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Stockman: Jabbering On The Edge Of A Live Volcano
You have to wonder whether there are any carbon units left in the casino. The robo traders and HFTs, of course, have an attention span of 10 milliseconds. So their utter lack of concern about context, fundamentals and history is readily explainable. They never get around to it.But somebody besides the machines is getting paid the big bucks on Wall Street. Do they really think that dancing on a live volcano, as the estimable Ambrose Evans-Pritchard put it recently, is not semi-suicidal? Yet for the last 18 months that is exactly what they have been doing. The S&P 500 closed today exactly where it first crossed in November 2014. In the interim, it’s been a roller-coaster of rips, dips, spills and thrills. The thing is, however, this extended period of sideways churning has not materialized under a constant economic backdrop; it does not reflect a mere steady-state of dare-doing at the gaming tables. Actually, earnings have been falling sharply and macroeconomic headwinds have been intensifying dramatically. So the level of risk in the financial system has been rocketing higher even as the stock averages have oscillated around the flat-line. Thus, GAAP earnings of the S&P 500 in November 2014 were $106 per share on an LTM basis compared to $86.44 today. So earnings are down by 18.5%, meaning that the broad market PE multiple has escalated from an already sporty 19.3X back then to an outlandish 23.7X today. And the latter is by no means reflective of an expected stick save turnaround in earnings. Analysts have been furiously marking down their estimates for Q1 for weeks now. At the latest reading profits are projected to fall by 10%, marking the fifth straight quarter of decline. Always and everywhere, such persistent profit collapses have signaled recession just around the corner. And there are plenty of macro-economic data points signaling just that. For instance, total US business sales have fallen by 5.1% since mid-2014—-even as inventories have soared. This means that while Wall Street speculators have been dancing on the edge of the volcano for 18 months, the US economy’s tepid rebound has been petering out. Indeed, there has never been an inventory ratio surge of the magnitude shown in the chart below—-from 1.29X to 1.40X in 18 months—- that did not signal a recession dead ahead. During the stock market’s most recent dead-cat bounce, the signals that the US economy is drifting into a downturn have only grown more frequent and intense. For instance, class 8 truck orders—-a classic leading indicator—–are now plunging. At the same time, inventories haven’t been this high since early 2007. Likewise, rail car loadings were down 13.7% year-to-date compared to 2015. As is evident in the chart below, the plunge in shipments is now approaching the depths of 2008-2009. Perhaps that is why some market technicians are fretting about the non-confirmation of the rally by the transports. Then there is the latest reading on GDP by the unusually accurate running gauge published by the Atlanta Fed. As of this morning, there isn’t any. Q1 GDP is now forecast to come in at stall speed or just 0.1%. Not even the Chinese can measure things that finely! In light of these fundamentally negative trends it might be wondered why in the world every attempt at correction in the casino gets short-circuited in another dead-cat bounce. Presumably, the remaining carbon units would recognize the danger at some point, thereby precipitating a sell-off that would eventually trigger a spasm of liquidation by the machines. Needless to say, the latter will happen. It’s only a matter of time and the right catalyst. But in the interim, there can be no doubt as to what explains the stock market’s treacherous dance on the crater’s edge. To wit, honest price discovery in the financial markets was destroyed by heavy-handed central bank intrusion long ago. So what remains is simply episodic spasms of stock buying in response to open mouth actions emanating from the Eccles Building. In that context, Janet Yellen’s risible proclamations and recurrent bouts of incoherence play a major role. She let loose of a patented barrage of Keynesian jabberwocky at the Fed heads soirée yesterday. More at the link Posted by: badanov 2016-04-12 |
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