NEW$ & VIEW$ (29 JULY 2013)


We are past the mid-point in the Q2 earnings season. Here’s the run down:

  • From S&P:

With 58% of S&P 500 companies having reported, the beat rate is 66% and the miss rate  24%, roughly unchanged from the earlier report. The miss rate is particularly high (33-35%) in Energy, Materials and Consumer Discretionary, the most cyclical sectors. Even though actual earnings are coming in 1.9% higher than the estimates, estimates from Q2 to Q4 continue to be reduced although only marginally.

At just past the mid-point of the Q2 2013 earnings season, the percentage of companies reporting actual earnings above estimates is 73%. This percentage is equal to the 4-year average of 73%. However, the earnings growth rate for the second quarter has only increased by one percentage point since the beginning of the earnings season. On June 30, the earnings growth rate was 0.8%. Today, the earnings growth rate is 1.8%. Over the past four years, the median increase in the earnings growth rate from the end of the quarter through the end of the earnings season has been five percentage points.S&P 500 Surprise %: Q109 – Q213








The answer can be found in the surprise percentage reported to date for the second quarter. At this point in time, the surprise percentage for Q2 2013 is 3.2% (i.e. companies in the S&P 500 are beating EPS estimates in aggregate by 3.2%). This percentage is below the 4-year average of surprise percentage of 7.0%. In fact, if 3.2% is the final surprise percentage for the quarter, it would reflect the second-lowest surprise percentage for the index since Q1 2009. The lowest surprise percentage recorded to date since 2009 was in the third quarter of 2012 (3.1%).

Unless there is an improvement in the surprise percentage during the second-half of the earnings season, there is a good chance that the Q2 2013 quarter will finish with the third lowest earnings growth rate recorded by the index in the past four years, trailing only the Q3 2009 (-15.3%) quarter and the Q3 2012 quarter (-1.5%).

Pointing up Most interesting however:

S&P aggregate Q2 EPS is tracking $0.38 above the season start levels (around 0.8% beat) and financials account for an astounding $0.63 of that!


This goes along Moody’s findings reported here last Friday: Financials are saving the earnings season so far as earnings ex-Fins are flat YoY.



Earnings for companies in the S&P 500 are projected to climb 3.3 percent, led by a 27 percent increase in bank profits, based on more than 11,000 analyst projections compiled by Bloomberg. Without the financial industry, S&P 500 income would contract 1.2 percent.

Of the 815 companies that have reported earnings so far this season, 65.2% of them have beaten earnings estimates.

Bespoke tallies all NYSE companies. The beat rate has declined sharply last week from 71% to 65%.

This a.m.: Corporate Profits Lose Steam

Revenue at the companies that make up the Standard & Poor’s 500-stock index—excluding banks, whose profits have soared—is expected to creep up by just 1.1% in the second quarter from a year earlier, according to Thomson Reuters, which melds Wall Street analysts’ projections with company reports.

Earnings, meanwhile, are expected to decline 0.6%. That would be the first profit decline for nonfinancial companies since last autumn and the first time in a year that earnings grew more slowly than revenue, a sign that margin widening is petering out. (…)

Analysts are divided on whether margin expansion will remain a reliable source of earnings growth. Tony Dwyer, U.S. portfolio strategist for Canaccord Genuity, says profit margins will continue to widen unless revenue drops, because companies are keeping expenses in check. “Margins should do pretty well,” he said.

But Howard Silverblatt, senior index analyst for Standard & Poor’s, questions whether margins will continue to increase.

“I don’t know how many more people you can get rid of,” he said. “You cannot continuously cut to get your way out.”

On margins: Margins Calls Can Be Ruinous In Many Ways


European Earnings: Bad And Getting Worse, As Majority Of Companies Miss EPS

Not surprisingly, we find that of the 120 DJStoxx600 companies reporting so far, the revenue picture is about the same as in the US, with 58% of companies beating the topline and 42% missing, a carbon copy of the US’ 58%/43%. But it is the EPS where the difference truly shines: while in the US some 73% of firms have “beat”, in Europe this number is only 48%. The flipside, or misses? In the US it is 26%. In Europe: a majority of companies, or 51%. In brief, anyone expecting a quick and easy turnaround in Europe’s corporate earnings picture will have to wait some more.

Source: Deutsche Bank

3 Signs the Market Is Near a Top


One study of bull market peaks over the past 80 years finds eerie similarities with current conditions.

We may be closer to a major market top than most investors think.

That at least is the conclusion that emerged when I compared the current market environment to what prevailed at major market tops of the past century. (…)

Market rises steeply before bull dies

The typical bull market comes to an end following a period of extraordinary performance. (…) 

Since the 1920s, the average bull market has gained more than 21% over the 12 months prior to a top — more than double the long-term average.

Interestingly, the stock market recently has produced a return that is quite similar to this average 12-month gain prior to market tops: The S&P 500 over this period is up nearly 23%.

Riskiest stocks shine before market tops

(…)  the historical record suggests the stock market is a particularly risky affair over the 12 months prior to market tops. The margin between the average value and average growth stock over those 12 months is nearly double that historical average; the same is true for the margin of the average small-cap over the typical large-cap.

Ominously, recent experience adheres to this pattern. The value-over-growth margin over the past 12 months has actually been nearly triple the historical average (Fama and French define value as riskier than growth). Though the small-cap sector hasn’t outperformed the large-caps by as big a margin, it still is well ahead over the past 12 months.

P/Es at market tops

I had fully anticipated, when focusing on price/earnings ratios, to find that they are at extreme levels at market tops. But that is not what I found.

On the contrary, the average P/E for the S&P 500 has been 18.7 at bull market tops since the 1920s. That’s only modestly higher than the 16.8 average over the entire eight-decade sample. (…)

This provides both good and bad news for the current market. On the one hand, the S&P 500’s current P/E, at 17.9 when calculated on the basis of trailing earnings, is hardly at an extreme level. On the other hand, however, the market’s current P/E is only marginally less than where it stood on average at past bull market tops — 18.7.

The bottom line?

Needless to say, not all historical parallels to the current market are worrisome. The index of leading economic indicators, for example, shows no signs of an imminent recession. And even though interest rates have begun to rise, the yield curve — which has an impressive forecasting record — has not only remained quite steep, but even become slightly steeper in recent weeks. That’s good news, because that means it’s moving in just the opposite direction of its becoming inverted, and only when it’s inverted would it signal a heightened risk of a downturn. (…)

All we can say right now is that, when we compare the current stock market to past market tops, there are some worrisome parallels.

This doesn’t automatically mean that the current bull market will soon end. But it also means we shouldn’t be too confident that it won’t.

Mark Hulbert always does interesting statistical work. This piece is no exception even though it is leading investors just about nowhere. When an analysis begins with

We may be closer to a major market top than most investors think.

And ends with

This doesn’t automatically mean that the current bull market will soon end. But it also means we shouldn’t be too confident that it won’t.

The reader is justified to ask: what’s the point?

There are nonetheless several worthy points in Hulbert’s analysis:

  • Market rises steeply before bull dies: do not buy equities just because they are rising. Beware when the crowd moves in. Keep your cool at al times, using objective analytics to gauge risk vs reward.
  • Riskiest stocks shine before market tops: Keep your cool at al times, using objective analytics to gauge risk vs reward.
  • P/Es at market tops: A long term analysis of absolute P/Es is bound to produce faulty results since inflation significantly impacts P/E ratios. Using averages of absolute P/Es during 80 years of fluctuating inflation rates is meaningless. Look at the charts below (click to enlarge) if you doubt that.



  • The bottom line? Hulbert confuses market corrections and recessions. Always sell stocks if you believe a recession is coming, whatever the P/E, because profits will collapse. The LEI and the yield curve are useful tools for that. Equities can also decline meaningfully to correct excessive valuations. This is when the Rule of 20 is most useful because it has a proven record and it uses objective facts.

Related read: S&P 500 P/E Ratio at Troughs: A Detailed Analysis of the Past 80 Years

Thumbs up Thumbs down The Employment Road To Tightening

Table 1 shows the average monthly increase in payrolls that is needed to achieve the Fed’s unemployment rate forecast, based on two assumptions about labor force growth. First, the working-age population picks up slightly, as per the Census Bureau’s projections. And second, the labor force participation rate (or part rate) holds steady near 34-year lows, as the upward push from cyclical forces (in particular, a tightening labor market) offsets the downward structural pull from an aging population.


Until now, the cyclical and structural forces have worked in concert to reduce the part rate by almost 3 percentage points since 2006 (one recent study suggests it was nearly an even split in terms of influence).

Under these assumptions, the jobless rate will hold steady if job growth averages 110,000 per month. However, the Fed has set a much higher bar than 7.6% unemployment before it slows stimulus, let alone tightens policy. With inflation in check, policy is squarely aimed at reducing the jobless rate to a sustainable range of 5.2% to 6.0%. The Fed expects to reach the upper bound of this range in late 2015. This will require employment gains averaging 189,000 per month in the next 2½ years.

Of note, the minimum unemployment-rate threshold (6.5%) that the Fed  has established before it considers raising rates is not expected to be reached, at the earliest, until late 2014. This will require job gains averaging 200,000 in the next 1½ years.

In the event that the part rate turns up, more job growth would be required to keep the Fed’s unemployment rate forecast on track. For every 0.1% increase in the part rate, an additional 7,000 jobs (over and above 189,000) would be needed to achieve a 6.0% jobless rate in late 2015. So, the higher the part rate, the more likely the Fed will delay tightening unless economic growth exceeds expectations. (BMO Capital)


IMF: Manufacturing Could Lift Long-Term U.S. Growth

(…) “The contribution of manufacturing exports to growth could exceed those of the recent past,” the IMF said in a new report on the U.S. economy that identifies important structural changes that could boost growth over the long term.

The IMF noted that U.S. production of durable goods like computers, motor vehicles and machinery returned to prerecession levels towards the end of 2011, before the overall economy did, and that the recovery of this sector has been more robust than in other advanced economies.

Pointing up  This dynamic is the result, the IMF said, of a decrease in labor costs relative to those of emerging markets, cheaper energy produced by the shale gas and oil boom, and a depreciation of the U.S. dollar. Thanks to these gains in competitiveness, if U.S. manufacturers were to shift the focus of their exporting activities to fast-growing Asian markets, the sector could add between 0.4 and 0.6 percentage point to growth through 2020, compared to a 0.2 percentage point contribution in the first decade of this century. (…)


China Aims to Help Small Businesses

China has rolled out temporary tax cuts and promises of fresh credit for small businesses that have been hit hard as economic growth slows, but the move will have only a limited impact on the economy, analysts said. (…)

On Friday, the central bank said it would encourage banks to lend more to smaller firms and it would encourage these companies to tap the bond market for financing. That followed an announcement by the State Council, or China’s cabinet, on Wednesday that it would temporarily suspend business and value-added taxes for companies with monthly revenue under 20,000 yuan ($3,260) starting Aug. 1.

That’s not small, that’s very tiny!

Small and medium-size enterprises account for 80% of China’s urban jobs, according to the Ministry of Industry and Information Technology.  (…)

Jobless rate to be ‘last straw’ for policy

Analysts believe that a sharp deterioration in the employment situation could be the ‘last straw’that forces changes in economic policy, although it’s not yet clear what the government’sbottom line for growth is this year. (…)

Zhu Baoliang, an economist at the State Information Center, a think tank under the NationalDevelopment and Reform Commission, said that the “safe zone” for unemployment is 4 to 5 percent. (…)

Don’t you worry about unemployment in China. It is clearly under control at 4.1%: Winking smile


Pointing up  Shale Threatens Saudi Economy, Warns Prince Alwaleed

Saudi Arabian billionaire Prince Alwaleed bin Talal has warned that the kingdom’s petroleum-dependent economy is increasingly vulnerable as rising production of U.S. shale oil and gas reduces global demand for crude from members of the Organization of the Petroleum Exporting Countries.

In an open letter dated May 13 addressed to Saudi Oil Minister Ali al-Naimi and several other ministers, which was published Sunday on Prince Alwaleed’s Twitter account, he said the kingdom won’t be able to fulfill its plan to increase its crude production capacity to 15 million barrels because of the shale threat.

Saudi Arabia, the world’s biggest oil exporter, is now pumping at less than its production capacity because consumers are limiting their oil imports, Prince Alwaleed said. This means the kingdom is, “facing a threat with the continuation of its near-complete reliance on oil, especially as 92% of the budget for this year depends on oil,” said the prince. (…)

In a report last month, OPEC’s own analysts predicted that demand for the group’s crude would fall next year to 29.6 million barrels a day, more than 600,000 barrels a day below its level last year. The International Energy Agency expects demand for OPEC crude to decline again in 2015 to 29.2 million barrels a day, before starting to rise gradually in the following years. (…)

European oil demand on the rise
Hopes for sign of increased economic activity

(…) The year-on-year increase in European oil demand in April and May – the first consecutive increases since the start of 2011 – means the continent is now set for its first quarter of oil demand growth since 2010.

Diesel demand has increased for three consecutive months, a sign of increased economic activity because it means trucks are making more journeys, according to David Wech, an analyst at JBC Energy in Vienna.

The International Energy Agency has raised its estimate for second-quarter oil demand in Europe by 2 per cent since the start of the year, and some analysts say European consumption could continue to exceed expectations.

High five  Some of the increase may have been due to a  cold spring encouraging consumption of fuel and heating oil.

And this:  Euro Area Credit Contraction a Stiff Headwind

However, while activity may at last be stabilizing, the economy
faces a significant headwind in the sharp contraction in bank lending. Lending to the private sector fell in July, as it has in 18 of the past 21 months, leaving total loans outstanding down a record 2.6% y/y. (BMO Capital)image

DRIVING BLIND (continued)

Fed ‘Doves’ Beat ‘Hawks’ in Economic Prognosticating

The WSJ examined more than 700 predictions in speeches and testimony by 14 Fed policy makers—and scored the predictions on growth, jobs and inflation.

(…) To evaluate the performance of individual Fed officials, the Journal looked at texts of speeches and congressional testimony. Forward-looking comments about the economy were rated for accuracy.

The Journal gave a mark ranging from -1.0—far off the mark—to 1.0—nearly perfectly correct—for each comment and averaged the total. A final score of zero showed someone was wrong as often as correct. (…)

Ms. Yellen and Mr. Dudley—both in Mr. Bernanke’s inner circle—ranked first and second in the Journal analysis. Both predicted slow growth and low inflation over the past four years. Ms. Yellen had the highest overall score in the Journal’s ranking, 0.52. Mr. Dudley scored 0.45.

The lowest scores were tallied by Mr. Plosser, -0.01; St. Louis Fed President James Bullard, 0.00; Richmond Fed President Jeffrey Lacker, 0.05, and Minneapolis Fed President Narayana Kocherlakota, 0.07.

Investors who closely follow every comment by Fed officials don’t appear to distinguish policy makers by the accuracy of their economic forecasts.

Macroeconomic Advisers LLC, a research firm, determined Mr. Plosser, Mr. Bullard and Mr. Lacker consistently moved markets more than Ms. Yellen. (…)


Well, the “overall scores” look strange to me when considering the “growth scores”.


John Mauldin in his latest Thoughts from the Front Line:

This week President Obama gave a speech on the economy that sounded like a campaign speech except that he should not be running any longer. He blamed the rise of technology for the loss of jobs, the decimation of the power of unions for flat incomes, and the policies of his predecessor for the current malaise. The speech was a wish list of new programs and promises, yet nothing is getting done. He fails to engage with the most pressing problems of our time and doubles down on a healthcare plan that is a train wreck even his most ardent supporters are walking away from. Did you see the recent letter from multiple union leaders asking for a course correction on healthcare?

The Congressional Budget Office now estimates that 7 million people will lose their employer-provided health insurance at the end of the year. One would assume that those are almost all full-time workers. So instead of getting health insurance in some form as a benefit, they will likely soon be paying $1400 a year (minimum) in mandated taxes (the level set by the Supreme Court), and those costs will rise dramatically over the next few years, according to the current schedule. That is a HUGE tax increase for those people.

Young people who have no insurance and are making more than $10 an hour will be paying about $1300 a year, or close to 10% of their after-tax income. That blows a monster hole in their disposable income at those levels. There is no other way to look at this: it’s a huge lower-middle-class tax increase. Yes, they get a benefit (health insurance) that someone somewhere in society was already paying for, but they personally did not have these costs before.

The unintended consequences of the healthcare bill are going to be vicious. Not only is there a tax increase on the rich and on small employers, there is a tax increase on young people and the middle class. And it’s a tax increase that comes in the middle of the slowest recovery on record. It is possible that we grew at less than 1% this last quarter. And the burden piles on top of a secular shift in employment practices that is making life more difficult for the younger generations.


Mauldin again on the next Fed chief:

Oh, dear gods. (…) This is most distressing. On the one hand we have the most uber-dovish candidate ever in the form of Janet Yellen, with no real-world experience and likely to continue QE at the sight of her own shadow, which as I noted yesterday in the letter is a real problem, OR
We get a man from whose vocabulary the terms collegiality and consensus are somehow missing.

He is possibly less dovish (maybe a good thing, but who knows what he would really do, as he is not going to tell us until after he is confirmed), and he will continue to be Larry Summers, which is to say divisive. I have talked to some of his colleagues at Harvard. You get mostly nuanced statements with a lot of clear body language that says “I am glad he’s gone.”

GOOD READ China’s Bad Earth

Industrialization has turned much of the Chinese countryside into an environmental disaster zone, threatening not only the food supply but the legitimacy of the regime itself.

(…) Estimates from state-affiliated researchers say that anywhere between 8% and 20% of China’s arable land, some 25 to 60 million acres, may now be contaminated with heavy metals. A loss of even 5% could be disastrous, taking China below the “red line” of 296 million acres of arable land that are currently needed, according to the government, to feed the country’s 1.35 billion people.

Rural China’s toxic turn is largely a consequence of two trends, say environmental researchers: the expansion of polluting industries into remote areas a safe distance from population centers, and heavy use of chemical fertilizers to meet the country’s mounting food needs. Both changes have been driven by the rapid pace of urbanization in a country that in 2012, for the first time in its long history, had more people living in cities than outside of them. (…)

The consequences of this shift catapulted to national attention in February, after China’s Ministry of Environmental Protection refused to release the results of a multiyear nationwide soil-pollution survey, calling the data a “state secret.” The decision—brought to a head when an activist lawyer pressed the ministry to reveal the numbers—sparked an outcry online and in the traditional media. (…)

Crying face Burgundy vineyards devastated by storm
Crop damage ranges from 10% to 100% after hail deluge

(…) France’s agriculture ministry said on Friday that up to 40 per cent of vineyards were hit in the Côte de Beaune, which accounts for about 10 per cent of the Burgundy region’s annual 200m bottle production. Crop damage in the stricken vineyards ranged from 10 per cent to 100 per cent, the ministry said.

Among the best known wine-growing districts hardest hit were Pommard, Volnay, Monthélie, Beaune and Meursault, according to BIVB, the Burgundy wine board, which estimates losses of more than 4m bottles. “In 40 years, we have never seen a whole area hit like this,” a BIVB spokeswoman said. “In 20 minutes, everything was ruined.” (…)


Leave a Reply

Your email address will not be published. Required fields are marked *