Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
UK Population Growth - Latest ONS Immigration Statistics and Consequences - 24th Mar 19
The Fed Follows Trump's Tweets, And Does The Right Thing - 24th Mar 19
Yield Curves, 2yr Yield, SPX Stocks and a Crack Up Boom? - 24th Mar 19
Risk/Reward in Silver Favors Buying Now, Not Waiting for Big Moves - 23rd Mar 19
Similarities Between Stock Market Today and Previous Bull Market Tops - 23rd Mar 19
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

Stock Market Day of Reckoning

Stock-Markets / Stock Markets 2014 Dec 23, 2013 - 10:27 AM GMT

By: Fred_Sheehan

Stock-Markets

Thomson Reuters (This Week in Earnings, December 6, 2013) notes another New World Record. We are breaking plenty these days. This often foretells a Grand Finale. For the fourth quarter of 2013, 103 companies in the S&P 500 have announced negative earnings revisions. Only nine have disclosed positive profit assessments. The ratio of negative-to-positive, 11.4:1, exceeds the previous high (negative-to-positive ratio) of 6.8:1.


This is worth consideration. The 6.8:1 silver medallist was during the first quarter of 2001. Early 2001 was unpleasant. More importantly, for a ratio comparison, the unpleasantness was by then a protracted, dismal bust, and was not news, except to Alan Greenspan, who announced to the FOMC at its January 30-31, 2001, meeting that: "there is little evidence of which I'm aware that long-term profit expectations have deteriorated to any significant extent." A century from now, interested parties will need to address the dilemma of who possessed the tinier minds: members of the FOMC or the world that stood still in fear of its pronouncements, debating the layers of analysis that never existed at the Fed prior to post-meeting announcements.

As a reminder of the moment: "By the end of 2000, the Nasdaq Composite had fallen 51 percent and the Philadelphia Internet Index had lost 77 percent from its peak. All told, investors in U.S. stocks had lost trillions of dollars and were constantly reminded of this by the wonder of technology's multicolored screens that flashed instant calculations of their attenuated portfolio holdings." (Panderer to Power, pgs. 235-236).

Announcements by companies of adjusted earnings predictions in a different direction usually lag a sharp break (from recession to rebound, or its opposite.) The first quarter 2001 reassessments were made by companies in the midst of liquidation, most of which had accumulated during the boom: "On December 4, 2000, Cisco Systems Chairman John Chambers delivered his annual speech to Wall Street analysts. 'I have never been more optimistic about the future of our industry as a whole, or of Cisco.' In January, Cisco Systems announced the value of its inventory rose from $1.2 billion to $2.0 billion in the previous quarter.Companies announced plans (or hopes) to reduce inventories by the end of 2002. This unwinding across the whole economy would take years to complete-unless some artificial paper printing inflated prices.... In April 2001, John Chambers admitted, "[T]his may be the fastest any industry our size has decelerated." Chambers was paid $279 million in 1999 and 2000 for his foresighted leadership." (Panderer to Power, pgs. 235, p. 237-238).

Since these moments of abrupt break are so easily forgotten, yet, so traumatic, some more color: "Hewlett Packard was 'buffered by the slowing economy in just about every segment of our business. Sales from dot.coms [are] essentially zero.' Gateway's sales 'plummeted below already lowered estimates.' The CEO of Nortel admitted, 'We now expect the U.S. market slowdown to continue well into the fourth quarter of 2001.' Lucent's CEO warned, 'We have serious execution problems,' after which, he immediately restored public confidence in his execution acumen by firing 10,000 workers. Oracle's CFO made the head-scratching admission, 'I haven't a clue what will happen,' and, 'We're still trying to figure out what happened last quarter.'" (John Hancock Quarterly Market Review, April 1, 2001. Thanks, Andrea)

So, what might we hear from CEO's in the first quarter of 2013? A schizophrenia exists in which "we're in a bubble" is stated, even by some central-banking bureaucrats. At the same time, the word from the Street is cheery. The S&P 500, Dow, and Russell 2000 periodically post new highs; there seems to be no concern (or knowledge) that 10-year Treasury yields have doubled since before Bernanke's QEIII trillion-dollar, asset-buying commenced in the fall of 2012. Corporate earnings as a percent of sales are the highest since records were first collected in 1947. From the mouths of the Experts, this is a good thing. So, why might we be on the verge of another first quarter 2001?

Stock prices are artificial. They have been lifted by central-bank asset buying and the belief the Fed will not permit markets to fall. This same trust emptied the brokerage accounts of believers twice in the past 13 years, but it goes on. Zero Hedge recently reported the days on which the New York Fed has engaged in POMOs (Permanent Open Market Operations) of $5 billion or greater, between April 2009 and April 2013, the S&P 500 rose 540%. On days when POMOs were less than $5 billion, the index rose 15%. On days without POMOs, returns were -2%. (The New York Fed lists the daily schedules for POMOs with estimated sizes several days in advance. The Fed wires the electronic, keyboard money to primary dealers who relay electronically conjured money to recipients.)

Andy Lees reports: "Asset prices have...continued to soar. Margin debt is at record levels in absolute terms, and is towards record levels as a percent of market cap. A week or two back I was told that hedge funds are running a gross exposure of about 258%. If I remember correctly, derivatives and financial sector lending is predominantly off balance sheet. What appears to be happening therefore is that the loan growth is driving or supporting asset prices, but it is being funded, at least in part, by taking liquidity out of the real economy, similar to the late 1920's. Why would a bank lend to the real economy where there is disinflation and the weakest nominal GDP growth outside of recession, rather than to the financial economy where there is massive asset price inflation and the banks can make returns very quickly?"

Andy Lees described one path through which the world's asset markets are inflated, by layers of leverage upon leverage upon leverage. The central bankers remain completely unaware of this since their holy DSGE model (dynamic stochastic general equilibrium model) does not acknowledge the existence of financial markets.

Lees' comment, "liquidity out of the real economy," is most apparent in falling household incomes. Falling incomes partially answers the reason for record profits. A large part of the increase in profit margins is due (as a percentage of revenues) to a reduction of salaries, taxes, investment, and interest payments on debt. The last would never happen except in a National Socialist economy, one that keeps setting New World Records in corporate debt issuance with practically no carrying cost (interest payments). When the Fed abandons its attempt to control the yield curve (see comment about the 10-year direction, above), interest payments will leave many a CFO admitting: "We have serious execution problems."

Companies also have serious liquidation problems of their capital investment. The first run at the third quarter GDP report pegged corporate investment at -0.1%. Record debt accumulation with negative investment is truly New Era management, but, as in many New Eras past, one that will vanish with a "poof." The main route for the debt is to repurchase common shares. Fewer shares with record profits raises stock prices and prods the cash-out rate of stock options by senior management: the 1%.

We may be heading into a melt up (the opinion of some long-time market watchers), followed by a reckoning when it becomes apparent so many companies have been hollowed out. To note the obvious, after the central bankers lose the yield curve, their ability to support markets (first, the mortgage melt up, then, 2008 and onward) will also go "poof."

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Frederick Sheehan Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules