Ten days ago, the few carbon-based habitual gamblers left in the market stopped and read Goldman's report which, as we said, may have 'just killed the music' with its slam of the market saying the "S&P500 is now overvalued by almost any measure." Recall: "The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings." Since then, many of Goldman's client must have been displeased that David Kostin refuses to drink from the punchbowl anymore, and sent in their complaints. However, Goldman has refused to budge and issued a follow up defense to its thesis that stocks are overvalued more than at any other time except the tech bubble with "Valuation fact vs. fiction part 2: Responding to common questions about S&P 500 valuation."
"The latest review shows how the seeds of the current divergence were already sown in the early years of the euro, as unbalanced growth in some Member States, based on accumulating debt fuelled by low interest rates and strong capital inflows, was often associated with disappointing productivity developments and competitiveness issues. In the absence of the currency devaluation option, euro area countries attempting to regain cost competitiveness have to rely on internal devaluation (wage and price containment). This policy, however, has its limitations and downsides not least in terms of increased unemployment and social hardship, and its effectiveness depends on many factors such as the openness of the economy, the strength of external demand, and the presence of policies and investments enhancing non-cost competitiveness." - European Commission
Unlike their American counterparts in the world of "what to do with all the easy money sloshing around the market," it appears the Chinese learned their hard lesson in the collapse of stocks in 2007/8. As the following charts make abundantly clear, the (hidden) inflation that trillions of dollars worth of central bank largesse is creating has piled into real estate markets in China and not in stocks - a problem for the central planners who know the potential for social unrest from a nation unable to afford housing (especially in light of its reform policies). Chinese stocks are -13% YoY, while Chinese real estate is +20% YoY. In the US, of course, we have an always-willing-gamble public more than happy to throw their marginal dollar at all-time high equity and real-estate prices.
IBM Asian Revenues Crash, Adjusted Earnings Beat On Tax Rate Fudge; Debt Rises 20% To Fund Stock BuybacksSubmitted by Tyler Durden on 01/21/2014 17:40 -0400
Fudging Non-GAAP numbers is nothing new: everyone does it, even if it means that real, operating earnings for IBM (and most other companies) are substantially lower, and sure enough IBM's real EPS was $5.73. But this is just the tip, because one has to look deep into the income statement to find just how it is that IBM, whose pre-tax income actually declined by 11% could post a 14% increase in non-GAAP EPS. The answer: taxes. And just like Bank of America, IBM decided to crater its Q4 tax rate, which was 25.5% in Q4 2012 and in Q4 2013 dropped to... 11.2%. Seriously IBM? Incidentally, this epic accounting gimmick is also why one should look at IBM's revenues which were a debacle: not only did they miss expectations of a $28.3 billion in Q4, printing at $27.7 billion, but were down 5%. And while most revenue items were weak, the piece de resistance was Systems and Tech revenue, which cratered 25%!
"It looks like this year’s economic horse will pull up lame," warns Bloomberg's Richard Yamarone, adding that the Bloomberg Orange Book Sentiment Index – a proxy for the overall state of economic affairs in the U.S. – has been running below 50 for 49 consecutive weeks, which implies a stagnant growth rate in GDP in the 2-to-2.5% range. The driving theme behind this subpar, sluggish recovery, Yamarone points out, is the lack of desirable growth in real disposable personal incomes, which grew at just 0.6% during the 12 months ending in November.
A number of readers have recently suggested there must be collusion between America and China over the transfer of physical gold from Western capital markets. They assume that governments know what they are doing, so there is a bigger game afoot of which we are unaware.
The truth is that China and Western capital markets view gold very differently and with very different philosophies about gold.
"Treasuries have turned medium term bullish," writes Macneil Curry in his latest reports, advising traders to "get ready to buy a dip," in bonds. At a minimum, he notes, BofAML expects yields to test the 2.691% area, but the most likely outcome is for a push to the multi-month range lows between 2.544% and 2.459%. Curry adds that he expected 5s30s to flatten to around 201bps and while they remain equity bulls he warns, "watchout" as seasonals turn much less constructive once February rolls around and the ratio of 3m-to-1m implied volatility is fast approaching the 1.20 level that traditionally coincides with complacency and market corrections.
The world may or may not have closure on the IRS' targeting of Conservative groups (it doesn't), but by the time the media is finished with Chris Christie, he will be too. Case in point: today's report from the Hill that as a result of Bridgegate, the New Jersey Govenor has seen his popularity plummet in a head-to-head match-up against Hillary Clinton, based on a new Quinnipiac poll. "Christie dropped 9 percentage points in the poll, and now trails Clinton 46 percent to 38 percent in a potential general election matchup. That reverses a December poll that showed Christie leading Clinton 42 percent to 41 percent."
All this boils down to one simple question: can the top 10% (roughly 11 million households) support the billions of square feet of retail space that were added in the 2000s? If the answer is no, as it clearly is, then the retail CRE sector is doomed to implode. Let's try a second simple question: what's holding the retail CRE sector up? Answer: leases that will soon expire or be voided by insolvency, bankruptcy, etc. as retailers close stores and shutter their businesses. One last question: who's holding all the immense debt that's piled on top of this soon-to-collapse sector? The domino of retail CRE will not fall in isolation; it will topple the domino of debt next to it, and that will topple the lenders who are bankrupted by the implosion of retail-CRE debt. And once that domino falls, it will take what's left of the nation's illusory financial stability down with it.
Having been un-shunned and then re-shunned by the UN and US over the Syria peace conference, an Iranian news agency has confirmed that for the first time in history, Iran's navy has dispatched warships on a mission to the Atlantic Ocean. No specific military mission or targets were announced but previous statements had discussed the move to protect the country's cargo ships and oil tankers against pirate attacks. Iran's Rear Admiral had a message of peace and friendship for the rest of the world and said the nation only sought to display its defensive capabilities (just like China, then?).
Having been outspoken over capitalism and the rise of income inequality; for the first time, an address from the leader of the world's 1.2 billion Catholics was read to the political and business elites at the World Economic Forum in Davos. Pope Francis pulled no punches as he implored attendees to remember that "humanity is served by wealth and not ruled by it," and called for "decisions, mechanisms and processes directed to a better distribution of wealth." The guilt-ridden tone was heavy as The Holy See admonished, "I wish to emphasize the importance that the various political and economic sectors have in promoting an inclusive approach which takes into consideration the dignity of every human person and the common good. I am referring to a concern that ought to shape every political and economic decision, but which at times seems to be little more than an after-thought."
"A mysterious new technology emerges, seemingly out of nowhere, but actually the result of two decades of intense research and development by nearly anonymous researchers. Political idealists project visions of liberation and revolution onto it; establishment elites heap contempt and scorn on it. On the other hand, technologists — nerds — are transfixed by it. They see within it enormous potential and spend their nights and weekends tinkering with it. Eventually mainstream products, companies, and industries emerge to commercialize it; its effects become profound; and later, many people wonder why its powerful promise wasn’t more obvious from the start. What technology am I talking about? Personal computers in 1975, the Internet in 1993, and — I believe — Bitcoin in 2014."