers look bad, let's just make up some new, better numbers!

 

 

Thu, 09/03/2015 - 12:34 | 6504820 Bill of Rights
Bill of Rights's picture

If one notices as well even their fake false flags are blowing up in their faces these days IE; Ineffective. They've showed their whole card and the bluff is exposed.

Thu, 09/03/2015 - 13:06 | 6504855 Implied Violins
Implied Violins's picture

Yeah, funny thing about that:

http://redefininggod.com/2015/01/throwing-the-game-why-the-globalists-ar...

http://www.shiftfrequency.com/false-flag-gun-control-flops-increase/

It's all part of their plan. Even the incompetence (...to a point).

Thu, 09/03/2015 - 12:37 | 6504839 khnum
khnum's picture

a playmate of the year recently gave up porn to become a day trader,the story is in the archives here a month or so back,at that point I knew to get out just as Carnegie knew when the shoe shine boy gave him stock tips it was time to get out.critical morass approaches

Thu, 09/03/2015 - 12:37 | 6504840 ghostzapper
ghostzapper's picture

USD only gonna get stronger versus Brazilian garbage . . . . . . . if you like Brazilian broads now is the time to finalize which one you want to purchase.

Thu, 09/03/2015 - 12:45 | 6504882 Tyrone Shoelaces
Tyrone Shoelaces's picture

I like big butts.

 

Thu, 09/03/2015 - 14:50 | 6505546 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

you other brothers can deny

Thu, 09/03/2015 - 12:45 | 6504883 whats_that_flashing
whats_that_flashing's picture

icon test

Thu, 09/03/2015 - 12:46 | 6504884 Consuelo
Consuelo's picture

"And at the center, of course, is the unraveling of the Great Red Ponzi of China."

 

Why, Of Course...!!!

 

Even with all the corruption, guys like Stockman just can't bring themselves to admit that the genesis of the 'Great Ponzi' is right under their feet...

 


Thu, 09/03/2015 - 13:37 | 6505165 lasvegaspersona
lasvegaspersona's picture

No matter how you look at things in dollar terms, one great truth is that the East is now back into the 21st century and will be a competing force in the world economy going forward.

Americans will have to compete with a few billion additional people, many of whom are energetic and smart. Even the reserve currency won't protect Americans and their relatively higher wages. The future looks bright, for everyone but us. The USA has some catching up (errr down) and some 'splainin' to do.

Thu, 09/03/2015 - 12:46 | 6504887 Rodders75
Rodders75's picture

Long nailguns 

Thu, 09/03/2015 - 13:59 | 6505270 C.A Ahmadine
C.A Ahmadine's picture

CNBC is more bullish on Obumbo than even the S&P...

Thu, 09/03/2015 - 14:15 | 6505347 Insurrexion
Insurrexion's picture

Da Bear's market Theme song....

https://www.youtube.com/watch?v=KLxqm7ey4Nw

Dance muther fuckers.

Thu, 09/03/2015 - 14:24 | 6505414 Palladin
Palladin's picture

A Ratio is a common and well know term we hear every day. Wall Street decided to hijack that well known term in an attempt to describe the relative value of one company to another.

The Price Earnings Ratio (P/E) of a stock or any index is calculated by dividing the price by the earnings.

Well, what’s wrong with that? Nothing, but it’s not a ratio. It’s simply one number divided by another.  Wall Street needs to give it importance so it calls this simple division the Price Earnings ratio or simply P/E.

We are all familiar with PI, which is a real ratio, describing the relationship between the diameter of a circle and its circumference. If you know one of the values, you can calculate the other, because the ratio is always the same, and PI is a constant. Or put another way, a circles circumference divided by its diameter will always = PI. Always, for all circles. There are many other ratios when it comes to PI, but the circle is probably the most familiar one.

Another ratio is A2 + B2 = C2 or the Pythagorean Theorem. It describes a ratio of the two sides (A and B) of a right triangle to the Hypotenuse (C). If you know any two you can calculate the third. The most common one we use every day is the 3/4/5 ratio to calculate a right angle. Measure 3 feet, on one leg, 4 feet on another and when the hypotenuse is 5 you have a 90 degree right triangle. It doesn’t matter if you use inches, feet, meters, miles, or light years. The ratio is always the same.

So why are we talking about esoteric mathematics, and what does this have to do with the Stock Market? Simple, it’s just more Wall Street hype.

If you take a look more closely at how the P/E (that’s how they refer to it) is calculated you can see some problems right away. The first are the components, both are variables. The price of a stock is a variable, as are the earnings that are generated. And that’s OK if you only talking about one stock. But when you take more than one stock, you get back to that A+B=C, X+Y=Z thing where you cannot take the sum (C) and compare it in any way to (Z). But that’s what they do on Wall Street every day when they calculate P/E.

It’s like saying, to calculate the circumference of a 3” diameter circle is 9.869 (PI*D) but we need to use a different ratio for circles that are 4”. Does that make any sense?

In mathematics it doesn’t but on Wall Street it does. The biggest flaw is when you try to calculate it as a ratio. In the example of the 3” circle, I can take the circumference of any circle, and divide it by PI and it will give you the diameter of that circle. Exactly, every time, with every circle.

Now try that with P/E. Lets say the earnings of say IBM is 10.00 a share, and the computer group has a average P/E of say 14. Does that mean that the stock price of IBM is $140.00? Maybe, but probably not. The only way to calculate a P/E is to divide the stock price by the earnings of that particular stock. Even using an average P/E as suggested above will not even come close to the price of the stock using a P/E and the earnings. It only works one direction.

Why? Because it’s not a ratio, it’s a Marketing gimmick. They like to smooth talk over the inconsistencies by saying that different companies have different P/E’s but when taken as a group they are pretty similar. Does that make sense? Circles anyone?

Another way around the P/E’s never matching up, is that the company will “grow” earnings so that the P/E will fall in line with their peers. Everybody nods their head like that’s really going to happen. It might, but usually it’s just something an Analyst will say to try to convince you to go out and buy or sell (generate commissions) whatever stock he is hyping that particular day.

There is no end to the ways the earnings (E) in the P/E is calculated. They come up with new ones every day so it’s hard to keep track of them.

And to make it a bit more confusing, there are various ways to calculate earnings. There is EBIDA which stands for “Earnings before interest, taxes, depreciation and amortization”. Hard to believe but true. There’s no end to the gimmicks they come up with. Then there’s GAAP which stands for Generally Accepted Accounting Principles.  Well that makes sense, but a lot of times you will hear the term Non-GAAP which would mean not Generally Accepted Accounting Principles? And they say it with a straight face. And here’s my favorite… Pro-Forma Earnings.

There was a boom in the reporting of pro forma results in the USA starting in the late 1990s, with many dot-com companies using the technique to recast their losses as profits, or at least to show smaller losses than the US GAAP accounting showed. 

The pro forma models the anticipated results of the transaction, with particular emphasis on the projected cash flows, net revenues and (for taxable entities) taxes. Consequently, pro forma statements summarize the projected future status of a company, based on the current financial statements.

 To illustrate how bizarre the Price Earnings Ratio can become, take a look at P/E’s of Amazon, Apple and Facebook. All three are household names, and command a very hefty stock price and are followed by countless Wall Street Analysts. Yet somehow the P/E’s of Amazon, Apple and Facebook differ by a wide margin. How wide a margin? See for yourself:

Does that make any sense, to have this “important” metric differ by such a large factor for such large well know companies? Common sense would say no. But you will hear it every day on Wall Street. Such and such has a P/E of “whatever” and that “whatever” is simply used to promote the stock the Analyst is trying to get you to buy.  Plain and simple.

 

Thu, 09/03/2015 - 14:48 | 6505534 Couvrot2
Couvrot2's picture

FYI. In mathematics a RATIO is, and can only be, a fraction, i.e. a numerator divided by a denominator.

Thu, 09/03/2015 - 16:15 | 6506046 Enceladus
Enceladus's picture

Where were you when the FED invented math? This information would have been more helpful say in 1913. You are just a Monday morning quarter back.

Fri, 09/04/2015 - 00:39 | 6507837 fiatmasochist
fiatmasochist's picture

+1000.

Thu, 09/03/2015 - 14:41 | 6505499 PrimalScream
PrimalScream's picture

YEP, IT'S A GRIZZLY!

And no amount of monetary "bear spray" is gonna stop it from charging.

Thu, 09/03/2015 - 14:42 | 6505507 Batman11
Batman11's picture

"The post-crisis money-printing binge was orders of magnitude larger and more radical, and was universally embraced by every significant central bank on the planet."

Central banks are independent.

Independent of their nations best interests.

But the heads of all major Central Banks are directors of the Bank of International Settlements in Switzerland (including China).

Our policy makers are the same the world over and they reside in the BIS in Switzerland.

 

Thu, 09/03/2015 - 20:40 | 6507081 Herdee
Herdee's picture

I'm just wondering if that's why FXCM and others such as Bloomberg have such shit-ass indicators for the American fiat paper currency?They are so crappy and the worst two are symbols DXY and FXCM's indicator USDOLLAR.Bloomberg's BUXX is just as shitty a representation as the rest.So,traders don't be fooled by a bunch of garbage that doesn't even come close in our computer age to showing a fair or remotely accurate representation of a piece of junk issued as a " Federal Reserve Note" and how it trades with other countries.

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