QUICK READS- special evening edition

Note: I am still away. Some thoughts and charts to keep you cautious …

David Rosenberg:

(…) history shows that downgrades light a fire under policymakers and the belt-tightening budget cuts ensue, taking a big chunk out of demand growth and hence profits. It is not just the United States — the problem of excessive debt is global, from China to Brazil to many parts of Europe.

Now the question, in the name of consistency, is whether France is next — is it really AAA with the U.S. at AA+? Does that make any sense? But if France was ever to see a cut, then the EFSF no longer works as planned since the facility’s AAA rating is critically dependant on France and Germany obviously maintaining their pristine rankings. Or what about an Italian downgrade? Does it deserve to be A+? A1? That would likely be a market-mover as well and cannot be ruled out. This downgrading process cannot possibly stop at the U.S.

We also had an emergency G7 conference call and press statement that
policymakers will do all they can to mitigate gyrations in the marketplace. So for investors, our fate is very much tied up in the prospect that government bureaucrats and politicians manage to get ahead of this latest version of the global debt crisis.

Gold is also rallying hard as it becomes oh-so-painfully evident, now with the ECB joining the fray, that debt monetization by the monetary authorities globally is going to be part and parcel of the solution to this leg of the crisis. Expect gold to go much, much higher as well — just to get back to prior highs in inflation adjusted terms would mean a test of $2,300; and normalizing by world money supply points to $3,000 an ounce.

Dow Theory advocates will point to the transports confirming the breakdown in the industrials. And the transports sliding along with the oil price, which last happened like this in 2008, is indeed an ominous economic signpost.

On the economic front, much damage has been done here as well. The OECD leading indicator fell to 102.2 in June — the lowest since November 2010 — from 102.5 and is down now for three months running and the declines were broad based across the G7 and emerging Asia.

This is not a replay of mid-2010. The global economy is slowing down much than was the case then and the problems surrounding sovereign
government debt are far more acute. While the Fed may be forced at some point into more easing action, there is more reason to be skeptical of any success now than before. And fiscal austerity is now the policy watchword in Washington the largesse last fall after the midterm elections played a key role in stimulating the economy, at least for a short while, and risk appetite as well.

The market may be less-cheap than it appears. According to
research cited in the FT, nearly 70% of the few (76) that have provided guidance have reduced it, and in the most cyclical names as well (Tyco, Illinois Tool Works, Netflix, Texas Instruments).

In a market correction during a period of economic growth, brief market pullbacks of 10% or 15% are common. But in a recession, corporate earnings and the equity market both typically go down between 25% and 35% — these are averages — which would then mean a test, and possible break, of the 2010 lows (below 1,000). An $80 EPS profile for next year and a trough 12x multiple would yield a similar result.

From BMO Capital Markets: markets worry about Italy and a US recession.



Over 87% of S&P 500 index companies have now reported, with 72% beating on earnings and 75% beating on revenues. According to Thomson Reuters, the consensus estimate of S&P 500 earnings growth in Q2 has risen to 12% (20% excluding financials) from 10% (18% excluding financials) last week and an initial estimate of 7% (14% excluding
financials). The consensus estimate of sales growth has risen to 12% from 11% last week and an initial estimate of 10%.


  1. Current estimates are for 15% EPS growth this year and next on revenue growth of 10%.
  2. Revenue growth should taper off toward 7% along with global GDP growth slowing.
  3. Profit margins are at such lofty levels that it is heroic to assume further gains.


4.   The US economy has already downshifted.


(…) chief executive officers have more money than ever after boosting cash for 10 straight quarters to $963.3 billion, 58 percent more than in December 2007 near the start of the credit crisis, S&P data show. More than 160 companies in the gauge pay dividend yields above the 10-year note, according to data compiled by Bloomberg.

Cash on corporate balance sheets excluding financial, utility and transportation stocks represented about 9.7 percent of market value as of March 31, up from the 20-year average of 6.7 percent, S&P data show.

U.S. companies have authorized $331.8 billion in buybacks this year and carried out $182 billion, data compiled by Birinyi Associates Inc. show. They bought back $342.7 billion in 2010, the most since 2008, when they repurchased $387.2 billion, according to data from the Westport, Connecticut-based money- management and research firm.



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