LONGWave Audio Slides-12-10-12-sub-Beginning is Near
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LONGWave Audio Slides-12-10-12-sub-Beginning is Near
- 1. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 2. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 3. THE BEGINNING IS NEAR LONG TERM – FUNDAMENTALS “EARNINGS PEAKED” Peaked and Being Taken Down By Analysts Market Generals Becoming Fewer & Weaker However: ….Shadow Banking Money Flows, Central Bank Policy & Japanese Election Suggest Onslaught of Liquidity But: QE is not working INTERMEDIATE TERM – RISK “CANARIES SINGING” EU in Recession, ECRI Suggests US Likely there also Bond Bubble to Work Against Equities Surge in Cash Deposits SHORT TERM – CONFIDENCE “HOPE TURNS TO FEAR” UNCERTAINTY & COMPLACENCY – An Unusual Combination PATTERNS – “Of Concern” Divergence of Public and Business Sentiment Fiscal Cliff: The “Holy S#^t Moment!” After the Can Successfully Kicked Down the Road The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 4. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 5. THE BEGINNING IS NEAR The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 6. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 7. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 8. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 9. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 10. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 11. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 12. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 13. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 14. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 15. THE BEGINNING IS NEAR While this is taking place we will find a different scenario in the equity markets. The Fed will not be investing money directly in equities and so the liquidity that has propped the stock markets during the Treasury buying phase and will help at the margin with the MBS purchases is not going to have such a dramatic influence in my opinion as the MBS cash is likely to flow back into other segments of the bond markets and not so much into equities. There is also the American Fiscal Cliff, the worsening recession in Europe, the slow-down in China and the possibility of some political event in Greece, Spain, Portugal or Ireland as the funding nations in Europe get strained and could break during 2013. There is a point I assure you and I think we are verging on it where the people of various nations, under their own strain of recession, just cannot afford the grand scheme of European Union and revolt. The IMF is already getting testy with Greece and when Spain shows up hat in hand, their data is found to be inaccurate and the price tag far past the ridiculous estimations of the EU/ECB then “buddy can you spare me a dime” may fall on deaf ears. It should be noted that during the worst year of the Great Depression, 1933, that America had an unemployment rate of 25% which is exactly where we find both Spain and Greece today. A telling sign of things to come perhaps? Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 16. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 17. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 18. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 19. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 20. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 21. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 22. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 23. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 24. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 25. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 26. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 27. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 28. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 29. THE BEGINNING IS NEAR Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 30. DISCLOSURE STATEMENT AND TERMS OF USE THE CONTENT OF THIS SLIDE PRESENTATION AND ITS ACCOMPANYING RECORDED AUDIO DISCUSSION ARE INTENDED FOR EDUCATIONAL PURPOSES ONLY. This slide presentation and its accompanying recorded audio discussion are not a solicitation to trade or invest, and any analysis is the opinion of the author and is not to be used or relied upon as investment advice. Trading and investing can involve substantial risk of loss. Past performance is no guarantee of future returns/results. Commentary is only the opinions of the authors and should not to be used for investment decisions. You must carefully examine the risks associated with investing of any sort and whether investment programs are suitable for you. You should never invest or consider investments without a complete set of disclosure documents, and should consider the risks prior to investing. This slide presentation and its accompanying recorded audio discussion are not in any way a substitution for disclosure. Suitability of investing decisions rests solely with the investor. Your acknowledgement of this Disclosure and Term of Use Statement is a condition of access to it. Furthermore, any investments you may make are your sole responsibility. THERE IS RISK OF LOSS IN TRADING AND INVESTING OF ANY KIND. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
Notas del editor
- 12-01-12 EARNINGS - Inflation Adjusted Chart of the Day 11-28-12 With third-quarter earnings largely in the booksthis chart provides some long-term perspective to the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. The chart illustrates how earnings declined over 92% from its Q3 2007 peak to Q1 2009 low which brought inflation-adjusted earnings to near Great Depression lows. From its Q1 2009 low, S&P 500 earnings surged to a level that approached its credit bubble peak. Since Q4 2011, however, earnings have gone flat and have actually declined over the past two months. In the end, the latest data has inflation-adjusted earnings making new 13-month lows.
- 11-30-12 AGE-PROFIT DISPARITY - Peak Profits, Trough Wages Corporate Profits Vs. Total Wages 11-29-12 BII find thesecharts astounding. The latest Q3 GDPrevisions show that corporate AFTER TAXprofits in the top left hit a brand new all-time high in the quarter. Another way to look at corporate profits is as a share of GDP which is a pretty decent proxy for profit margins – shown on the top right . Once again, brand new high.On the bottom in BLUE we show total wages as a share of GDP, which has fallen to a new low.Record profits have been squeezed from labor. The question is how much is left to squeeze with TOP LINE SALES now consistently flat to down.
- 11-27-12 S&P 500 - Between 40-70% above pre-bubble valuation normsOverlooking Overvaluation John P. Hussman, Ph.D.Stocks are overvalued, and market conditions have moved in a two-step sequence from overvalued, overbought, overbullish, rising yield conditions (and an army of other hostile indicator syndromes) to a breakdown in market internals and trend-following measures. Once in place, that sequence has generally produced very negative outcomes, on average. In that context, even impressive surges in advances versus declines have not mitigated those outcomes, on average, unless they occur after stocks have declined precipitously from their highs. Our estimates of prospective stock market return/risk, on a blended horizon from 2-weeks to 18-months, remains among the most negative that we’ve observed in a century of market data. On the valuation front, Wall Street has been lulled into complacency by record profit margins born of extreme fiscal deficits and depressed savings rates. Profits as a share of GDP are presently about 70% of their historical norm, and profit margins have historically been highly sensitive to cyclical fluctuations. So the seemingly benign ratio of “price to forward operating earnings” is benign only because those forward operating earnings are far out of line with what could reasonably expected on a sustained long-term basis. It’s helpful to examine valuations that are based on “fundamentals” that don’t fluctuate strongly in response to temporary ups and downs of the business cycle. The chart below compares historical price/dividend, price/revenue, price/book and Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) to their respective historical norms prior to the late-1990’s market bubble - a reading of 1.0 means that valuations are at their pre-bubble norm. Note that outside of the bubble-era, major bull market peaks tended to occur with valuations about 30-50% above the historical norm, while bear markets regularly brought valuations back to the historical norm and often well below that level. “Secular” lows generally occurred at valuations about half the historical norm. The 2000 market peak (which the S&P 500 remains below, more than 12 years later) reached valuation multiples more than three times the historical norm. Presently, on the basis of smooth fundamentals such as revenues, book values, dividends and cyclically-adjusted earnings, the S&P 500 is somewhere between 40-70% above pre-bubble valuation norms, depending on the measure. That’s about the same point they reached at the beginning of the 1965-1982 secular bear period, as well as the 1987 peak. Stocks are far less overvalued than they were in the late-1990’s, but it is worth noting that nearly 14 years of poor market returns have resulted simply from the retreat from those bubble valuations to the current rich valuations. If presently rich valuations were to retreat again to undervalued levels that have accompanied the start of secular bull markets (see 1982 for example), stocks would produce yet another extended period of dismal returns. That prospect certainly isn’t the reason for our present defensiveness, but it’s worth understanding the dynamic that has produced the pattern of market returns we’ve observed over time. The defining feature of dividends, revenues, book values and the 10-year average of inflation-adjusted earnings (the denominator of the Shiller P/E) is that they are smooth and insensitive to cyclical fluctuations in profit margins over the business cycle. In contrast, standard price/earnings ratios generally seem very reasonable when profit margins are elevated, and seem extreme when profit margins are depressed. Needless to say, that is no small risk for investors who are enamored with seemingly “reasonable” P/E ratios based on forward operating earnings (which assume that companies will indefinitely earn profit margins about 70% above historical norms). While we prefer to explicitly model the stream of expected future cash flows in our own valuation work, these multiples can be converted into 10-year total return estimates for the S&P 500 using a fairly “model free” rule of thumb, by associating “fair” value with a 10% prospective return. If we write the normalized price-fundamental ratio as “NPF”, and assume that deviations are gradually corrected over a period of 10 years, we have: Estimated prospective 10-year S&P 500 total return = 1.10/(NPF^.1) – 1So for example, an NPF of 1.0 corresponds to a 10% 10-year prospective return. An NPF of 0.5, which we might see at the start of a secular bull market, would correspond to a 10-year prospective return estimate of 1.10/(0.5^.1)-1 = 17.9%. As a more concrete example, with the S&P 500 price/dividend ratio presently about 43, versus a historical norm of 26, the NPF on dividends is about 43/26 = 1.65. That figure translates into a 10-year prospective return estimate of 1.10/(1.65^.1)-1 = 4.6%. The chart below compares 10-year total return estimates using this rule-of-thumb with the actual subsequent 10-year total returns (nominal) achieved by the S&P 500. While explicitly modeling cash flows generally produces tighter results in our experience, these “model free” estimates have aligned well with subsequent outcomes. It should be evident that smooth fundamentals such as dividends, revenues, book values, and long-averaged earnings can provide a reasonable basis for long-term return expectations. As always, past relationships between fundamentals and subsequent market returns don't ensure the future reliability of these relationships. It’s interesting to note both the broad correlation between the estimates and the subsequent returns, as well as the periods where they don’t match. In general, points where the actual 10-year return on the S&P 500 (SPX10YR_TR) shoots well beyond the projected return are points where the terminal valuation at the end of the 10-year period was well out of line with historical norms. Examine 1964 for example – the actual subsequent 10-year return significantly undershot the expected 10-year return. That outcome reflects the fact that the terminal valuation at the end of the 10-year period (1974) was deeply below the norm, so stocks lost more during that period than one would have expected. Similarly, examine 1990. In that case, the actual return substantially overshot the expected return. That outcome reflects the fact that the terminal valuation at the end of the 10-year period (2000) was dramatically above the norm. At present, the return of the S&P 500 over the past decade – though below average – has actually overshot what would have been expected in 2002. This reflects the fact that valuations today are still well above their norms. Unless we assume that valuations will remain rich forever, this doesn’t portend well for returns going forward. Emphatically, the rule-of-thumb cannot be accurately used with fundamentals like “forward operating earnings” that are sensitive to expansions and recessions. When the denominator of your valuation multiple is affected by cyclical economic fluctuations, the multiple often says more about where you are in the business cycle than where you are in terms of valuation. Likewise, the proper historical “norm” for a valuation multiple is the level that is itself associated with “normal” subsequent returns. We sometimes see analysts using valuation “norms” where nearly half of the data represents bubble valuations since the mid-1990’s. We are now nearly 14-years into a period where the S&P 500 has underperformed Treasury bills. It is lunacy to consider the valuations that produced this outcome as the “norm.” To illustrate this point, notice that while Shiller P/Es below 12 have historically been associated with subsequent returns averaging about 15% annually over the following decade, Shiller P/Es about 22 or higher have been followed by nominal returns averaging only about 3.6% annually over the next decade, on average (the present multiple is 21.2). With little respite, the Shiller P/E has been above 22 since 1995, and the average Shiller P/E since that time has been over 27. To load that stretch into the calculation of the “normal level” destroys the whole concept of a norm: the valuation norm should be the level that is reasonably associated with “normal” subsequent market returns. We remain convinced that stocks are richly valued here. A fairly run-of-the-mill normalization of valuations in the course of the present market cycle would imply bear market losses of about one-third of the market’s value, without even establishing significant undervaluation. Then again, there’s no assurance that valuations will normalize, or that stocks will experience a bear market here. Maybe Wall Street is correct that profit margins will remain forever elevated and The New Global Economy™ will never again witness “normal” valuations on these measures at all. There’s no shortage of analysts who effectively embrace that view by focusing only on forward-operating earnings. Still, it’s worth a moment’s consideration that “secular” lows (which we typically observe every 30-35 years, most recently in 1982, and that serve as launching pads for long-term market advances) have usually been associated with declines in normalized price-fundamental ratios to about half of their historical norms. Such an event even 15 years from today would be associated with an estimated annual total return of just 2.7% for the S&P 500 between now and then. Such an event a decade from now would be associated with a negative expected total return for the S&P 500 in the interim. And while it’s not our expectation, such an event in the present market cycle would make “S&P 500” not just an index, but a price target. [Geek’s Note: The more general version of this rule of thumb is: Estimated prospective 10-year S&P 500 total return = 1.10/([NPF_current/NPF_future]^(1/T)) – 1. So moving from an NPF of 1.4 to an NPF of 0.5 over a period of 15 years would produce an estimated prospective return of 1.10/([1.4/.5]^(1/15))-1 = 2.7%].
- 11-27-12 EARNINGS - 10 Tired Generals Carrying the Market 10 Stocks Account For 88% Of S&P 500 Earnings Growth 11-26-12 Morgan Stanley via BI Presently,just 10 companies are accounting for 88 percent of all of the earnings growth in the S&P 500 this year. Apple, Bank of America, Microsoft, GE, and Google areforrecasted to be one-quarter of the entire S&P500’s earnings growth in 2013,with the top 10 names driving just 34 percent of growthMorgan Stanley's US Equity Strategy team which put this chart together are calling for the S&P 500 to end next year at 1,434.
- 11-29-12 EARNINGS - In a Few Tired Hands 4 Fun Facts On 2012/2013 Earnings 11-28-12 Morgan Stanley via ZHwith downside potential of 1135 possibleof the 20 firms expected to grow earnings faster in 2013 than in 2012, 8 of them will be swinging from major slumps to miraculous gains. It seems that once the fiscal cliff is behind us then the whole world is fixed, equities can initiate ramp-mode, and analysts' expectations have a chance of coming true. Fun Fact 1: These 10 stocks accounted for 88% of the Earnings growth of the S&P 500 in 2012 - so much for diversification...Fun Fact 2: those same 10 names will account for only 34% of EPS growth next year (still 2% of the names accounting for 34% of the growth is remarkable)Fun Fact 3: These 5 firms are forecast to account for 25% of the S&P 500's EPS Growth in 2013!!Fun Fact 4: And the following names will see 2013 earnings growth faster than 2012, some will be entirely miraculous in their resurgence...So, all in all, the numbers remain highly concentrated, highly hopeful, and highly extrapolated... as it appears 2013 expectations have a long way to fall back to reality (as many learned in 2012...)Charts: Morgan Stanley
- 12-01-12 ANALYTICS - PE Expansion Possible, though Likely Temporary On The 'Uniqueness' Of 2012's Equity Performance 11-29-12 JP Morgan via ZHIt appears that this year looks to be a reward to those who stuck to normal investment allocations despite the macro issues in play, and despite low global economic growth.One way to visualize 2012: the red dot in the chart, which shows global GDP growth and equity market returns each year since 1970. There’s normally a connection between growth and equity returns, with the exception of the dots in the box, which are low-growth equity rallies. If we remove post-recession rallies and rallies based on significant interest-rate declines; what we are left with is the conclusion that 2012 is kind of unique: a low-growth year with double-digit global equity returns not based on a recession rebound or a bond market rally.The only other was 1998. Of course, a huge factor this year was the European rescue. What about 2013?Without the usual catalysts for a low-growth rally, a stronger recovery in global growth would probably be needed to generate similar equity returns. As things stand now, the pieces are in place for a modest improvement in growth in the US, China and EM Asia, but less so in Europe and Japan. At first glance, a 3% global growth rate would match up with high single-digit global equity markets returns in 2013.A fiscal “grand bargain” in the US could result in multiple expansion which would drive returns higher. Multiples of 13.6x on the S&P 500 have room to rise before becoming overpriced (at least from a historical perspective).How likely is this “grand bargain”? Recall the Republican Presidential debate in which some candidates pledged to eliminate or seriously constrict the Environmental Protection Agency. A proposal like this2 reflects the fact that after the Budget Control Act, there really isn’t that much non-defense discretionary spending left for politicians to fight over (by 2017, it will be at the lowest level in 50 years). On government spending, the grand bargain is mostly about cutting entitlements, which runs counter to voter sentiment.Source: JPMorgan
- EARNINGS - Overstated Due to the Magnitude of One Time Write-Offs14% Of S&P 500 Earnings Is "One Time Write Off" Vaporware 11-27-12 Zero HedgeWith everyone now well aware that revenues of S&P 500 companies have taken a turn for the worse and are declining for the second consecutive quarter (with well over a majority missing sellside estimates and trimming Q4 guidance), many are wondering: how can corporate EPS continue to grow, even if nominally? Are there really so many people left to be laid off? The answer, to the latter, is no, for the simple reason that it is not layoffs that have driven the upward persistency in corporate earnings. Then what has? Simple: when in doubt, "charge it" - this axiom seems to work not only for cash strapped consumers, but for corporations who know very well that when unable to satisfy earnings estimates using regular way earnings, companies can just write off "one time charges" and get the going concern EPS benefit for such an action. In fact, as the table shown here (I appologize for the detail), a whopping 14% of all 'pro forma' 2012 EPS will be due to "one time write offs" - the highest proportion of total earnings since 2009!What is very clear is that of the 104 in pro forma EPS, a whopping 14% of this, or 14.06, is in accounting "one time write off" fudges which are merely creative accounting ways to get benefit for deteriorating operations, and which never manifest in the form of actual earnings or cash flows.In other words, far from the touted adjusted EPS growth from 97.88 to 104 in 2012, which implies the S&P is oh so cheap at 1400, or under a 14x multiple, when one looks at real earnings pre-write offs which are not and have never been earnings, but are merely an accounting gimmick used and abused by every company since time immemorial, the real earnings in 2012 will be 89, which in turn means that the implied forward PE multiple is roughly 16x at the current market level: above historical average.It also means that in 2012, GAAP EPS will grow by a tiny 2.7%, the bulk of which can be attributed to financial firm's loan loss reserve release, which is also a form of one-time EPS adjustment. Finally, and proving that the real EPS trend has caught up with the decline in revenues, is that Q4 GAAP EPS of 22.00 are going to be down from Q3's 23.29, dashing all hopes of a surge in Q4 earnings net of every GAAP fudge imaginable. And this is how companies perpetuate the myth that all is well on the bottom line, since top line growth is now dead as the twinkie, and only endlessly recurring "one time" adjustments are left.
- 11-20-12 Q3 EARNINGS - Only 30% of firms Beat Revenue Estimates. 65% Beat Earnings Q3 Earnings In One Chart 11-19-12 Bloomberg via ZHA shockingly low 30% of S&P 500 firms beat revenue expectations in the prior quarter and while Bloomberg's data suggests around 65% beat earnings expectations, the in-period adjustment of expectations (analysts ratcheting down earnings as the season progresses) naturally biases this to look rosier. The critical question is - how much more fat is there to cut? With Sales (and outlooks) so weak, how many more jobs need to be cut to meet margin expectations or accounting gimmicks can be found?2013 top- and bottom-line (+13.6% EPS growth) expectations remain magnificent in their optimism – The question is -> do you believe in miracles?Chart: Bloomberg Chart of the Day
- 12-01-12 JAPAN - Negative Current Account a Turning Point Is the Yen Doomed? 11-28-12 Axel MerkBecause of Japan’s massive public debt burden, pundits have called for the demise of the Japanese yen for years. Are the yen’s fortunes finally changing? Our analysis shows that the days of the yen being perceived as a safe haven may soon be over. Let us elaborate.So many foreign exchange (“FX”) speculators have lost money shorting the yen that the currency earned the nickname the widow maker. Indeed, as the yen has had a weak patch as of late, some are already cautioning the trade might be crowded. But we don’t talk about a trade; we talk about a fundamental shift in the dynamics that might finally be unfolding.To understand the yen, consider the earthquakes that hit New Zealand and Japan in early 2011: New Zealand’s shaker caused the New Zealand dollar to fall; Japan’s earthquake, in contrast, pushed the yen higher. In the short-term, earthquakes disrupt economic growth; conventional wisdom suggests less growth leads to a weaker currency. However, economic growth and currencies do not correlate as highly as one might expect. Indeed, everything appears backwards in Japan, and there’s a reason: historically, Japan has enjoyed a current account surplus. As a result, Japan does not rely on inflows from abroad to finance its budget deficit. Despite conventional wisdom, note that when there’s a shock to the economy, consumers save more/spend less, a positive to a currency all else being equal (i.e., in the absence of a current account deficit). In contrast, countries like the United States, or New Zealand for that matter, have a current account deficit; in the absence of growth, foreigners are less inclined to invest in the country, potentially depriving the country of inflows needed to finance budget deficits and, in the process, putting downward pressure on the currency. One reason why U.S. policy makers favor growth over austerity is to encourage inflows to finance the deficit. On that note, the lack of growth in the Eurozone, where the current account is roughly in balance, may be bad for employment, but the euro has managed to hold up reasonably well despite the crisis.In some ways, when a country has a current account surplus, currency dynamics may be counter-intuitive: the more dysfunctional the Japanese government, the stronger the yen appears to have been in recent years. Since 2005, Japan has had seven prime ministers, with another change likely soon. A government with rotating heads suggests a government that doesn’t get anything done. Usually a government that “gets things done” is one that spends money, but Japan could not even get an expeditious rebuilding effort under way after the earthquake struck.However, Japan's current account has been deteriorating in recent years. Consider Japan's seasonally adjusted monthly current account balance below:Japan is doing its part to accelerate the demise of its current account:With one of the world’s highest life expectancies, almost no net immigration and falling birth rates, Japan’s aging population is often cited as the key-long term driver of the country’s deteriorating current account balance. The Japanese retire later than others in developed countries, cushioning the impact somewhat.The main “achievement” after the earthquake was announcing to abandon nuclear energy. Increasingly relying on imported energy is bad news for Japan's current account balance.Rising tensions with China don't bode we'll for trade. Shinzo Abe, Japan's likely prime minister to be is said to potentially escalate tensions further. If correct, we expect Japan's current account balance to suffer as a result.Why does this all matter? After all, the US has had a massive current account deficit for years. The size of the current account deficit represents the amount foreigners need to buy in assets (local financial assets or real assets) to keep a currency from falling. With a current account deficit, Japan's debt to GDP ratio of over 200% may suddenly matter, as Japan may need to offer higher rates to attract foreigners to buy local assets (e.g., Japanese government bonds). The trouble is that Japan’s debt might be unsustainable at higher interest rates. To the extent that Japan has a current account surplus, it doesn't matter whether foreigners buy the yen, but those surpluses have fallen to deficits recently and that trend looks set to continue.Some will argue that it still doesn't matter, as Japan is currently more concerned with negative rates. Our analysis, however, shows that the market does care: in recent years, the yen often appreciated when there was a "flight to safety;" if we use the VIX index, a popular measure of implied volatility of S&P 500 index options, as a proxy for the amount of fear in the market, then the yen should show a high correlation with the index. Below please see the 12-month rolling correlation of the yen versus the VIX index:What the chart shows is that the yen isn't the safe haven it used to be. The yen no longer is the "go to" place when fear is elevated. There might be many reasons for this, but we like to look at it in the context of the current account balance, shown in the previous chart: as the current account has deteriorated, the yen's safe haven status appears to be eroding. The one thing still going for the yen is that Japanese policy makers often don't execute on their talk. For example, Abe's election rhetoric suggests that the Bank of Japan (BOJ) will lose its independence as the government may force it to increase its inflation target of 1% (which it has failed to achieve) to 2 or 3 percent. But the BOJ has failed over and over again to live up to its promises. A side effect of that is that in recent years the BOJ's balance sheet has barely grown (the BOJ has "printed" very little money as one might colloquially say); Japan did its money printing in the 90s.However, it may matter little what the BOJ is up to once the current account deteriorates further. We don't look at these trends as academic exercises, but rather consider the risk of acting versus not acting. At this stage, we assess the risk of not acting to be high and are putting our money where our mouth is.
- 12-03-12 BOND SHORTAGE - Potential Panic Buying As Ayn Rand stated:You can avoid reality, but you cannot avoid the consequences of avoiding reality.The avoidance of reality has overtaken our society. The consequences of doing so have been building for decades and will soon overwhelm us. On our current path, much of what we knew and cared about will be destroyed.Mark J. Grant: It's Me Baby, With Your Wake-Up Call 12-02-12 Mark Grant Out of the Box A great friend of mine and one of the best bond traders on Wall Street said this recently: “Get ready for The Great Bond Shortage in North America. If it has a cusip and it is rated, it is going higher/tighter.” I am down with his observation. The compression in bond spreads since the Fed started all of their “made-up/newly printed money for free” antics is the root of all of this and I do not expect a change anytime soon. There are various estimations for the 2013 net new issue supply in all sectors of Fixed Income but I peg it around $400 billion. Around $800 billion will be paid to bond holders during the year in coupon payments and, if reinvested, will cause a supply deficit of about $400 billion for the year. Exacerbating all of this is the Fed, who will buy around $500 billion in MBS this year and perhaps the same amount in Treasuries which could take $1 trillion out of the market all by itself. Consequently we face a lack of bonds denominated somewhere between $900 billion and $1.4 trillion, depending upon the Fed, which will increase the rolling train of compression, lower interest rates further in all likelihood and cause great angst for investors who will find very little of value left in the Fixed Income markets. Safety; yes but yield; no. While this is taking place we will find a different scenario in the equity markets. The Fed will not be investing money directly in equities and so the liquidity that has propped the stock markets during the Treasury buying phase and will help at the margin with the MBS purchases is not going to have such a dramatic influence in my opinion as the MBS cash is likely to flow back into other segments of the bond markets and not so much into equities. There is also the American Fiscal Cliff, the worsening recession in Europe, the slow-down in China and the possibility of some political event in Greece, Spain, Portugal or Ireland as the funding nations in Europe get strained and could break during 2013. There is a point I assure you and I think we are verging on it where the people of various nations, under their own strain of recession, just cannot afford the grand scheme of European Union and revolt. The IMF is already getting testy with Greece and when Spain shows up hat in hand, their data is found to be inaccurate and the price tag far past the ridiculous estimations of the EU/ECB then “buddy can you spare me a dime” may fall on deaf ears. It should be noted that during the worst year of the Great Depression, 1933, that America had an unemployment rate of 25% which is exactly where we find both Spain and Greece today. A telling sign of things to come perhaps? "We all know what to do, we just don't know how to get re-elected after we have done it." -Jean-Claude Junker
- 11-26-12 CASH DEPOSITS - Largest Weekly Surge A Major Crisis Indicator Just Hit Its Highest Level Ever Zero Hedge via BI When one thinks of America, the word "savings" is likely the last thing to come into a person's head, for the simple reason that the vast majority of Americans don't save: recall that in September the personal savings rate dipped to 3.3%, the lowest since 2009 save for one month.On the surface this makes sense: the average US consumer, tapped out, with more spending than income, has no choice but to max out their credit card, and eat into whatever savings they may have.This is usually as far as most contemplations on savings go. And this is a mistake, because at least according to official Fed data reported weekly as part of the H.6, which lists the data on the various components of M1 and, more importantly, M2, the real story with US savings is something totally different.As a reminder, the H.6 lists the bank sector "liability" equivalents of the components that make up M2, which as most know comprises of M1, or physical currency in circulation at just over $1 trillion as well as Checkable and Demand deposits, amounting to $1.4 trillion, and the various M2 components which comprises of Savings Deposits, the largest component of M2 at $6.6 trillion, a modest amount of Time Deposits, and an even more modest amount of Retail Money Funds.It is the Savings Deposits component that is of most interest. Recall that the primary definition of a savings account is, naturally, an amount of cash parked with an institution for a longer period of time, in exchange for receiving interest (or no interest in the era of The Great Chairman), which also have a limitation on the number of withdrawals: six per month at last check. Savings accounts also encompass the broader Money Market account category, which has a higher floor requirement than an ordinary savings account.At first blush one would balk at the concept of a Savings Account in the New Normal: after all who in their right mind would face the counterparty risk associated with having money in a bank, especially money that has withdrawal limitations, if there is nothing to be gained in exchange, because under ZIRP nobody collects any interest, and won't until the system finally collapses.Well prepare to be surprised.The chart below shows the time progression of the largest Savings Component: total Savings Deposits at Commercial Banks, which at $5.6 trillion in the week ended November 5, 2012, is also the largest single component of M2, and thus broader money stock of the US (accessible source data via the St Louis Fed).The chart above hardly shows any slowing down in cash entering Savings Accounts. In fact, quite the opposite. As we have conveniently highlighted, the historic rate of growth in this category of about $200 billion per year, aka the "pre-New Normal" regime, nearly quadrupled to just shy of $700 billion, with a distinct break when Lehman failed aka the "post-New Normal". That's $700 billion per year entering what the Fed defines as a "Savings Account." And all it took to get everyone to scramble to the uncompensated safety of savings accounts? A near collapse of the entire financial system!This topic alone is worthy of a far greater discussion, because there is a distinct possibility that what the Fed discloses as a "savings account" book entry may simply be a book entry "plug" at the bank level to account for the surge in Excess Reserves into the banking system, after applying an appropriate reserve discounting factor: one way of thinking of M2 is the full lay out of the monetary system using base currency and Fed Excess Reserves and applying a Fractional Reserve banking multiplier. At last check the, multiplier from currency outstanding (1.08 trillion) to total M2 ($10.3 trillion) was 9.5x, in line with the historic ratio of ~10x.A better representation of the very tight correlation between M1, which captures both currency and physical excess reserves, and M2 can be seen on the chart below.As can be seen M1 is M2 just with a multiplier factor of ~4.5x.What has been unsaid so far, is that to Ben Bernanke and the champions of the status quo, money in Savings Accounts would be far better used if it were to be dumped into stocks. After all, the primary reason for the urge by the Group of 30,Tim Geithner,Bernanke and the SEC to crush money markets and to make them even more uneconomical is to pull all the cash contained there and to have it invested into bonds, stocks, and other risky products.The money not chasing yield in this Bond Bubble is money that is being allocated to Savings Accounts, the more Bernanke's attempts to rekindle the "animal spirits" fail. And while this cash is at least on the surface what is known as "money on the sidelines", the flipside also is that should this money ever leave the "sidelines", modestly at first, then all at once, then the Fed's moment of reckoning will come, as that will be the moment when the Fed's ability to keep inflation grounded in "15 minutes" or less, will be thoroughly tested.Paradoxically, Bernanke wants this money to re-enter the risk markets, and/or the economy, but not in a way that leads to hyperinflation. After all there is $10 trillion in electronic "money" in the US system, and only $1 trillion in cold, hard cash available for cash claims satisfaction.All that brings us weekly changes in the amount of cash held in Savings Deposits at Commercial Banks. As the chart shows, rapid, dramatic shifts, characterized by massive inflows of cash into such savings accounts usually coincide with times of great monetary stress: the three biggest episodes in history to date have been the 2008 Lehman failure, the August 2011 Debt Ceiling Crisis and associated US downgrade, and the May 2009 First Greek failure and bailout.Those three episodes represent the biggest weekly Savings Deposits inflows number 2 through 4.When was the largest ever inflow into Savings Deposits at Commercial banks, at $131.9 billion in one week?A few weeks agoWe don't know, but the people who control $5.6 trillion in US commercial bank savings deposits - certainly not the vast majority of the US population who have virtually no money saved up, but the true 1% - just decided to park the most cash on a week over week basis into their savings accounts in history.Perhaps ask them why they did it...Source: H.611-27-12 CANARIES - Cash Going to the Sidelines"The Cash On The Sidelines" Is The Smartest Money... 11-27-12 Zero Hedge GMO, Boston's $104bn asset-management firm, has 'given-up' on the bond market. However, this is not a clarion call for equity bulls, as the FT reports, GMO's head of asset-allocation Ben Inker notes the only time he has held more cash was in late 2007, before the financial crisis. Today's equity valuations, he notably points out, are predicated on today's profit margins being sustainable and he thinks US corporate profits are set to fall - even if growth picks up. Critically, this smart-money cash-hoarder rightly sees the problem as one prominent during the presidential election - that of income inequality. "One of the things that happens as profits grow as a per cent of gross domestic product is income becomes more and more unequal because the ownership of capital is extraordinarily uneven. And there's a natural tension that forms there from a societal perspective." So far, Inker adds, government spending has supported the economy and so profits. But a pick-up in growth requires higher consumption, and the only way to get that is through higher incomes, which must come from profits. So that's where the dry powder is Maria - in the smartest investors' hands.Via FT:But his dislike of fixed income does not mean he is a fan of stocks...Rather, Mr Inker says that he is waiting for better times; forty per cent of a benchmark free asset allocation hedge fund he oversees is in “dry powder”.The only time it has held more cash was in late 2007, ahead of the financial crisis, he says. A tenth of the portfolio is in emerging market and asset-backed paper and the rest is in stocks for want of anywhere safer....However, he thinks US corporate profits are set to fall even if growth picks up, in part because of an issue that was prominent in the presidential election – growing income inequality.“One of the things that happens as profits grow as a per cent of gross domestic product is income becomes more and more unequal because the ownership of capital is extraordinarily uneven. And there’s a natural tension that forms there from a societal perspective.”He says that since the financial crisis, government spending has supported the economy and so profits. But a pick-up in growth requires higher consumption, and the only way to get that is through higher incomes, which must come from profits.... A disorderly break-up of the euro remains the big “undiversifiable risk”, says Mr Inker. Emerging markets are fairly valued but “scary” due to the unknown path for China.
- 11-28-12 PATTERNS - DivergencesJust A Reminder... 11-26-12 Zero HedgeAs you glare hopefully at the critical 1400 level on the S&P 500, we thought a gentle reminder of that vertically challenged relative performance of economic fundamentals would be worthwhile...
- 11-29-12 PATTERNS - Market Not Prepared for Fiscal Cliff Disappointment! Only The VIX Gets The Fiscal Cliff 11-28-12-Scott Barber, BlackRock via BI If you watch coverage of the Fiscal Cliff, you might think that on January 1, the economy is going to go full on Thelma & Louise and crash to its fiery death into a gigantic canyon if there's no deal. Every network is running countdown clocks to the moment the US meets its demise. 38 days! 37 days! 36...But there are two problems with this way of thinking about it. One is that the amount of intransigence in Washington is nothing like it was in the Summer of 2011, when an emboldened Tea Party took Obama to the mat over the debt ceiling. The other problem is that there's time to get into January without a deal, provided that Washington agrees to something fairly early.Who gets that? The market does.Scotty Barber (the brilliant chart maker who used to work at Reuters) posted this great chart at his new perch at BlackRock comparing the VIX (the volatility index) vs. a "Policy Uncertainty" index, which tries to gauge the amount of uncertainty based on certain headlines.BlackrockUnlike virtually every other uncertainty spike since 2000, there's no VIX spike along with a spike in uncertainty.Now you can dispute the validity of an uncertainty index, but the fact that it corresponds fairly well to the VIX is compelling. And the fact that the VIX isn't worried this time speaks to the fact that perhaps the coverage is overhyped.
- R12 - 12-10-12 SENTIMENT: Uncertainty Always Stops Business Investment Trying to Calculate the Cost of Uncertainty 12-05-12 WSJ When it's unusually hard to tell where the economy and government policy are going, businesses will be reluctant to invest and hire. The notion isn't new. It was central to Federal Reserve Chairman Ben Bernanke's Ph.D. dissertation in 1979 and I quote” "Increased uncertainty provides an incentive to defer investments in order to wait for new information," he wrote. With a lot of equations, Mr. Bernanke argued that investing and hiring decisions are hard to reverse. When there is a lot of doubt, businesses wait.But the possibility that uncertainty about government policy might make a weak economy worse is timely. There is growing angst about the U.S. "fiscal cliff," the spending cuts and tax increases set for the beginning of January. There are signs that fears of going over the cliff are contributing to slower business investment and gloomy forecasts about fourth-quarter growth. There are doubts about the longevity of the euro and whether European governments can pay their debts. 1), there is more uncertainty when the economy is bad because that is when governments are more likely to actually do something (for better or worse), so that is when markets are particularly sensitive to clues in politicians' rumblings; and 2), stocks tend to move in unison when there is little clarity about government policy because it is hard for investors to discern which companies will be winners and which will be losers. As the chart on the right of the University of Michigan Sentiment chart shows, Confidence has plummeted since the eelction
- PATTERNS - Volumes Continue to Warn NYSE Volume 11-26-12 Zero HedgeThe lowest Monday-after-Thanksgiving Day NYSE volume since 1996!
- 12-07-12 CREDIT DEMAND - Falling Off Dramatically On The Demise Of Animal Spirits 12-06-12 Morgan Stanley via ZH Just one more QE-episode... growth will come in two quarters, we promise... housing has bottomed... stocks 'signal' all is well. We have heard these 'meme's a thousand times and yet still what is borrowed is given to shareholders and animal spirits (judging by the dismal confidence among small business leaders) remain mired in the quagmire of uncertainty and risk aversion. Nowhere is this more evident than the roll-over (and now falling) demand for new loans across global credit markets. This is not large public companies borrowing at ultra-rich spreads, courtesy of Bernanke's financial repression forcing supply into IG and HY markets, to merely charm pension funds with dividends; this is real demand for credit (per loan officer surveys) all turning down as the balance-sheet-recession continues.Chart: Morgan Stanley
- 11-30-12 PATTERNS - Bear Market Short SqueezeIs November's Epic Short Squeeze Roundtrip Over? 11-29-12 Bloomberg via ZHThe broadest US equity indices began to fall following the 2nd Presidential Debate in mid-October, and stabilized after the 3rd Debate. Weakness was well balanced with the 'most-shorted' names staying in sync with the indices (in a more systemic risk-off manner). Hurricane Sandy appears to the beginning of traders pressing the most-shorted names(we would suspect this was beta chasing on expectations of weakness) and then once the election results were known the most-shorted names really outperformed (i.e. fell considerably more than the index). As the chart shows, just as the Washington 'cone of silence' began, the Russell 3000 had fallen 6% in November (and 8% from the 2nd debate), while the Russell 3000's Most-Shorted Index had dropped almost 10% for the month (and 12% from the debate) for a massive 400bps outperformance. The following two weeks led to today where the most-shorted index has been squeezed 9.25% higher to catch up to the broad Russell 300's performance for the month. As the month closes, the index and its most-shorted names are perfectly in sync and unchanged with one another - thus reducing dramatically the fast-money ammunition for further squeeze potential.The Russell 3000 and its most-shorted names have recoupled after dramatic short-chasing post-election.Chart: Bloomberg
- R12 - 12-04-12 SENTIMENT: Fiscal Cliff Uncertainty Parallels With Debt Ceiling Negotiations (The "Holy Shit" Moment) On The Fiscal 'Cliff' (Not 'Slope') And The 3 'F's Of American Policy-Making 12-01-12 Barclay's and BoAML via ZH Some policymakers (and commentators) are attempting to make a molehill out of a mountain; seemingly less worried about the outcome of negotiations in the short-term, as they believe the cliff is not a cliff, but more of a slope, since economic damage will initially be limited while any equity market sell-off will only spur a resolution. We tend to side with Barclays and BofAML that the full set of expiring measures constitutes a cliff, not a slope. In brief, here is why - automatic withholdings and in Geithner's words "no authority to delay the process." The extent to which households can buffer this higher withholding is significantly weak as recent 'savings' rates have plunged - implying a need to draw on liquid assets to smooth any consumption shortfall. Citing Winston Churchill"You can always count on Americans to do the right thing - after they have tried everything else,"and we remain stoic that stock market weakness and severe outside criticism will be important in forcing any agreement, as the politicians appear to face six signficant hurdles ahead. It seems to us like we are following the same path as last year's debacle - what we like to call the Three 'F's of Fiscal Policy in America... Fear, Faith, and Oh F##K!!Barclays:Given the tight legislative calendar and the two parties’ gaping differences of opinion, we see a strong possibility that policymakers will “go over” the cliff, raising questions about how quickly a resolution can be reached before serious damage is done to economic activity and financial markets.