By Mark St. Cyr
It’s official: all the markers of manias both past and present have now been surpassed.
NASDAQ™ new highs? Check. All major Indexes both in actual terms as well as adjusted for inflation? Check. Earnings reports being enthusiastically reported as more “beats” than misses? Check. How about employment data? Yep. Within statistically accepted range of near full employment. How about all the macro data? Is it supportive of such a move? Absolutely! And getting better with each release. For Bad is now good, and worse is – excellent!
All of the above sounds great to the uninitiated person on the street. The only problem is as you may now understand the real truth is: that specious (i.e., superficially plausible, but actually wrong) has replaced true/truth – as fact. And in my opinion not just superficially. It now seems how most, if not all financial matters are reported. At all levels.
It is in this context that explains why the average person as well as rudimentary “investor” in some 401K plan is both confused by what they hear, as well as disinterested. The default position when it comes to topics such as these (i.e., data deciphering) is to not pay any mind and just “hope for the best.” There’s no greater example of this than the unopened 401K statement that arrives in the mailbox.
In times of distress, market gyrations, confusion and more. The default thing to do by nearly all “passive investors” is to – not open the envelope. Using this frame of reference it should leave no wondering why channels like CNBC™ aren’t tuning in viewers, but actually turning them off. So let’s take some of the opening paragraph and put the implied references against the true meanings of what has been reported thus far.
The indexes have all once again hit “never before seen in the history of the markets” highs. Once would infer that the economy should then be tearing along at a pace relative to such strong “market” forces. Yeah, not so much.
One would think an “earnings beat” would mean just that: beat because they earned more money than projected. No. You “beat” because of financial engineering. i.e., GAAP vs Non-GAAP. This is where “fake it till you make it” takes on a whole new level of meaning in the corporate world.
Take Amazon for example. Earnings? You mean as in make money over and beyond operating expenses where net profits are the end all be all measurement of success? I would answer that with: “Why start now?” Nearly two decades later since becoming a public company, reporting less than expected losses has now morphed into some meme resembling “They killed it this quarter! They’re raking it in.” But (and it’s a very big but) the story and narrative doesn’t stop there.
Again, nearly two decades later the “analysts” across the financial media are touting why; not only can their stock price go even higher bypassing the Moon, Mars, and any other near galactic measure straight towards Alpha Centauri. It will do this because of the realization the “profits in their retailing efforts aren’t as profitable as their profits in their web services. And that will mean more focus to the web service side.” Wait…What?
First of all one must ask: What profits in retailing? Maybe it’s just me, however, I don’t recall a profitable earnings release in the way I as a businessman understand profits to be. i.e., sale price – minus all costs – resulting in a net profit. All I’ve ever known or heard is, “They only lost X this quarter instead of Y.” And now nearly two decades later the meme is turning to, “Yeah, forget about all that “retailing” stuff. The Cloud is where they’re gonna kill it! Just you wait and see!”
Well, we’ve been waiting two decades for retailing, they’re already a decade into the web service thing, I guess we’ll just have to wait another decade to see. Because if what they reported for “retailing” is true: It’s last twelve months bottom line is now negative $406MM. The worst since 2001. And what did the share price do on all this “bad is now good news” do? You guessed it. Never before seen in the history of the company as well as markets new high. Alpha Centauri – here we come!
This is not to pick on Amazon. As a customer I have nothing but accolades. However, on a stock price and the financial market reporting of that price and how and why it got there? Please, pass the unicorns and rainbows to the next in line. I seem to be a little full. And they do! Going right along dishing it out as in touting next how Facebook™ – is now “killing it!”
Facebook from what I garnered added more “eyeballs” this report than last report. What I didn’t see was based on GAAP numbers was if they made and kept more “net profits” this time than last time. And if “net Income” means anything. Via GAAP Q1-2015 was $512MM. That’s down nearly $200MM from the prior. Or, said more succinctly: nearly a quarter of a BILLION dollars less than the previous report. (I use the BILLION reference because in Silicon Valley, millions is for paupers, Billions is what you need to be garner attention.)
And not to seem like I’m “cherry picking” numbers, for it is true Facebook’s Q4 reports are normally greater than Q1 I’ll use Q1 of 2014. Surely they must be making more money with more eyeballs 12 months later no? No. Q1 2014 $642MM. via reported GAAP.
Wait, that means revenues are over 1/10th of a BILLION dollars less than the prior comp? Yes they are. Unless you want to use Non-GAAP. There you can make $512MM into $1.189 BILLION just by adding some unicorn tears. To me, Silicon Valley’s tagline should resemble something along the lines of: “Hacking – it’s not just for coding anymore.”
And the stock price? Well, it’s still high, but it seems it may be needing some additional rainbow magic before Wall Street finally realizes or further contemplates: If eyeballs are the resource to sell more ads to advertisers. Then why isn’t an increase in eyeballs generating corresponding increases in profits?
Unless, those eyeballs are growing from more unemployed users with more time than money to waste on Facebook. Or worse: All those new eyeballs – are newly employed eyeballs whose job is to “click”, and “follow,” and “like” etc., etc., pages or stories on Facebook. Just something to contemplate. For after all, if “eyeballs” is the true metric of success: Why is Yahoo™ struggling? Or better yet, Alibaba™? Yet, the NASDAQ? Onward towards Titan while singing the line “and the band played on…”
The S&P 500™ and the DJIA™. You guessed it. Here too the phenom of GAAP vs Non-GAAP plays out. One look inside a report or listening to a conference call like that of the bell-weather of global economic health Caterpillar™ and one sees nothing to write home about. Unless you’re writing letters of caution.
However, just like the tech index these are also hitting gravitational release heights. And how is this being accomplished? Again: Easy, bad news is not only considered good. It’s now empirically: excellent! The worse the macro data reporting of the economy in both data as well as meme – the more hardened the notion the Federal Reserve wouldn’t dare raise interest rates this coming June.
You see, we’ve decoupled from anything resembling true economics long ago (which people like myself were and still chastised for even suggesting) and now it’s routine for both the financial, as well as main stream media, to allude that the “fundamentals” for the markets to continue rising has nothing to do with “true financial health and measurements” it’s all about: “whether or not the Fed. will or will not raise rates.”
I guess even they can no longer control themselves from laughing out loud when they have to try to and speak to the meme “This market is rising based on fundamentals.” (I can’t type that myself without snickering)
U.S. Macro data as of today is the worst it’s been since the preceding days of the market crash bottom in early 2009. The markets of today based on data that’s the worst in 6 years – have now nearly tripled! From 700-ish to now over 2100.
Yet, being at this level one would think we’re still proceeding on this “space shot” in a straight line as we’ve been over the last half decade since the market bottomed. No, in some respects we seem caught in the gravitation pull of “reality” that many of the scientists tell us “fundamentally speaking” is just a theory. However, in truth it’s trying to reassert as to prove – it’s the Keynesian mad scientists that are not basing facts within reality.
As we edge higher there’s no acceleration of momentum, just residual. Volumes are not increasing, they’re dwindling. Professional traders and more are leaving the markets. The “pits” at the exchanges that were once the lifeblood of the markets have more in common with pitiful when it comes to describing activity within them. So much so the CME™ closed many in one fell swoop just this year. The S&P large contract pit housed at the CME where everyone references in their mind’s eye when thinking about Wall Street and what takes place in those pits now routinely has less than 75% of the participants interacting. All this when the markets are at the highest. Sorry – something is fundamentally wrong with this picture.
Oh wait, maybe this picture shows the new “fundamentals” of today’s markets. Below is a chart of where we are, how we got here, and how we’ve been able to stay whenever the market has hiccuped. (chart source Bloomberg™ via screenshot at ZeroHedge™)
Welcome to today’s example of “one picture is worth a thousand words.” Where the new fundamentals are, what we were told, are not. i.e., The only reason why these markets are trading at these levels is based solely on the fundamental fact the Fed. is the one holding it up in its entirety.
It doesn’t take a rocket scientist to look at the above chart to interpret escape velocity based on macro data was rejected and began falling back to ground speed precisely at the time the realization of QE was indeed not only going to end – but did. Only to be saved with the now famous (if not infamous) “stick save” supplied by St. Louis Federal Reserve President James Bullard when he quipped the Fed. was open to initiating another round of QE if needed.
Since then we’ve regained the “umph” needed to overcome stall speed and subsequently every time the rocket boosters seemed to be failing another Fed. official has come out in a press conference, interview, op-ed, ___________(fill in the blank) to state in one form or another “don’t worry, be happy.” And the markets have shrugged off all other implications for bad data and now the interpretation is: Bad is good, and worse is Excellent!
Although, if one is to take a second gander at that chart another funny thing is also revealing itself. For all the talk and now open speculation that we could see a NASDAQ 10K in the not so distant future. Over the last 7 months since that Sept. 2014 peak – we really haven’t gone that much further.
I mean, all these gyrations and we’ve only traveled a mere 100 S&P handles in over 7 months? We used to travel that distance in month! What changed? Did something “fundamentally” shift in the markets to cause such a slowing? Yes it did.
Welcome to the first Qtr. without QE. And so far, it’s been nothing more than questionably pathetic if not out rightly so. And this market bubble has shown the only way its going to remain at these heights for much longer is another infusion of “hot air” from the Fed.
The market just better hope the Fed. doesn’t believe all the financial media hype. Because if they do: a raising of interest rates of just 1/4 of 1% has the implications of taking this hopium filled market – and turning it into a lead balloon filled with cement faster than a HFT can spoof a buy or sell order.
© 2015 Mark St.Cyr