Saturday, February 9, 2013

Ominous Signs In Corporate Earnings

by Tyler Durden @ Zero Hedge:
Over the past few weeks, virtually all of the empty chatterboxes on financial comedy TV have been repeating ad infinitum just how much cheaper the market now is compared to its prior peak in 2007 because, get this, it trades at "only" a 15x multiple compared to the 18x or so reached at its peak in 2007. By doing so these same hollow pundits simply confirm just how painfully clueless their cheerleading is, as the market, or what's left of it in the "new Bernanke centrally-planned abnormal", never trades on current earnings but always future discounted EPS, or in other words, forward P/E, or any other valuation, multiples. And it is when one looks at the future on an apples to apples basis, that the market now is more expensive than it was back in 2007!
As the chart below shows, specifically the red dotted line, the 2013 S&P 500 consensus earnings, which have obviously been declining for the past year from 120 to roughly 110, are now less than what 2009 consensus earnings were at the peak of the market in 2007, when they, too, hit some 120 in Earnings per share. In other words, on a forward multiple basis, in 2007 the market was cheaper than it is now as earnings were supposed to go up virtually parabolically, from under 90 for year end 2007 to 108 for 2008 and 120 for 2009.

Just as notable is the full year 2012 earnings which too were supposed to soar to nearly 120 as recently as 2010, instead closed at the very lowest of the forward projection series, or just about 100 in S&P500 EPS. Putting this number in historical perspective as the blue line shows, back in 2007 the Wall Street consensus was expecting that 2008 earnings would be higher than where 2012 actual earnings will close the year.
Of course, what ended up happening was vastly different, and both 2008 and 2009 actual earnings imploded from their peak estimates of 110 and 120 to approximately 65 and 60, or were literally cut in half as the Great Financial Crisis destroyed not only the corporate bottom line but all hopes of multiple expansion.
And now we are back to forecasting a massive growth in the future, which as history has shown time and again, ir rarely if ever attained. But that is what the sell-side lemming crew is taught to do: draw upward sloping arrows and goalseek their models to fit an artificial regression line.
Yet what the second chart below shows is that when one normalizes for the recent historical pattern in earnings, the consensus 2013 earnings forecast will once again be a major disappointment, and will end up being drastically reduced. In fact, if one extrapolates the inverted curved yellow line of what actual S&P earnings have been in recent years, it is very likely that not only has the broader economy peaked, but so have corporate revenues, margins and earnings, and at this point any profit growth will be very limited at best.

Finally, slamming the door shut on the future hope versus current reality myth, Goldman's latest Q4 earnings tally reminds us that with over 80% of Q4 earnings season done, EPS is now expected to decline by 1% relative to Q4 2011, (when Europe was imploding (as usual), and when the global central banks had to bailout the world once more). Some other observations:

  • Trailing four-quarter margins declined in almost every sector. Index-level margins look stronger excluding charges but are still below last year’s peak.
  • Management guidance for 1Q 2013 is more negative than usual. 78% of companies guided down versus consensus estimates (versus 68% historically).
  • Full-year margins fell by 30 bp versus last year with declines in almost every sector. The largest margin declines came from Telecom Services, Energy, and Materials. While Information Technology margins declined by 46 bp versus 2011, 8% sales growth resulted in relatively strong earnings growth of 5%.
  • Bottom-up consensus expected 2012 EPS of $107 one year ago. This is 5% higher than realized results comparable to those estimates. A -5% revision is in-line with the median historical revision since 1984
  • Bottom-up consensus forecasts $112 of EPS for 2013. Consensus already lowered estimates by 1% in 2013 with the largest declines in Health Care and Information Technology earnings estimates.
Who performed best? Why the one group benefitting most from trillions in excess reserves, and which is full to the gills of fake earnings like one-time items, non-recurring non-cash charges, and of course: loan-loss reserve releases rarely if ever matched by the need to raise provisions for the coming avalanche of lawsuits against all banks:
  • The Financials sector reported the strongest year-over-year growth in 2012. Financials EPS grew 7% versus 2011
Finally, for that most trotted out metric that companies are "beating expectations" - here's why: since the start of earnings season in January, consensus Q4 earnings have declined by a massive 8% in just a few weeks! Why of course companies will beat consensus EPS numbers that were some 8% higher just one month ago. The reality is that in order for companies to "beat" estimates, the consolidated Q4 EPS for the S&P500 has had to drop from $25.51 to $23.47, which as already noted means a 1% drop in Y/Y Q4 earnings, and which means that contrary to what Bob Pisani may tell you, this earnings season will be the weakest in all of 2012, with little real hope for a pick up in 2013.

Friday, February 8, 2013

Futures Daily for Feb 8, 2013

Cotton continues to lead higher, while Feeder Cattle is today's laggard.

Thursday, February 7, 2013

Fed to Purchase 75% of Future 30 Yr Treasuries

The Fed already holds 41% of all 30-yr US Treasuries!

from the Federal Reserve's own documents:
Federal Reserve Holdings (1 of 2)
As of Dec 26, 2012 the Federal Reserve System Open Market Account (SOMA) held approximately $300 billion in 21+ year US Treasury debt

  • SOMA holds 41% of the 30y Treasury bonds issued since 2009
  • In Feb 2013, Fed will buy 75% of new 30y Treasury supply

Twist and QE operations have significantly lengthened the WAM of the Fed’s SOMA portfolio
The Fed currently owns 29% of all marketable 10yr Equivalents outstanding
My thoughts:
There is nothing to be concerned about, I'm sure! (Italics = sarcasm)! And Mr. Bernanke claims to Scott Pelley at CBS News that he is NOT monetizing the debt? Is lying a prerequisite to being a Fed Chairman?

There Is Plenty of Volatility Today

Even the Euro was down nearly 1%, a very large move for currencies!

But the commodity indexes are trending solidly lower today. I've noticed that when commodities peak and head lower, it is often a precursor for stocks to correct soon thereafter.

But Only Stocks Rebound

And Stocks Follow Suit

Euro Plunges 1% Following Draghi Press Conference

Diapason's Sean Corrigan notes, Germany's Industrial Production, stymied by a surging EUR, has just suffered its third biggest quarterly decline on record - plunging back to 2007 levels. Furthermore, France's Industrial Production is back at levels first seen in 1997 - also plunging (perhaps explaining Hollande's recent exclamations at EUR strength); as the core is starting to soften significantly.

Wednesday, February 6, 2013

It's a See-Saw Market Today

Stocks Modestly Lower On More Eurozone Concerns

Funds Seen Leaving Commodities Due to Lackluster Returns

Pension funds and other institutions are retreating from popular investments linked to commodities after finding they did little to protect their portfolios against inflation risk and the unpredictable returns of stocks.
Investors have yanked nearly $10 billion from tradable indexes tied to energy, food, metals and other commodities after two years of record outflows. That leaves about $133 billion, said Kevin Norrish, a managing director at Barclays PLC.
The trend is accelerating this year, analysts and investors said, driven by lackluster returns and looming U.S. regulations that could make these investments more complicated and costly.

Tuesday, February 5, 2013

David Rosenberg: Not Excited About Last Friday's Jobs Report

Via Lance Roberts of Street Talk Live,

I went through the January data one last time with a fine tooth comb. I fail to see what got everyone so excited, beyond the upward revisions to the back data. That only proves that productivity has been weaker than initially thought. And the income from those upward job revisions has probably already been spent. But as I highlighted yesterday, the broad-term trends are slowing down and doing so discernibly.
There were a variety of sobering developments in the latest data report.
1) Let's not forget that the 157k headline print was below consensus and 22% lower than the 201k average of the prior three months. That's the problem with upside revisions — they go on to exaggerate the slowdown.

2) Private payrolls have slowed for two months running — 256k in November to 202k in December to 166k in January. This was actually the lowest print in four months and fully 26% lower than the three-month average. So get with the program — the pace of private sector job creation is slowing down, not speeding up.

3) Temp agency employment fell 8k in January, the first decline since last September. This sector is widely viewed as a leading indicator of labor demand.

4) Self-employment in the nonfarm sector plunged 189k, the sharpest decline since last February and down now in three of the past four months. This too is a leading indicator and moving in the wrong direction.

5) Average hourly hours for production and nonsupervisory fell 0.3% in January after a flat December. Another leading indicator heading in the opposite direction as escape velocity.

6) As for incomes, or lack thereof, average weekly earnings dipped 0.1% for production and nonsupervisory workers.

7) Household employment came in at the grand total of +17k. That is an 85% haircut from the average of the prior three months. Why all the exuberance over this report. The peak in Household employment was in October. How has that been missed by the masses, especially since it is this metric that leads at turning points?

8) The population and payroll comparable number from the Household Survey showed a 351k plunge, the second such large decline in the past three months.

9) The most cyclical component of payrolls is durable goods manufacturing - the grand total of +3k in January or 67% lower than the three-month average and the weakest tally since October. This widely-held view of "escape velocity" comes from where exactly? The front cover of Barron's?

10) Education/health/leisure/professional services accounted for half the job gains last month. This is why the diffusion index for private payrolls slid to 59.6 from 64.5 in December, a four-month low. And in the mother of all non-ratifications, as it pertains to the ISM index, the diffusion index for manufacturing (which measures the breadth of the job gains) dropped from 54.9 to 48.1 in the first sub-50 reading since last September.

11) The markets rejoiced a report on Friday that revealed a 126k increase in the ranks of the unemployed in January and this followed a 164k pickup in joblessness the prior month. Try and convince these folks how great the economy is doing, Ditto for the 169k that dropped out of the labor force.

12) Of the increase in unemployment - those who were job losers jumped 229k, the sharpest advance since November 2010. Job leavers fell 2k and down in two of the past three months — a sign of receding worker confidence. New entrants dipped 4k after a 35k falloff in December. And re-entrants fell 72k, In other words, the churning or turnover in the labor market was left for wanting in January.

13) The manufacturing workweek slipping 0.25% to 40,6 hours from 40.7 and overtime stagnated for the second month in a row, And you call this a renaissance? Average weekly hours sagged 0.5% in the key durable goods sector,

14) The short-term unemployed — a real-time cyclical indicator — measured by the number of folks unemployed for less than five weeks, spiked 90k after an 80k rise in December. And those unemployed for between 5 and 14 weeks soared 190k and up in three of the four months.

15) Those working part-time because they have to, not want to, due to "slack" economic conditions, jumped 198k in the steepest advance since last September.

16) The average weekly hours index for production and nonsupervisory workers — a GDP proxy — was down 0.2% in January, the sharpest decline since last August,

US Justice Dept Sues S&P for $5 Billion

This is hooliganism and intimidation taken to an all-new low!

Commodity Inflation: Highest Ever!

Mixed(-Up) ISM

from Zero Hedge:
"...the Institute for Supply Management revealed that the February non-manufacturing ISM declined from 55.7 to 55.2, but was just above the expected 55.0, which was enough to send the headline scanners into full blown liftathon mode and the S&P to intraday highs. Ignored was that the key New Orders series actually declined from 58.3 to 54.4, yet offset by a jump in Employment from 55.3 to 57.5. What was amusing was the jump in New Export Orders to 55.5 from a contractionary reading. We can't wait to learn just whom the US is exporting its mission critical services to these days. Finally, and perhaps most relevant, was one of the healtcare related respondents who said the truth, the whole truth and nothing but the truth on the issue of Obamacare: "Healthcare reform causing continued slowdown and less investment." That's only the beginning."

Yesterday's Losses Completely Erased

Despite that today's ISM figures were a disappointment, stocks have rallied about 150 points from yesterday's lows and may yet go positive. We are definitely in bubble territory! We're certainly in bubble behavior!

Stocks to Go Parabolic, Then Collapse

"IF I AM WRONG AND WE TRULY HAVE FOUND ECONOMIC AND MARKET NIRVANA SIMPLY THROUGH THE CENTRAL BANK PRINTING PRESS AND ENORMOUS INDEBTEDNESS, THEN I WILL HAVE NO HESITATION IN ENJOYING THE FUTURE, THINKING ABOUT THE FUNNY MONEY MIRACLE, NEVER NEEDING TO WORRY ABOUT ECONOMIES OR GROWTH EVER AGAIN (all hints of sarcasm entirely intentional)....Real wealth can only be created by innovation and hard work in the private sector, with policymakers, the financial sector and financial markets there to aid and encourage/incentivize. Real wealth is not created by the printing press and by excessive government spending. We simply cannot turn wine into water – after all, if it were that easy, why have we not done this before (with any lasting success, as opposed to abject failure, for which there is plenty of evidence)! " Bob Janjuah, Nomura Securities

Monday, February 4, 2013

Futures State 2-4-2013

Today's big movers thus far are coffee, beans, and natural gas!

The Current State of the Future(s)

Retreat! Suffering Stocks

 This is the biggest stock market slide this year!
from Zero Hedge:
"Slowly things in Europe are starting to go bump in the night again, with the EURUSD down some 150 pips from Friday's multi-year 1.37 high, Spanish bond yields spiking 20 bps to over 5.41%, back over the declining 50 DMA, Italian BTPs getting slammed up some 10 bps to 4.42%, as both Spanish and Italian stocks are sharply down on the day, by 1.2% and 1.9% respectively, following yet another Monte Paschi halt lower earlier in trading."
There will be a lot of profit-taking today! I include myself in that action!

Coffee Collapses, While Soybeans Surge

Coffee has been rising steadily, but over the past few weeks, the commodity is showing significant weakness. Coffee is down 2% today!

Meanwhile, soybeans are showing the strongest gains today! Dry weather in Argentina is affecting the crop there. This sounds familiar!
from Bloomberg:
"Soybeans reached a seven-week high and corn rose on speculation that warm, dry weather will reduce yield potential in Argentina, the world’s biggest shipper of soy-based animal feed and vegetable oil."

Fresh Europe Woes Send Stocks Sharply Lower

Factory Orders Disappoint Markets

Today's December factory orders data came as a surprise to those expecting a whopping beat of expectations in the aftermath of the superficial beat in the Durable data released last week. Instead, the headline Factory Orders missed expectations of a 2.2% rise, growing just 1.8% in December, with the November data revised lower from 0% to -0.3%. Worse news was that Factory Orders ex the meaningless and volatile transportation number (see Dreamliner), rose just 0.2% in the last month of 2012, after declining 0.2% in November. Yet the ugliest number of the day was the year over year change in factory orders ex transports, which is perhaps the best coincident indicator of general business spending, and in line with the non-defense capital goods ex aircraft series from the Durables report. This posted a -0.2% nominal drop in December, the first decline since July. All those hoping that the freeze on capital spending increases will thaw any time soon, can put all such hopes back in carbonite where they belong.

EurAmerica! The Europization of America!

From Confounded Interest blog:

One of the most important measures for housing is employment. And while payrolls are SLOWLY improving,
but food stamps are growing at a much faster rate.
foodstamps vs payrolls
This is from Bloomberg Briefs:
“An ongoing concern is that growth in jobs continues to be dwarfed by the surge in food stamps. During the first 10 months of 2012 there were 1.01 million new additions to the USDA’s Supplemental Nutrition Assistance Program (SNAP), a 2.2 percent increase. During the same period, the number of nonfarm payroll jobs increased by 1.5 million, a 1.1 percent gain.
The results from the end of the recession in June 2009 are even more staggering. The number of food stamp recipients has rocketed 30 percent since mid-2009, yet the number of nonfarm payroll jobs has inched up a mere 2 percent over that same period. Considering the composition of those jobs – in low wage industries – the household sector is clearly suffering.”
The growth in food stamps correlates with the longer-term decline in wages and salaries (as a percentage of GDP).
It is hard to have a traditional owner-occupied housing recovery under these conditions.
Particularly with GDP growth at -0.5% in Q4 2012 and forecast to be +1.5% in Q1 2013.
In addition to the fiscal cliff and the debt cliff, we also have the “Welfare Cliff.”
welfare cliff
Welcome to the Europization of the USA!

The Cost of QE -- Pensions Underfunded

from WSJ:
Ford Motor Co. F -0.54% expects to spend $5 billion this year shoring up its pension funds, almost as much as the auto maker spent last year building plants, buying equipment and developing new cars.
The nation's second-largest auto maker is one of a who's who of U.S. companies pouring cash into pension plans now being battered by record low interest rates. Verizon Communications Inc. VZ -0.61% contributed $1.7 billion to its pension plan in the fourth quarter and—highlighting companies' sensitivity to this issue—Boeing Co. BA -0.47% now reports "core earnings" to separate out pension expenses.
"It is one of the top issues that companies are dealing with now," said Michael Moran, pension strategist at investment adviser Goldman Sachs Asset Management.
The drain on corporate cash is a side effect of the U.S. monetary policy aimed at encouraging borrowing to stimulate the economy. Companies are required to calculate the present value of the future pension liabilities by using a so-called discount rate, based on corporate bond yields. As those rates fall, the liabilities rise.