The S&P’s 13th Trip Thru 2100 Since February 13th: Call It Monetary Rigor Mortis – The Bull Is Dead – David Stockman’s Contra Corner 08-19-15

Salient to Investors:

David Stockman writes:

  • The bull market is dead, yet stock option addicted corporate executives are buying their own drastically over-priced shares hand-over-fist. Corporate stock buybacks and dividends are back to late 2007 levels of all of net income, lured by 80 months of ZIRP and $3.5 trillion of debt monetization by the Fed.
  • Q2 S&P 500 reported earnings are down 5.6% from the prior year and 8.2% since the cycle peak in Q3, 2014. GAAP earnings are rolling over. The S&P500 is at 2100, 35% above its October 2007 high, despite earnings growth over the last 8 years averaging only 1.72% per annum.
  • The market is expensive at 22 times trailing earnings given tepid earnings growth, the very long-in-the-tooth domestic business cycle, and global deflation gathering momentum, triggered by China’s meltdown following its 25-year credit binge.
  • China cannot bailout the world economy this time around because of the short-term dollar debts of Chinese companies and speculators, now at near 10% of GDP, versus 3% at the 2008 financial crisis. China, whose capital outflows during the last 6 quarters have totaled nearly $850 billion, is for the first time in more than 2 decades being forced to shrink domestic credit, sending shock waves through commodity markets, which are down 50% from their 2011 recovery peak and more than 65% from their pre-crisis peak.
  • Fixed investment in industrial capacity and public infrastructure in China reached $5 trillion in 2014, equal to Europe and North America combined and which has inflated the Chinese economy to dangerously unstable levels.
  • The coming deflationary cycle will erode corporate profits for years to come, with central banks now out of ammunition. China’s 20-year boom based on a 56 times explosion of fiat credit has caused unprecedented overcapacity worldwide across the board, and it is only a matter of time before price cutting destroys the profits of global corporations.
  • Massive monetization of the public debt does not jump-start growth in an environment of peak debt.

Hans Redeker at Morgan Stanley said short-term dollar debt of 9.5% of Chinese GDP is a level that in emerging markets is a perfect indicator of coming stress, viz the Asian crisis in the 1990s.

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Don’t Worry About the Bull Market; Worry About the Dollar: Richard Bernstein – ThinkAdvisor 06-22-15

Salient to Investors:

Richard Bernstein at Richard Bernstein Advisors writes:

  • The bull market is intact. Markets rise after the Fed starts raising as earnings trump rising rates, and there is no end of cycle behavior, like excessive leverage or a big buildup in inventories except for energy.
  • The MSCI European stock index is up 11% year-to-date, but only 5% in dollar terms.
  • Currency is the most important issue when investing globally: between 2002 and 2008 the decline in the dollar accounted for 80% of the gain in the Euro Stoxx 50 index for US investors.
  • The dollar rise since 2011 will continue so US investors should hedge this risk.
  • Bullish on South Korea, which is where Japan was 2 years ago. South Korea has terrible corporate profits and is slipping into deflation so has no choice but to depreciate the won.
  • China is at a competitive disadvantage because their currency is somewhat pegged to the dollar and their companies have a lot of dollar-denominated debt, so they are unable to depreciate and will lose market share.
  • India is unable to depreciate because of high inflation so will lose market share to Japan and South Korea.

FactSet predicts S&P 500 earnings will fall 4.7% in Q2, rise 2% excluding energy: for all of 2015 rise 1.6%, 8.2% excluding energy.

Bank of America Merrill Lynch says fund investors remain bullish on European stocks.

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Calm in Stocks Ending as Earnings Season Brings Volatility – Bloomberg 07-09-14

Salient to Investors:

  • Matt McCormick at Bahl & Gaynor says investors are bracing for more volatility on the basis that the economy and market are not as strong as they thought.
  • Raymond James said equities are vulnerable to losses. Citigroup is concerned about a severe pullback.
  • Christine Lagarde at IMF forecasts a cut in global growth forecasts on continued weak investment and US risks.
  • Peter Tuz at Chase Investment Counsel expects increased volatility and says the extremely low VIX period is over.
  • Frederic Dickson at D.A. Davidson says the rise in the VIX from 11 to 12 is just a technical correction and not a concern: going to 20 would be.
  • Jason Brady at Thornburg Investment Mgmt says the market is relatively high-priced and vulnerable to a selloff, so is increasing cash and replacing riskier stocks with safer ones.
  • The S&P 500 is at 18 times earnings, the highest since 2011. Analysts predict profit growth of 5 percent in Q2 2014. Over 130 S&P 500 companies report quarterly results in the next 2 weeks.

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Obama Stocks Among Best After Re-Election as Rally Tested – Bloomberg 11-11-13

Salient to Investors:

Chad Morganlander at Stifel Nicolaus said the market is fairly valued at best and will require an improving economic and earnings outlook well above where we stand.

S&P say the S&P 500 has not fallen more than 10 percent since October 2011, the longest stretch without such a drop since 2007.

Mark Luschini at Janney Montgomery Scott said the market is richly valued, but suggests that return assumptions for US equities going forward should be much more muted.

Bloomberg and Birinyi Associates said 9 of the last 12 bull markets have ended in 5 years or less.

At the start of 2013, Wall Street strategists forecast the S&P 500 would rally 7.6 percent to 1,534 by year’s end: the index surpassed that level on March 5 before rising another 15 percent.

James Paulsen at Wells Capital Mgmt said the first year after elections is usually not very good but time is mightily different because the Fed is doing a totally unconventional thing here.

Lawrence Creatura at Federated Investors said gains can continue for a long time as interest rates are likely to remain low for the next year and profits are forecast to keep climbing. Creatura said there is no law that says how long a bull market has to last.

Walter Todd at Greenwood Capital Associates earnings growth has been slowing so with monetary policy things like tapering it is going to be harder to keep going higher.

2013’s 24 percent jump in the S&P 500 is the 3rd largest annual rally after a president was returned to office since the 1930s, behind Clinton and Reagan, and the broadest rally ever.

The length of this bull market exceeds the average by almost a year, valuations are up 18 percent in 2013 to 16.8 times earnings, and the prospect of Fed tapering clouds the outlook for further gains under Obama.

S&P 500 earnings beat analyst estimates by 4.1 percent in Q3. Analysts project earnings will climb 10 percent in 2014 and 2015.

The median analyst predicts the Fed will begin tapering in March 2014 and GDP to fall to 2 percent growth in Q4.

The average Wall Street strategist predicts the S&P 500 will fall 2.4 percent to 1,728 before the end of 2013.

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Debt Ceiling Wall of Worry Another Reason for Investing – Bloomberg 10-01-13

Salient to Investors:

Since 1976, the S&P 500 has risen 11 percent on average in the 12 months following a government shutdown versus an average return of 9 percent over 12 months. There have been 17 shutdowns since 1976, with 5 occurring within 3 months of each other – in all the cases, the Index was higher by the end of the next 2 years. The S&P 500 declined an average of 0.59 percent during the shutdowns.

While the S&P 500 has fallen seven of the past eight days on concern the political deadlock over the U.S. budget and debt limit will hurt the economy, investors at Raymond James & Associates and PNC Wealth Management say equities will recover as profits rise.

Analysts expect Q4 earnings for S&P 500 companies to rise 9.1 percent, the most since Q3 2011, and will continue to grow in 2014 and 2015, when they rise more than 10 percent.

Jeff Saut at Raymond James said he is a buyer on weakness, and once we are past the debt ceiling, the market will focus on improving economic numbers and improving earnings.

Martin Leclerc at Barrack Yard Advisors said going back to the 1990s and the last one, shutdowns were actually good for the stock market.

Kristina Hooper at Allianz Global Investors said stock swings will widen during the shutdown because the majority of the market was not expecting it as late as last week. Hooper said the longer-term picture is positive and we will work through this relatively quickly.

Kevin Caron at Stifel Nicolaus said stocks need to fall further before they become bargains because we have not seen a significant correction and the market is at fair value.  The S&P 500 is at 16.1 times earnings.

Mark Zandi at Moody’s Analytics said a 3-to-4 week shutdown would cut growth by 1.4 percent – without a shutdown Q4 growth would have been 2.5 percent annual.

E. William Stone at PNC Wealth said the gridlock in Congress won’t weaken the overall economy and investors should take advantage of these kinds of sell-offs as the fight does not harm the long-term market or the underlying economic picture.

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U.S. Stocks Have Worst Week Since June Amid Fed Concern – Bloomberg 08-09-13

Salient to Investors:

The S&P 500 is at 15.3 projected earnings, the highest in 3 years. 72 percent of the 449 S&P 500 companies so far reporting have beaten earnings estimates, 56 percent have beaten sales estimates.

Rick Fier at Conifer Securities said earnings are pretty much done and tapering is on the way so catalysts to move us higher are done for the short-term. Fier says the next move will be lower, but not terribly.

Robert Wetenhall at RBC Capital Markets said decelerating orders and potentially higher interest rates may continue to hurt investor sentiment toward the housing industry.

Credit Suisse reduced its allocation to stocks to neutral from overweight. Analyst Michael Strobaek said the fundamental environment remains attractive, but the markets are overbought and a combination of a positive economic outlook and further supportive monetary policy are largely priced in, limiting the upside in the near term.

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Stocks Extend Rally With Metals on Central Bank Pledges – Bloomberg 08-01-13

Salient to Investors:

Michael Vogelzang at Boston Advisors said the tone from central banks is that the economy is a little better but not yet at escape velocity without monetary support, and as long as there is strong accommodative policy, the market can go up a lot, driven by Fed policy and good earnings.

Investors invested $38.1 billion into ETFs listed in the US in June, the most since December 2008 and the 4th highest inflow ever, and of which almost $30 billion went to American equity funds.

The S&P 500 is at 15.5 times estimated earnings versus 13.9 times average over the past 5 years.

Phil Orlando at Federated Investors said world central banks remain accommodative and you do not want to fight them. Orlando said this market will keep rising as all economic data indicates the economy and the labor market are improving, and earnings are coming in better than expected.

73 percent of the 373 S&P 500 companies so far reporting have beaten estimates and 56 percent have beaten sales estimates.

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Banks on Brink of S&P 500 Supremacy as JPMorgan Beats Microsoft – Bloomberg 07-28-13

Salient to Investors:

Banks, brokers and insurance companies make up 16.8 percent of the S&P 500, almost double the level from 2009 and versus tech companies at 17.6 percent. Banks were the largest US industry during the bull market that began in 2002, and financial firms grew to 18.8 percent of the index in the late 1990s,

Bulls contend the change signals banks will lead the economy even after the Fed begins to taper. Bears say S&P 500 profits would be down this quarter if not for banks, and the last time financials were the biggest industry, in 2008, the consequences were disastrous.

Kevin Caron at Stifel Nicolaus said the reasonably good performance of the banks provides confidence in the underlying economy – without the financials working, all the rest would not be working.

Analysts expect S&P 500 earnings to climb 3.3 percent, led by a 27 percent increase in bank profits: ex-financials industry, S&P 500 earnings would contract 1.2 percent. Banks are beating analyst estimates by 8.9 percent. Economists expect GDP to increase 1.8 percent in 2013, and 2.7 percent in 2014, and versus the average of 2.4 percent since 1990. Computer makers and software designers have reported earnings 0.4 percent below analysts’ estimates on average.

Jeff Saut at Raymond James said we are rebounding as the banking system is getting healthier and eventually that flows into the economy in making it easier to get a loan.

JPMorgan, Goldman Sachs, Bank of America, Citigroup and Morgan Stanley controlled 95 percent of cash and derivatives trading for US bank holding companies at December 31, 2012.

Stanley Nabi at Silvercrest Asset Mgmt said the regulators are going to look over the shoulders of the banks and make sure that they are not raising their risk profiles.

Matt McCormick at Bahl & Gaynor said expectations are ahead of themselves, so prefers tech over banks in 2013.

Dan Veru at Palisade Capital Mgmt said banks will continue to tread higher as investors are starting to say that they need to invest in the sector.

Todd Lowenstein at HighMark Capital Mgmt said financials were hit hardest in the crisis we are still in the early innings of recovery.

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Bull Market Confirmed Through 2013 by 23 Years of Rallies – Bloomberg 07-22-13

Salient to Investors:

The S&P 500 Index’s advance to a record last week coincided with highs in the Russell 2000, the Dow Jones Transports, the S&P 500 Financials and Morgan Stanley’s gauge of economically sensitive equities. During the 4 biggest bull markets of the last 25 years, peaks in those indexes have come before the S&P 500 reached its highest level almost 90 percent of the time – the S&P 500 gained another 7 percent  on average for 6 months on average after they began declines. In 4 market tops during the last 23 years, small-cap stocks and the cyclical gauge never peaked after the S&P 500.

John Manley at Wells Fargo Funds Mgmt said the breadth shows an economy that is improving somewhat, the market has not been hyper-extended, and the Fed is still accommodative – so what’s not to like?

Phil Orlando at Federated Investors said the market is discounting mechanism looking out 2 to 3 quarters, and tells us that this economic and stock-market rally would improve.

Doug Ramsey at Leuthold Group said gains in small-caps, banks, transportation companies and cyclical stocks suggest the rally is not over.

Bears say the breadth shows indiscriminate buying just as profit growth slows and the Fed prepares to taper. Leo Grohowski at BNY Mellon Wealth Mgmt said increases in stock market breadth will work against bulls should earnings growth slow and investors become convinced all at once that Bernanke will taper as the economy improves. Grohowski cautions against using the past is a reliable indicator for the future primarily because the interest rate support for the market won’t be as strong, and actual news of economic improvement will increase concern about the Fed removing the punchbowl.

Uri Landesman at Platinum Partners said the simultaneous rallies are coincidence and valuations suggest past patterns are unlikely to be repeated – the market is priced for perfection and there is hardly perfection in the world.

Analysts expect S&P 500 earnings to rise 2.4 percent in Q2 from a year ago versus an average 4.3 percent in the last 5 quarters and 28 percent in 2010 and 2011. 73 percent of companies have exceeded forecasts in July, matching last quarter.

460 S&P 500 stocks are up in 2013, the most since at least 1990, and more than 90 percent were above their 200-day moving averages last week, versus 62 percent average over the past 23 years.

The S&P 500 is at 16.3 versus 17.5 when the last bull market ended in October 2007.

Profits are expected to climb 14 percent for cyclicals in 2014, 3 percent points more than the full market.

Transportation stocks are projected to boost profits more than 3 times as much as the S&P 500 in 2013.

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S&P 500 Climbs for 4th Week to Record on Earnings, Fed – Bloomberg 07-19-13

Salient to Investors:


  • 73% of 103 S&P 500 companies so far reporting have beaten estimates
  • 53% have beaten revenue estimates.
  • 80% of S&P 500 financial companies have beaten estimates by an average of 8.7%. Banks and insurers are predicted to report earnings growth of 26% this quarter. Excluding financial stocks, S&P 500 companies are expected to report a 2% drop in profit.
  • 17 tech companies in the S&P 500 so far reporting earnings have missed estimates by an average 3.6% versus 2.7% above forecasts for all index stocks.

Tim Leach at US Bank Wealth Mgmt said Bernanke made it clear that the Fed will remain flexible, while earnings are well supported going forward by economic activity and strong corporate balance sheets.

Vincent Lowry at VTL Associates said there is a broad-based move by retail investors into the equity markets, which are the place to be because they will be able to absorb any gradual increase in interest rates. ETFs are attracting money at the fastest rate since September 2008.

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