Call me a nut but I remain a bit mystified by how much the news flow does not appear to be matching the earnings flow. Sure – pace of growth overall is lackluster (cloaked by energy for another 2 quarters). Most appear to have chosen to overlook this rather obvious item.
A grand majority of those reporting so far are beating estimates and more than expected are even raising guidance – hence the reference yesterday to forward earnings starting a slow move upward.
BARRON’s this weekend included a survey of “experts”. To suggest they were potentially sedated when being questioned would not be far-fetched as the lack of excitement filled the air – or should I say page?
Seems a thin margin feel bullish – 38%. Meaning nearly 2/3’s are more bearish and neutral. (By the way, for the newcomers, neutral is German for “I have absolutely no clue.”) Add this to capital flow data and rampant money still choosing ridiculously low yields and you get the clear sense the world awaits the next shoe – repeatedly.
Did I mention that we are now back to within a few percent of all-time highs?
These summary numbers will change since hundreds more will report this week in the peak week of earnings season, but here goes:
With over 26% of S&P 500 companies reporting Q1-2016 results, the surprise metrics for revenues and earnings are better than at the comparable point of the Q4 season (read: the pace of being cloaked by the energy sector is dissipating).
The y/y growth comparison for earnings and revenues has deteriorated q/q, but that was not unexpected, and comparisons should improve as the year progresses.
Just over 130 companies in the S&P 500 have reported as of last evening. A surprising 76% exceeded industry analysts’ earnings estimates by an average of 4.7%. When adding in the energy side, they have averaged a y/y earnings decline of 4.3%.
While poor, Dr. Ed reminds us it is better than the same time period in Q4-2015, “when a lower percentage of companies (69%) in the S&P 500 beat consensus earnings estimates by a smaller 2.4%, but y/y earnings growth (1.4) was higher.”
For revenues reported, 58% beat sales estimates so far, coming in 0.4% above forecast and 0.2% lower than a year earlier. That’s also better than Q4’s comparable results of 49% above forecast, which missed estimates by an average of 0.3% and rose 0.8% y/y.
As covered in previous notes, results continue to benefit from buybacks. Share count data from Dr. Ed and his team covering the reporting companies with data so far “reveals that 80% of them reduced their shares outstanding y/y–higher than the final Q4 figure of 69%–and 29% did so by more than 4%, also above Q4’s 26%.”
With nearly 40% of the S&P 500 companies releasing Q1 results this week, the quarter is off to a pretty decent start.
Swift and Deep
The year started off the worst than any in decades we were told. Panic hit quick and filed short-term investors out the door as sellers overwhelmed the place for weeks. We had suggested this was very likely as DEC notes were made and cash levels were prepared. That never makes it fun to watch however.
Today it remains clear that the ’08-’09 collapse drove significant and deep fear into the marketplace – from investors to CEO’s. It merely takes a week or so of red ink to come to the surface.
Cash hoarding is now popular and so is rabid demand for low-yielding bonds. Heck, France just last week sold a 50-year offering at under 2.00% and it was oversubscribed. If you are scratching your head – don’t fret.
There is a fix.
Long-time investors with their eye on the proper horizon know the fix for fear is higher prices. Steadily – as prices have risen back from the depths of the panic we began the year with – doubt, anxiety and bearishness have all grown with the recovery!
While the data flowing in are better than expected, I still have this nagging feeling we have another window of opportunity arising. I could be wrong and the market fools us all by continuing its slow but steady trek up the never-ending mountain.
I stand by the idea that IF we can get a sell in May event and tie it into a summer swoon, all the better.
I suggest that because like we stated in late 2012, we are heading towards another one of those periods where we may find significant corrections to take advantage of will become (surprisingly) fewer and farther between.
We have all seen this chart above in various forms. It has been deemed the cycle of emotions investors go through – most often noted at bear market lows – and depicting how the psychology forces them out of the markets very close to or on the lows – only to be filled with regret.
It is this cycle – the moving from “what is not working” to “what is working” (French for buying high and selling low) – which drives the long-term results seen by the average investor. Multiple research reports continue to suggest the public sees roughly 30% of what the market actually delivers over lengthy periods of time.
That noted, the chart can also depict the cycle of emotion when the masses miss rallies as well. I suspect in time, this will become the accepted view of the rally off the most recent lows.
Bottom line: Let’s pray for another panic.
Speaking of Panic
I posted the latest TIME magazine cover about the US being insolvent in your notes last week. It trotted out the same research that I have read – since I began in this business in 1982.
In a nutshell it states that the US has been going broke for, well, since it started. It is sort of like saying you start dying the moment you are born. I suppose that is technically correct but how bizarre is that for a way to live?
The point is this: it is always fun to talk about debt levels – but everyone always leaves out the assets. By day’s end, there will be a research piece posted in your Member’s Area for review on the specifics.
…let’s cover two items which notoriously seem to invite continuous coverage whenever we are waiting for the next monster to appear.
It is almost as though producers ask their associated producers if there is any panic to report. If not, the age old answer is, “OK, then let’s do something on the US going broke and how we will all perish because of government debt….”
So here goes:
The debt story usually says:
The US government can’t afford the interest on the national debt – and,
China, Russia, Europe (pick a foreign country and enter name here) might sell US government bonds, crashing the US bond market
The first one is always trotted out to scare us when the news reel is quiet. The short answer is that the US government can completely control the cost of its debt if it so desires. (the long answer is in your Members research section)
It could choose to issue 30-day paper at a miserable number of basis points above zero and investors would scoop it up, so long as we’re not in an inflation crisis. The main point? The US government can completely control the cost of its debt by altering the duration of its liabilities and rolling them over. Not very sexy right?
As long as this paper is expected to be repaid at par (which in my 33+ years at this, has been written about a million times but never really been remotely in doubt), there’s no reason to expect cash holders to forgo the extra interest the US government is guaranteeing them.
We all know by now the press too often appears to confuse a solvency crisis with an inflation crisis. One is always a potential threat, while the other just does not apply in cases where you have a sovereign country which has its own bank and printing press. The gold bugs love this by the way.
The second point above – also rolled out often – sounds really scary and catches a lot of attention. Just months ago the score was “China is going to rule the world and their currency will take over the US Dollar.”
Yea – uh, no.
I recall hearing the identical language in the late 80’s when Japan was buying everything in sight. We bought it all back later at half price – or better. They too did not rule the world.
As sexy and scary as the media makes it sound, the US government doesn’t rely on foreign governments to drive demand for bonds. As I have read in many articles, this gets the causation backwards.
Other countries/trading partners end up with dollars because they run trade surpluses with the US. (What they do with those dollars is completely up to them.)
They can choose to leave proceeds in cash, or they can choose to earn interest. If they decide to sell their holdings or forgo that interest premium, then that’s their loss.
But what they won’t do is stop demanding US dollars. They will continue to want those dollars as a function of their trade with our consumers.
As such, when one pauses to think, it makes no logical sense to argue that demand for bonds might dry up when the very demand for those bonds comes from the high demand for dollars via trade with us.
In closing, let’s be clear, a sovereign currency issuer can default. We have covered that before in your notes.
The concerns raised in the latest TIME piece however, are like the many others we have been forced to read: they are not legitimate concerns.
They are taking story-telling and pushing the realities out of context – for getting attention.
And it works.