With first quarter's earnings season launching into full swing it is interesting to see just how many companies are beating earnings expectations. Of course, these are the current downwardly revised earnings expectations that are being beat, but they are beating them nonetheless. However, if we just stepped back to the 4th quarter of 2014 and used THOSE expectations, well, with 100% of companies missing earnings the markets would likely not be quite as chipper.
Like I have said previously, the "beat the earnings game" is quite laughable in reality as it is the equivalent of "moving the target to the arrow."
Don't misunderstand me, I do understand the "need" for predictions as it supports the emotional biases of greed and speculation. However, logic suggests that a return to making investment decisions based solely on trailing reported earnings might somewhat reduce the ongoing "boom/bust" cycles that have devastated investors over the last couple of decades.
But I digress. The point I wanted to make about earnings versus revenue is this. Operating and reported earnings have turned sharply lower over recent quarters which has historically been associated with major market peaks. As shown below, it is also important to notice that revenue has tended to lag these downturns in earnings previously. This is because the measures used to substantially boost profitability from each dollar of revenue generated through accounting gimmickry, share repurchases, and cost cutting are finite in nature. When the effect of those manipulations fade, so does the inflated profitability generated from each dollar of revenue.
This will be something worth watching closely over the next few quarters particular as the commentary of a "continued secular bull market" continues to hit the headlines. The reality is that with earnings deteriorating, the economy weak and valuations elevated the outcomes of investments made today are likely to be far more disappointing than currently expected.
That is the context around this weekend's reading list which is a literal "soup" of thoughts and ideas that explore the markets, earnings, rates and investing in an effort to determine what is likely to happen next.
HEADLINE OF THE WEEK: Nasdaq To Hit 10,000 By 2016 by Shawn Langlois via MarketWatch
1) Asset Correlations Make Market Riskier Today Than Before by Sam Ro via Business Insider
"The degree to which securities move hand-in-hand is measured by correlation. A correlation closer to +1 implies more of a dollar-to-dollar move in prices.
According to a new study from the IMF, correlations in general are much more elevated these days than they were before the financial crisis. In other words, there are fewer places to hide in the markets when the markets start tanking. Check out the red bars in the chart."
Read Also: Smart Money Options Indicator Is Bearish by Dana Lyons' Tumblr
Speaking Of Bearish: Tax Receipts Are Flashing A Warning
2) Welcome To The Casino by David Stockman via ContraCorner
"Zero Hedge recently revealed that $5.3 trillion of government debt trades at subzero interest rates. In today's fiscally profligate world that is a thundering tell. What it signifies is nothing less than financial regime change. There are no markets left in any meaningful sense of the word—–just a raging casino infected with the madness of the crowds and the central bank pied pipers who mesmerize them."
Read Also: 10 Things That Could Derail The Market by Jeff Reeves via MarketWatch
3) Q2 Dividends: US Economy Still Contracting by Ironman via Political Calculations
"Here, we've previously identified that the U.S. economy may be considered to be comparatively healthy when no more than 10 companies take the step of cutting their cash dividend payments to their shareholding investors in a single month. If more than 10 companies take that action during a single month, those collective actions are sufficient to indicate that a significant portion of the private sector of the U.S. economy is experiencing recessionary conditions, where the nation's GDP growth rate may be described as sluggish.
More recently, we've determined whenever the number of companies acting to cut their dividends in a single month rises above the 20-25 per month mark, it is likely that a significant portion of the U.S. economy is in outright contraction, where it is possible that the U.S. economy as a whole may be also be experiencing negative growth. We list the threshold for economic contraction as a range because we don't have enough data as yet to refine where the threshold really falls."
Read Also: Bull Market Fatigue by Dr. Ed Yardeni via Dr. Ed's Blog
4) How Bubbles Impact Future Returns by Ben Carlson via Wealth Of Common Sense
One of the most interesting aspects of asset bubbles is that they pull returns forward from future years. Or on the flipside they lead to lower returns for a number of years when you invest closer to the peak. The NASDAQ was down 80% after the tech bubble burst following the nearly 500% performance during the last 5 years of the 1990s.
What the perma crowd fails to tell you is that the only thing these numbers tell you — both above and below average — is that the markets are cyclical and come with risks to both the upside and the downside. Patience can be a great equalizer in the financial markets, but it usually has to be measured in decades, not just years."
Read Also: How To Trade Like Druckenmiller, Soros & Rogers by Jesse Felder via The Felder Report
5) The Humility of Rates And The Arrogance Of Equities by Michael Lebowitz of 720 Global
"The U.S. economic growth rate has been trending lower since 1950. The current growth cycle, as illustrated in the chart above, reflects further deterioration of this trend as today's economic growth rate is merely peaking at levels that were previously deemed recessionary (compare current growth rates with prior troughs in growth). This is troubling when one considers the unprecedented lengths to which the Federal Reserve (Fed) has gone to reverse this trend. It is not by any measure unfair to say that the monetary policy approach taken since the great recession introduces serious doubts about the efficacy of the central banks actions and leaves a lot of unanswered questions about the ultimate consequences of their actions.
We are certainly better off, so the argument goes, given the measures the Fed has taken, than we otherwise would have been. The flaws in this justification are two-fold. First, it abjectly fails to consider what might have been in the longer term had we not taken the easy route or as some say "kicked the can down the road". Second, it does not respect the risks the economy has assumed and the potential repercussions yet to manifest."
Read Also: The Negative Yield Matrix: Red Or Blue Pill by Charlie Bilello via Pension Partners
If US Stocks Are Expenssive, How Do I Protect Myself? by Meb Faber via Meb Faber Research
"First observation is that when US stocks go down, all stocks go down. It doesn't matter if you are small cap US, foreign developed or emerging, the high correlation means you all suffer.
Bonds of all flavors do a good job, but you can only count on them a little more than half the time. Good ol' 10 year US bonds had the highest median return of any asset during stock drops, However, the lower maturities have a higher hit rate, and of course cash is king with a perfect batting average, but doesn't do much to diversify and zag when stocks zig.
Commodities are a coin flip, but also had a monster -28% month, so also volatile (ditto for gold). REITs, being stocks, don't help."
Corporate Profits Are Vaporizing by Jim Quinn via The Burning Platform
"Hussman explains how corporations have been able to maintain record level profit margins. They've done it on the backs of taxpayers and the working class. The government transfers and increase in consumer debt (student loans & auto loans) have filled the gap of pitiful wage gains and kept corporate profits at record levels. Thank you Ben, Janet, Obama and a feckless Congress.
Elevated corporate profits since 2009 have largely reflected mirror image deficits in the household and government sectors, as households have taken on debt to maintain consumption despite historically low wages as a share of GDP, and government transfer payments have expanded to fill the gap, with 46 million Americans now on food stamps – a five-fold increase in expenditures since 2000. Essentially, corporations are selling the same volume of output, but paying a smaller share in wages, with deficits in the household and government sectors bridging the gap. As households and government have shoveled themselves further into the hole, corporate profits have climbed higher on the adjacent pile of earth. Deficits of one sector emerge as the surplus of another."
"“Mr. Mayor! Mr. Mayor, I’m looking for a frog who can sing and dance!” –Gonzo
“If he can balance the budget, I’ll hire him!” –Mayor Ed Koc" - Muppets Take Manhatten
Have a great weekend.