After a “Disappointing” Earnings Season, What’s Next?

Posted On May 9, 2018 By Dave Gonigam

  • Goldman Sachs is blaming you for their lousy quarter
  • Stocks stall despite standout earnings: So what happens next?
  • Are all those buybacks a sign that “the top is in”?
  • Who made a ton of money off CNN’s “fake news” yesterday?
  • Laying blame in all the wrong places: Readers weigh in on boomers vs. millennials

Well, there: Goldman Sachs says you’re the reason the stock market is going nowhere despite an outstanding earnings season.

From a MarketWatch story: “Citing both their outsize ownership of stocks and a surge in recent trading activity, Goldman attributed the recent whipsawing trading in the equity market to average investors, writing that retail investors — as opposed to institutional ones — ‘appear to have driven much of the U.S. equity market turbulence in late March and April.’”

Heh… Sounds as if Goldman’s trading unit has been having a few lousy weeks and the “vampire squid” is looking to lower expectations for the next earnings season starting in July. “The market would rally huge if it weren’t for those damn deplorables!”

Still, the paradox can’t be denied. Earnings are great, but you wouldn’t know it from the market’s performance. We started tackling the phenomenon on Monday, and we take a deeper dive today with the help of our income authority Zach Scheidt…

This earnings season was supposed to be our savior. Finally, we could get back to fundamentals,” Zach reminds us.

“The ‘noise’ that the mainstream media kept exaggerating was finally going to be drowned out by spectacular earnings reports. No more hearing about tariffs, or how frightening reaching 3% on the 10-year Treasury is, all without referencing the massive boon to the economy that was Trump’s tax cut.”

Instead, here’s what we’ve got since earnings season began on April 12…

earningschart

That’s despite earnings growth of 27% among the S&P 500 companies that have reported so far — way better than the 18% the “expert consensus” was counting on. And by now, earnings season is two-thirds over.

Turns out the “noise” refuses to die down: “Tariffs, interest rate fears and even just normal profit taking are all proving much more resilient in investors’ minds,” says Zach, “and are therefore overshadowing these results.”

So now what?

There’s a silver lining to the market’s weak performance despite standout earnings: “With earnings growing and stock prices stalling (and in many cases pulling back),” Zach explains, “you need to be aware that you’re getting a much better value when you buy a stock today than you were just a few weeks ago.

“Before the market correction, the average stock in the S&P 500 traded for around 20 times earnings. However, now the average stock trades for just 16 times earnings — which is the long-term average — and this market is far from average!”

But… there’s a nagging question we still can’t shake.

It goes back to a phenomenon we’ve revisited periodically since 2014. That’s when Larry Fink, chief of BlackRock — the world’s biggest asset manager — wrote an open letter to his fellow S&P 500 CEOs.

“It concerns us,” he wrote, “that in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”

Here at The 5 we read through his pussyfooting and offered up a plain-English translation: “After five years, you turkeys have cost-cut as much as you possibly can. If you expect to keep growing your earnings, you jolly well better start investing in the future of your businesses to attract more customers. You do think such investments will pay off, right? Don’t you? Anyone? Bueller?”

Here we are four years later. Corporate America just got a huge windfall from the new tax law. What are companies doing with that cash? Yes, there’ve been some pay raises and a few splashy announcements about new factories and equipment. But mostly it’s been dividend raises and especially share buybacks — like the $100 billion record buyback Apple announced last week.

I put the question to Zach: Isn’t all this cause for concern? Are CEOs hesitant to invest in their businesses now because they know the post-2008 expansion is getting long in the tooth? Heck, might that be the reason Wall Street’s reaction to these great earnings has been underwhelming?

“I don’t find it troubling that companies are buying back shares,” is his straightforward reply.

“Thanks to lower taxes,” he tells me, “I don’t think companies NEED to keep as much cash on hand for expansion purposes. Because today, more from every dollar of profits STAYS with the company. So if I want to build a factory next year, I’ll still have more cash coming in thanks to lower taxes to pay for that factory.

“So why not buy back shares with my cash today and then spend my extra cash next year once I see if the economy is holding up and if I can justify this new expense?

“Overall,” Zach adds, “I’m still very constructive on the economy and the market. Investors have taken a ‘wait and see’ attitude for a couple months. But if you look at the big picture, February’s pullback (and the consolidation from that point) has not really been that big in magnitude compared with the overall long-term bull market.”

To buttress Zach’s point, we return to a chart we shared in March — showing the stock market’s performance during the final four years of the dot-com boom/bubble.

As you can see, there were some thrills ‘n’ chills during that span. They included huge one-day sell-offs of 6.4% and 7.2%, both linked to debt crises in emerging markets.

As it happens, you’ll find financial pros fretting about emerging-market debt right now if you burrow into the back pages of The Wall Street Journal and Financial Times. Don’t be surprised if history rhymes a bit as 2018 wears on.

“I don’t mean to sound like Pollyanna,” Zach concludes, “but for now we’re still in a good spot.”

[Ed. note: There’s no reason you shouldn’t grab your share of the dividend-and-buyback bounty made possible by the new tax law. The “Cash for Patriots” program, Zach calls it. New payouts are being issued every month… but for maximum benefit, you really want to move before tomorrow. Zach explains why when you follow this link.]

To the markets… where crude is only a dime away from $71 a barrel.

The most recent bullish development is the weekly inventory numbers from the Energy Department — which reveal a surprise drawdown in U.S. stockpiles.

But of course the big driver of oil prices in the last week has been the prospect of Donald Trump withdrawing the United States from the seven-nation Iran nuclear deal and imposing new sanctions on Iran — which he did yesterday afternoon.

Yesterday morning, however, CNN served up some “fake news” that the president would stick with the deal while still imposing new sanctions. It wasn’t true, but it knocked $2 off the crude price for a few hours. Who floated the rumor and why? And how much money did they make from this move?

As it turns out, not everyone agrees that sanctions will meaningfully curb Iran’s oil exports. “European and Asian countries that buy Iran’s oil aren’t enthusiastic about joining Washington in putting the squeeze on Tehran, because they see Iran as continuing to comply with the deal,” writes Keith Johnson at Foreign Policy.

Meanwhile the major U.S. stock indexes are little moved, and neither is gold. The big economic number of the day is wholesale prices, up 0.1% in April. The Street was counting on a 0.3% increase, so any jitters about inflation have been put to rest — at least until the consumer price index comes out tomorrow.

For the record: It was a lousy first quarter for state and local government pensions.

The Wilshire Trust Universe Comparison Service says the typical pension plan lost 0.23%. Among all the plans tracked by the Wilshire database, the median annual target gain is 7.25%. That’s a lot of ground to make up in the final three quarters of the year.

Expect the pensions to come crying to the politicians for money… and the politicians to come crying to you for money.

“The younger generation wants it ALL and they want it now… no waiting, ‘I DESERVE IT,’” reads the first of many, many replies we got after yesterday’s episode of The 5.

“They have no patience for working for it… waiting until they can afford it. They want shortcuts to financial independence, and they want it now or tomorrow… before the week is up.”

“As a boomer I say the mess is at the hands of the boomers,” says a contrasting view.

“The boomers making the bad decisions are an elected few and they reside in our government. The mess continues for the majority of boomers and millennials and everyone else.”

Those two views, however, represent the extremes. Our reflections yesterday generated a voluminous quantity of thoughtful and nuanced emails — a reminder that The 5 is blessed with the most passionate, informed and engaged readership of any financial e-letter.

In particular, we want to share two responses that challenge the premise of intergenerational conflict. We’ve had to truncate both to stay within the limits of our 5 Mins, but we hope we’ve captured the gist of their views…

“Your question has a built-in prejudice,” says the first. “You fall into the trap of generalization.

“I would suggest that rather than focusing on labels, you focus on people. We didn’t get into this mess in the past five years, or 10 years, or 20, or 50. If I were to identify the point where we REALLY started screwing everything up, it would probably be 1913. But that doesn’t fit your ‘labels’ game… and Woodrow Wilson is deader than a doornail. But there you had one racist socialist who did his best to screw up the country.

“Now we are at the point where we have no value-based political parties. We have no understanding of the philosophy and the principles that could make the country and its people well off. And the question is not whether this is the ‘boomers’’ fault or the ‘millennials’’ fault. It’s PEOPLE (in general, and without labels) that put the clown in power that formulated the policies that have messed up the country. And those who think that more handouts are going to resolve this situation are simply digging themselves and their peers into a deeper hole.

“The ‘shower them with benefits’ theory is a farce. The country is technically bankrupt. The only way to get money for something like that is to steal from the existing private coffers, which will then stifle innovation, initiative and growth even more. Oh, sure, some cute-sounding phrases will be concocted to ‘justify’ brazen theft (like the idiocy that is proposed in England). But it’s just more of the same garbage. But even that money will run out, too. So it’s all a big joke.

“I wish I were wrong, but I believe we’ve gone past the tipping point. Absent a return to the principles that the Founding Fathers implemented, the future will be characterized by continued degradation of our lifestyle and then… collapse. Some don’t see it — such is the power of hubris. But that’s what’s coming.”

“Neither boomers nor millennials are responsible for America’s current sad state of affairs. Face it. 99.99% of Americans of all ages have no say in the matters of our nation’s business.

“Every four years we get to vote for a choice between two candidates, each backed by the same globalist investment banker cabal, of which, typically, neither party’s candidate considers the citizenry anything more than livestock to be manipulated, milked and collateralized for monetization. And that is only valid if our elections aren’t rigged. Ask Bernie about that. Never mind the Electoral College ultimately chooses our president.

“But pitting one generation against another is merely falling prey to the further perpetuation of the elitists’ divide-and-conquer strategy that has for generations enabled the confiscation of our nation’s private wealth by diverting our deficit-plagued spans of attention away from their brazen theft by the faux governmental Federal Reserve via any number, or combination, of well-known Keynesian monetary and market mechanisms to create boom-bust business cycles where political and financial cronies buy up assets for pennies on the dollar.

“To be clear, it is not the fault of our elected officials. Each is most probably well-meaning when first elected but the frailty of human nature exposed to such levels of corruptible temptation or coercion cannot stand unabated. So it is not against our elected officials for which I advocate these actions but in cooperation with, for they are not the enemy either. It is the head of the snake one must smite to end the threat. And though an impossibility to breach such defenses as those that protect the snakes in their lair, one can block their path and essentially quarantine them against further infecting our brothers and sisters striving to serve their fellow Americans.

“So today I reach out to you in the names of our Founding Fathers who understood the subterfuges of tyranny and created the U.S. Constitution to defend our nation against such infringements. Were it not for the continued erosion of these protections by the serpents avowed against us, one bribe, one threat, at a time, America could forever be a light unto the world, a bastion of liberty and prosperity for all. We are one. Americans. Our enemies care not whether America prospers. Their loyalty alone lies unto themselves and each other — and possibly Satan.

“With the advent of AI and the increasing automation of necessary services, quite frankly, many Americans of all ages won’t be needed — or wanted. In the dystopian world of one government, one currency and one centralized database, the common man and woman will be considered expendable and easily replaced. Beware sugarplum fairies bearing sparkly tales of universal income, for many a concentration camp detainee met his Maker on the way to a shower. Together we stand. United we fall.”

The 5: So many of the problems afflicting us today began with Woodrow Wilson and the depredations of 1913 — especially the Fed and the income tax.

Wilson represented an “Artist” archetype in the generational construct of Strauss and Howe, noted here yesterday.

The “Artist” generation alive today — those too young to fight in World War II but too old to be considered boomers — did not send anyone to the Oval Office. But it turned out a rogues’ gallery of string-pullers in the power elite who’ve done staggering damage for 30-odd years: Alan Greenspan, Robert Rubin, Madeleine Albright, Colin Powell, Dick Cheney, John McCain…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. The ex-manager of a multimillion-dollar hedge fund just issued a chilling warning.

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