Submitted by David Stockman via Contra Corner blog [19],
The robo machines pushed their snouts through 2100 on the S&P index again yesterday. This was the 13th time since, well, February 13th that this line has been re-penetrated from below.
[20]
But don’t call it an omen of bad luck; its more like monetary rigor mortis. The bull market is dead, but the robo-machines and talking heads of bubble vision just don’t know it yet.
And most certainly, the full-time stock traders who occupy the C-suites of corporate America don’t know it, either. They are still spasmodically buying their own drastically over-priced shares hand-over-fist. During last Monday’s knee-jerk stock market rip even Goldman Sachs confessed that their corporate buyback desk had a record day.
That should not be surprising, however. America’s stock option addicted executives are getting desperate. With nearly all of the S&P 500 companies having now reported Q2 results, LTM reported earnings have come in at about $97.35 per share. That’s down 5.6% from prior year and 8.2% since the cycle peak in Q3 2014.
What’s worse, GAAP earnings are rolling over a point that represents niggardly gains from the Q2 2007 cycle peak prior to the last bubble’s collapse. While the magic 2100 line represents a 35% gain from the October 2007 S&P 500 index high, earnings growth during the last eight years computes out to a trifling 1.72% per annum.
Let’s see. Who would pay nearly 22X for earnings that are growing at such a tepid rate, and which are also clearly rolling over in the context of a domestic business cycle that is very long-in-the-tooth and a global deflation cycle that is gathering frightful momentum?
Well, of course, the robo-machines are eager buyers. After all, its hard to get the PE multiple wrong during the course of 10 second holding periods.
So the dumb stock churning machines can be forgiven. But that doesn’t exonerate the “borrow and pump” carbon units which ostensibly manage America’s top 500 companies.
As is shown in the chart below, they announced new stock buyback plans at a $1.2 trillion annual rate in the most recent quarter. They are desperately trying to shrink the share count, hoping to keep the illusion of growth alive just a little longer.
In fact, the corporate game of flooding shareholders with cash via buybacks and dividends has now reached the same fevered pitch as late 2007 when companies were distributing every single dime they earned.
Thus, during the most recent four-quarters available, the S&P 500 companies reported $880 billion of net income, but flipped $900 billion or 102% of that amount straight into the casino.
That’s right. Stock buybacks alone accounted for $538 billion or 61% of earnings, and that was one top of $362 billion of dividends during the same 12 month period.
So, yes, in addition to the robo-machines of Wall Street, the greed machines in the C-suites are also buying shares. But it is pretty evident that whatever lesson they learned from the last stock market meltdown was long-ago washed down the memory hole by the Fed’s endless flood of money.
To be sure, the C-suites did have a spell of sobriety immediately after the financial crisis. By contrast to the most recent buyback frenzy, for example, the S&P 500 companies bought back only $160 billion of stock during the four-quarters after the March 2009 bottom, which represented just 30% of net income reported during that period.
Likewise, the combined total of $355 billion of buybacks and dividends amounted to only 65% of net income. Moreover, that combined figure did not even amount to two-fifths of the $900 billion flood of corporate cash which has surged into the casino in the most recent LTM period.
So the de facto “put” under the market that has kept gamblers buying the dips over and over since March 2009 has apparently also functioned as an “all-clear” signal to corporate executives and their boards. It was only a matter of a few quarters before they were back to pre-crisis rates of cash payouts.
What this means is that the Fed’s lunatic bubble finance policies are destructively pro-cyclical. As 80 months of ZIRP and $3.5 trillion of debt monetization have systematically falsified prices in the financial markets, the effect has been to lure corporate America into recklessly strip-mining their own balance sheets, thereby goosing the stock average with a final drop-kick of artificial demand.
Needless to say, the manic stock buying shown above at the 2007 peak was rationalized at the time by the claim that earnings would keep rising forever owing to the beneficence of the “goldilocks” economy. Accordingly, ex-items earnings for 2008 were projected at $120 per share, implying that the S&P 500 was fairly valued at its peak level of 1560 in October of 2007. After all, Wall Street’s amen chorus chimed that was only 13X earnings.
As it happened, LTM reported earnings for the S&P 500 had dropped to $51 per share by the June 2008 quarter and a low of $8 per share for the LTM period ending in June 2009.
But this giant divergence between expectations and reality was dismissed at the time owing to the financial crisis meltdown, which presumably had been visited upon Wall Street from a passing comet.
Besides, the Fed’s printing press was soon flooding the canyons of Wall Street with endless liquidity and a promise that all of the economic damage which had been done by the housing and consumer borrowing binge during the prior 25 years would be painlessly corrected by monetary stimulus.
So once again Wall Street rationalizes that PE multiples are within historic norms, and that it is eminently reasonable for the S&P 500 companies to be disgorging more than 100% of their net income into the casino.
But that is unadulterated nonsense—even for the broad market; and that’s to say nothing about the wildly speculative precincts in tech, social media and biotech where shares trade at 50X, 100X or infinityX.
Indeed, in light of the massive headwinds evident in both the domestic and global economies, the S&P index has reached peak bubble lunacy at 22X LTM reported earnings. That’s because the current Wall Street ex-items hockey sticks are no better this time that they were back in 2007. In fact, the world is heading into deflationary cycle which will erode corporate profits for years to come, and this time the Fed and other central banks are out of dry powder.
They are stranded at the zero-bound and have demonstrated beyond a shadow of doubt that massive monetization of the public debt does not jump-start growth in an environment of peak debt.
Accordingly, when the global economy slides into recession and proves that the great money printing binge of 2008-2015 was a complete failure, the central banks will not be in a position to crank up their printing presses to a white hot pace as the did last time. To do so would likely trigger the very panicked selling spree in the casino that they have spent the better part of seven years attempting to forestall.
So the global deflation now gathering steam will be knocking those $97.35 of S&P earnings sharply lower in the quarters ahead. And the proximate trigger will be the China meltdown because its 25 year long credit binge is finally over.
Stated differently, China’s madcap fixed investment in industrial capacity and public infrastructure, which reached $5 trillion last year and thereby matched the whole of Europe and North America combined, has finally reached the end game. Even the suzerains of red capitalism in Beijing are loathe to pump more credit into the giant Ponzi which has inflated the Chinese economy to its current absurd and dangerously unstable levels.
Nevertheless, the damage from China’s historically unprecedented and utterly aberrational boom has already been done, and now the adverse consequences will ensue. To wit, China’s 20-year frenzy of digging, building, constructing and producing based on a 56X explosion of fiat credit is the root cause of chronic and unprecedented overcapacity worldwide, from shipping, to steel, chemicals, aluminum, solar panels, construction machinery and much more.
And now that global trade is once again shrinking it is only a matter of time before desperate price cutting eviscerates the profits of global corporations.
Moreover, Beijing is in no position to bailout the world economy this time around. That’s because they too are now on the nasty end of the global “dollar short”. Chinese companies and speculators have borrowed massively in the off-shore dollar markets—with short term dollar debts at nearly 10% of GDP compared to just 3% at the time of the 2008 financial crisis.
Hans Redeker from Morgan Stanley estimates that short-term dollar liabilities reached $1.3 trillion earlier this year. According to him, “This is 9.5pc of Chinese GDP. When short-term foreign debt reaches this level in emerging markets it is a perfect indicator of coming stress. It is exactly what we saw in the Asian crisis in the 1990s”.
In any event, capital outflows have been enormous. During the last six quarters they have totaled nearly $850 billion. This means that for the first time in more than two decades, the Peoples’ Printing Press of China is being forced to shrink domestic credit—just as the Fed is preparing to normalize dollar denominated interest rates.
Self-evidently, the China economic slowdown and initial financial contraction has sent shock waves through commodity markets. The Bloomberg Global Commodity index, which tracks the prices of 22 major commodities, has now fallen by 50% from its 2011 recovery peak, and more than 65% from its pre-crisis top.
Presently it sits at levels last seen at the turn of the century. Yet the carnage is by no means over—-given faltering global demand and the continued arrival of new supply that was funded by the flood of cheap capital enabled by the world’s central bank during the last two decades.
[21]
Still, the Wall Street bulls urge not to be troubled. Commodities are purportedly “finding a bottom”, the authorities in Japan, China and Europe are aggressively stimulating growth and the US economy is heading for a breakout in the second half.
So buy the dip. The 13th time through 2100 is the charm.
No it’s not!
