What We're Reading

Past tense; that is.  A big move is coming in the S&P 500 and it will take everyone’s breath away. Simply put: The S&P 500 has traded in a multi-year consolidation range with a high of 2134 and a low of 1810. A breakout or breakdown out of this range could result in a measured technical move of the height of the range, i.e. 2134 – 1810 = 324 handles. Consequently a break toward the upside would target 2458 (15% above all time highs) and conversely a breakdown would target 1486 and represent a 30.4% correction off of all time highs.

I’ve outlined the bear arguments in detail in Feeding the Monster, so I won’t bother rehashing them here. However, in analyzing the larger market structures an interesting duality is emerging: A fight for control between the historic precedence of earnings and technicals and a very much divergent development in money supply, one of the key drivers behind stock prices since the financial crisis.

This duality can be summarized in one chart:

Speaking for a bre

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actuals and estimates for the current and following periods, please click here>>>

Here are the key points:

•    The Q1 earnings is effectively over now, with results from 492 S&P 500 members already out. Total earnings for these companies are up +13.5% from the same period last year on +7.2% higher revenues, with 72.6% beating EPS estimates and 65.2% beating revenue estimates.

•    These results represent a notable improvement over what we have been seeing from the same group of companies in other recent periods. While growth reached the highest level in more than 5 years, a bigger proportion of companies have been able to beat estimates, particularly revenue estimates.

•    For the Retail sector, total Q1 earnings are up +1.7% from the same period last year on +3.1% higher revenues, with 60% beating EPS estimates and 50% beating revenue estimates.

Before I present the insight on expected earnings ahead, there is one point I wish to make; that being Trump.  If you're not following our President elect on Twitter, you should get with it now.  Some may say it's not "Presidential" to be on TWTR but our commander and chief does what he wishes, and he wishes to scare whomever he can.  At the very least, throw him up as a column on TweetDeck and watch the charts fly when he mentions a name. 

Now while AMZN and GM were formerly expecting good growth in 2017, you will notice that both are now on Trumps radar for taxation and import/export fees which explains their recent trading action.  There seems to be no love lost between AMZN owner Jeff Bezos.  Even Trumps comments on taxation such as “If @amazon ever had to pay fair taxes, its stock would crash and it would crumble like a paper bag." should leave investors more than a tad concerned.  At this point, I feel we'll see quite a bit of this concern over China/Mexico/taxation/tariffs in th

We are into the homestretch of 2016, and the markets have seen strong upside this year, benefiting from the domestic economy's resilience and the election of Donald Trump.

With just four sessions to go, the Dow Jones Industrial Average has been a up a solid 14.4 percent, the S&P 500 has risen 10.8 percent and the NASDAQ Composite is 9.1 percent higher — with all the three major averages trading off their all-time closing highs.

Among the ten S&P sectors, eight have been in the green. Old economy stocks such as energy, material, industrial, financial, utility and telecom are all up by double-digit percentages. Technology stocks are also up decently. However, the healthcare sector has taken a hit.

Though it is tough to replicate the performance of 2016, given the tougher comparisons and the uncertainty around policies amid the political leadership transition, Wall Street does see some opportunities that are compelling.

Here is a compilation of some top picks recommended by Wall Street an

The S&P 500 Financials sector has been a focus sector for the markets in recent weeks. This past week, the Federal Reserve Board increased the target range for the federal funds rate. Earnings for banks and other companies in the Financials sector are particularly sensitive to higher interest rates. In addition, this sector has recorded the largest increase in value (+22.2%) of all 11 sectors in the S&P 500 since the start of the fourth quarter (September 30). Given these developments, have analysts been increasing their 2017 EPS estimates for banks and other companies in the S&P 500 Financials sector over the past few months?

The answer is yes. In terms of EPS estimate revisions, 38 of the 63 companies (60%) in the S&P 500 Financials sector have seen an increase in their mean EPS estimate for 2017 since September 30. At the sub-industry level, the three subindustries that have the largest percentages of companies that have recorded an increase in their mean EPS estimate for 2017 (sin

With “Black Friday” here, the performance of retailers will be a focus for the markets. As of today, which retailers in the S&P 500 are projected to see the highest and lowest year-over-year earnings growth for the fourth quarter? Which retailers in the index have seen the largest upward and downward revisions to earnings estimates for Q4 over the past two months?

In terms of year-over-year earnings growth, seven of the 13 retail sub-industries in the S&P 500 are predicted to report growth in earnings for the fourth quarter, led by the Internet & Direct Marketing Retail (23.6%), Food Distributors (14.3%), and Home Improvement Retail (13.8%) sub-industries. On the other hand, six of the 13 retail sub-industries in the S&P 500 are predicted to report declines in earnings, led by the Home Furnishing Retail (-16.0%), Hypermarkets & Super Centers (-13.5%), and Food Retail (-9.8%) sub-industries.

Revisions to Estimates

In terms of upward revisions to earnings estimates, four sub-industries

A December Fed rate hike, uncertainty regarding the U.S. presidential elections, weak earnings growth, diminished buyback activity and concerns about European banks pose near-term risks to global equities.  Comments in italics are mine.

The summer rally has left equity valuations looking stretched. The median U.S. stock now trades at a higher P/E ratio than even at the 2000 peak. The Shiller P/E ratio stands at 27, but would be 37 if profit margins over the preceding ten years had been what they were in the 1990s. The fact that interest rates are low gives stocks some support, but with the Fed likely to hike rates in December, that tailwind will begin to fade.

Lackluster earnings growth remains another concern. S&P 500 and economy-wide profit margins have rolled over. Granted, the collapse in profits in the energy sector has been the major culprit, and this headwind should wane if oil prices edge higher over the next 12 months, as we expect. Nevertheless, faster wage growth and a f

This week’s EVA brings the second edition of our new Random Thoughts format. The goal with this approach is to cover several key, but often unrelated, topics in a quick overview fashion.

In this issue, we are looking at, once again, the powerful financial force known as credit spreads.   Fortunately, they are not indicating financial stress at this time. We are also examining the supposed truism that this is one of the most detested bull markets of all time. Then, we wrap up with a look at the Fed’s and Wall Street’s forecasting track record (hint:  both make a dart-board look good!).

As always, your feedback is welcomed and appreciated.

RANDOM THOUGHTS

When the spread isn’t the thing. One of the themes this newsletter has emphasized most heavily this year has been the importance of the spread—or difference—between government and corporate bond yields. As we have repeatedly cited, when that gap is widening in a pronounced way bad things tend to happen both to the economy and financial

Another one that says what could cause a collapse; of course they never say "when" it will happen.  Another reason to remain cautious and take winners where you can.

According to CNBC, the S&P 500 is close to its record high as earnings season heats up, but one of the major drivers of the market's advance - stock buybacks - looks to be sagging.

U.S. companies announced about $182 billion in buybacks in the first quarter, according to Birinyi Associates research, putting buybacks on pace for their weakest year since 2012. Strategists link this, in part, to falling cash flow, a trend that is expected to worsen in coming quarters.

First-quarter earnings per share are expected to fall 7.8 percent, but more importantly for the outlook for buybacks, revenues are set for a fifth consecutive quarter of decline. Thomson Reuters data forecasts a 1.1 percent revenue drop.

Cash flow is a better indicator of buybacks prospects than earnings, as per-share earnings can be managed through cost-c

Of course, no where does it say how long this can continue but it's important to be aware. No, it can't go on forever.

We are now entering earnings season once again. Pre-announcements have been the second-worst seen over the past decade.

This has analysts lowering estimates. In fact, they’ve been lowered so far quarterly earnings now look to fall all the way back to 2009 levels.

For the trailing twelve months earnings are now back to 2011 levels…

…even while stocks remain 75% above their own levels from back then. Taken together you get a price-to-earnings ratio of 24, higher than any other time over the past several years.

It should go without saying that extreme valuations and falling earnings are not a bullish recipe for stocks.

So the fundamentals are not supportive of higher prices. What then has been driving them higher in recent weeks?

And the greater fools are none other than the companies themselves…

…for now. If earnings don’t turn around soon (and corp

"Just setting up my twttr" – those were the words that Jack Dorsey, founder and CEO of Twitter, tweeted on this day ten years ago to begin yet another social media success story. Twitter, with its simplicity and unique 140-character limit, hit a nerve and quickly gained a following among the tech- and media-savvy. In 2011, Twitter passed the 100-million user milestone and in late 2013 the company went public with huge fanfare.

Everything was well in the Twitter universe, but soon after the company’s successful IPO, the sentiment turned sour. Twitter’s user growth was tapering off quickly and the company continued to lose money. In 2015, Twitter’s share price began to tumble and has been on a downward trajectory ever since. It is becoming increasingly clear that, contrary to earlier projections, Twitter is not a second Facebook and probably never will be.

When Facebook celebrated its 10th anniversary a little more than two years ago, the company was much bigger in almost every aspect.

Investors may wade into unknown territory next month as the Federal Reserve readies the first rate hike in nearly a decade amid a corporate earnings recession.

S&P 500 earnings are on track to close their first reporting season of negative growth since the Great Recession and estimates call for sub-zero growth in the current quarter as well.

Even if the trend reverses next year, as expected, a Fed rate hike in December could mark an unprecedented conflict between a tightening cycle starting at the same time as earnings fall into recession.

"We can't think of any instances when the Fed was hiking during an (earnings) recession," said Joseph Zidle, portfolio strategist at Richard Bernstein Advisors in New York.

"In the last six months one can point at a lot of different things. But if you think about fundamentals, falling corporate profits and the threat of rising rates" are behind the market stalling, Zidle said.

With more than 90 percent of S&P 500 components having reported, S&P 500 e

This U.S. earnings season is on track to be the worst since 2009 as profits from oil & gas and commodity-related companies plummet leaving many to wonder, is the worst behind us or is there more to come?  Is China's growth story over or taking a 'rest'?  We've lived on ghost cities creating demand for so many years; where is the next growth story?

So far, about three-quarters of the S&P 500 have reported results, with profits down 3.1 percent on a share-weighted basis, data compiled by Bloomberg shows. This would be the biggest quarterly drop in earnings since the third quarter 2009, and the second straight quarter of profit declines. Earnings growth turned negative for the first time in six years in the second quarter this year.

The damage is the biggest in commodity-related industries, with the energy sector showing a 54 percent drop in quarterly earnings per share so far in the quarter, with profits in the materials sector falling 15 percent.

The picture is brighter for the telec

The majority of sector ETFs closed their week below their 50d with energy having filled the gap.....and found sellers waiting there.

SPX itself found sellers at $2100 (clearly we weren't the only ones selling) which is 17x earnings.  More and more are accepting reality that earnings have dropped the most in six years and the Fed (with no QE) will most likely begin to slowly raise interest rates in September.  Don't believe me, just ask Barclays.

• US dollar found buyers at the 10week sma, prior support.  Yes, they're taking profits.  Will it continue?  It's nonetheless weighing on U.S. earnings.
• China allowed further stocks to be shorted and talked of tightening margin lending.  They hit the sell button.
• Utilities are being held by their 50d - won't raise much if rates are going up.
• Transports are being held by their 20d bu the 50d is just overhead; waiting.
• For months money has been flowing into overseas markets searching for yield.
• Not to Greece though (although Putin le

Stock repurchase programs as well as dividends, are a great way to "return value to the shareholder" and also a way to "prop up" a stock price or keep funds in the game.  Unfortunately, nothing lasts forever and repurchase programs are unsustainable longer term.  At some point the market must heed the fundamentals, earnings growth and if margins contract, the positive effect of buybacks is lessened.   This from one of my favs, Variant Perception

Companies would expect their investment firm, especially management and Senior members, to not only dissuade insider trading, but to lead by example.  Here's a complete failure.

Case in point Mr. Michael Anthony Dupre Lucarelli.  The Director of Market Intelligence at a Manhattan-based investor relations firm.  Market Intelligence?  Serious oxymoron going on there?  Maybe not an oxymoron such as "honest politician" or "almost pregnant" but snake in the grass, no doubt (allegedly).

Today the SEC charged the "Director" of insider trading by more than a dozen clients.  The charges were filed against Mr. Lucarelli alleging he garnered nearly $1 million in illicit profits.

An SEC investigation and ongoing forensic analysis of Lucarelli’s work computers uncovered that he repeatedly accessed clients’ draft press releases stored on his firm’s computer network prior to public announcements.  The SEC alleges that Lucarelli, who had no legitimate work-related reason to access the draft press r

"The stock market is overvalued." "The stock market is undervalued."

Which one of these statements is true?

Both are, thanks to quirks of the most popular way of measuring a stock's valuation: the price/earnings ratio.

While no one disagrees about what the "P" is when calculating the ratio, there is no consensus on how to define earnings-per-share. One of the biggest points of dispute: whether to use analysts' earnings estimates for the coming year or reported company earnings from the previous 12 months.

Comparing ratios calculated in these two ways is little better than comparing apples to oranges, according to Cliff Asness, managing partner at AQR Capital Management, an investment firm with $84 billion of assets under management. In an email, he went so far as to say that those who compare P/Es in this way are engaging in a "sleight of hand," though he allowed that many may "not be aware of the mistake they are making."

Consider the S&P 500's current P/E based on trailing

In an economy where a good percentage of jobs being added are part time or earning $7.50/hour, I always wondered when the spending would slow, or at least corporations' efforts to hide it from their earnings line via internal re-organization, share buybacks, exhausting inventories, etc would run their course........and that time may be upon us.  Consider that MCD is already running their wildly famous "Monopoly" game now, in July rather in it's typical October/November slot and you get an idea that they're doing whatever they can to rustle up business.    24/7 Wall Street is wondering if the party is over as well.  My question now is who's next?  Mid-level retailers?  Leisure and activities? 

After McDonald’s Corporation (NYSE: MCD) posted a disappointing company earnings report we can only yet again consider that perhaps the easy money has been made in the casual dining sector. Many of these stocks have run up and done incredibly well since the end of the recession and now the privat