What we've learned from earnings
Recent corporate results show that even if you can accurately predict a company’s earnings, the market’s reaction is still much harder to get right.
As the most-recent "earnings season" winds down, it's worth looking at the overall message from the stock market so far.
Heading in to this earnings season, I was not expecting a lot of positive reports from the companies I follow, due to weak gross domestic product worldwide and the strong dollar. But I was especially interested to see if poor results and/or lowered guidance could take the overall stock market lower, or whether bad news would be ignored.
Thus, I was paying particular attention to some of the larger names in the technology sector as a litmus test for real economic strength.
Just a slap on the wrist
As I suspected, Intel (INTC) and Microsoft (MSFT) were unsuccessful at beat-the-number and had to lower guidance for the year. But the stocks weren't hit that hard. (Microsoft publishes MSN Money.) Meanwhile, IBM (IBM) -- which once again reported light revenue -- managed to make yet another earnings number (as long as you're willing to look past never-ending write-offs and believe the accounting treatment of its acquisitions and what that does for its profit-and-loss statement down the road).
Nevertheless, IBM's revenue shortfall was ignored, and its earnings were the focus. That, combined with how easily the market shrugged off lowered guidance and light revenue for Yahoo (YHOO) in favor of fantasizing about an Alibaba initial public offering, made me feel as though the imagination component of stocks was going to trump any sort of bad news -- and the reaction to IBM's results sort of corroborated that. (On the other hand, eBay's (EBAY) revenue was also light, and its stock price was punished.)
By the end of last week, we had seen results from Google (GOOG), Microsoft and SAP (SAP). As a group, pretty much all the major players in the tech world had either revenue or margin problems, or expected to (as Oracle (ORCL) announced last month), indicating that the world economy is not as strong as people had expected.
If we were not in a money-printing environment, this would be the exact setup for building substantial positions on the short side, because these sorts of issues would obviously matter. As more companies report similar problems, it cumulatively would put pressure on the market to the downside. However, since we are in a money-printing environment, that makes life particularly tricky.
One of my short-selling rules is that if the Federal Reserve is printing money, one has to refrain or be extremely careful and use guerrilla tactics -- i.e., try to get in front a of a catalyst. When that comes and goes, get out of the way, unless somehow the cumulative effect matters. Consequently, the few shorts I have tried lately have been very short-lived.
While some companies (Microsoft and eBay, for instance) did see their share prices decline after announcing earnings, the stock market in general was largely unaffected by poor corporate earnings news. As this week came to a close, it was becoming pretty clear that, for now, stocks would move higher. while bad news would be ignored.
Corroborating that viewpoint, Caterpillar (CAT) lowered its earnings guidance on July 24 and downgraded its view of world growth, but the stock was penalized by only a couple of percentage points.
Thus, the stock market is on autopilot until it exhausts itself (which could happen at any time, maybe next week), bond rates rise high enough or some catalyst trips up speculators. However, I do believe that the risks for equities continue to rise as prices move higher and people are seduced by momentum.
Unlearning our lessons
Speaking of bonds, one could make the argument that the 10-year bond failed at around 2.5%.But before getting too excited about that, and to really be convinced, we will need to see 10-year rates rise above the high of 2.73%, or so we saw a couple of weeks ago. I continue to think that, at some point, equities will take a tumble and bonds will have a knee-jerk bounce, so I would like to see how high that goes.
I made the comment late in winter that it felt like 1998. From time to time I continue to feel that way about stocks, and right now is one of those occasions. Compared with the bubbles of the 1920s and late 1990s, the amount of money that has been printed is so staggering you can't say that stocks can't go crazy, which is why I have avoided short-selling.
But I still find it hard to believe that so many people are pouring so much money into stocks after the debacles we have seen in the past decade, while all of the pre-existing problems rotting beneath the surface -- with the exception, perhaps, of massive consumer debt -- are still with us (though consumers have traded their debt for not being able to get a decent job). In any case, from my perspective, the markets are basically a wild sea of speculation.
Is it really that shocking to see money being poured into stocks, not really. Humans tend to have short memories, especially when it comes to issues of Greed. We literally have two Americas. Some have never had it so good and some have never had it so bad. Eventually, cause and effect will take over, then everyone goes down with the ship, Literally.
" amount of money that has been printed is so staggering ... ... while all of the pre-existing problems rotting beneath the surface. ..." The Fed has "created" an increase of over 300 percent in the money supply in four years. A 300% decrease in the "real" value of the American dollar? Yes. foreign travel or a trip to the grocery story confirms that.
I have never in my long life seen a trend line so precise and near-perfect as the Dow performance of Friday, July, 26th, 2013. . But for one wiggle, an absolutely straight line from low point up to closing!
It has since occurred that it may very well have been executed by a computer and a program such as the HFT (High Frequency Trading) with no need at all for executing a live trade, a built-in profitable execution. Don't panic. Line up, place your bets and we'll feed it into the system in a metered process, without interference or interruption!
It should have been obvious - too embarrassingly perfect for the moguls behind the move to miss - yet they did. . . Perhaps a few more wiggles here and there in the trend line to dispel suspicion, something to indicate some human hesitancy or a wavering commitment would have been better. . .
Amazing! From 150 points down to +3 up in the precise remaining time. Would that explain the one hiccup? But, no! Never the work of randomizing mortals. A policy was at work; in no way could it have been mortals. The tiny irregularities resulting could be explained by uneven transactional quantities alone.
How easy to adapt to cynicism these days when we're fed evidence hardly challenging!
Doubters need do nothing other than consult the Dow performance for Friday on your own. Amazing! And it will never be investigated or mentioned by anyone again.
NASDAQ and S&P 500 came close to following suit.
HE SAYS THE AMERICAN PEOPLE WILL HAVE A NICE LOOKING FUNERAL!!!!!!
AMERICANS (TERM LOOSELY USED) ARE ASLEEP AT THE WHEEL!!!!!!!!!!!!!!!
Risk-reward still matters; Standards & Poor forecasts even with slow global and US growth S&P 500 earnings will be up at a 12-14% constant dollar clip for the next 24 months. So, all other factors being equal, that should be the return on stocks over the next 2 years, i.e., 12-14% in real terms ... that is awesome historically.
And, before the crash, the S&P PE ratio was in the low 19s [just mathematically that's 5.25% ROI] while 10Y Ts were paying around 4.5%. So, the move was to lower risk bonds and one would have made a lot of money when rates plummeted and far more relative to stocks. [Full disclosure: I'm not one of them who did.] Now the S&P mathematic ROI is 6.2% while 10Y Ts are paying 2.6% and the Fed is hoping to let rates rise as the economy slowly grows faster which will devastate bond holders. And people have felt that in their portfolios for 6 months now. It might be a record; I don't know; but 10Y Ts holdings are down 50% annually for the last 2 quarters while stocks are up about 18%. The fire is on individual investors feet to fulfill the prophesied "great rotation" back into stocks that has been imminent since 2009. I see this continuing in addition to the risk premium being so low.
So, fear based on the 2008 debacle seems irrational. This is not then. I won't advise others, but I'm leveraged into stocks until these basic facts change while preparing myself for a disastrous 30% bear market which I think can only emanate from a crisis in China; and I think that risk is overstated because there is no reason the Chinese junta, if you will, cannot keep doing what it's been doing to it's long-suffering people which is nefarious however profitable and sustainable.
Mr. Fat Cat;Why should I put another $20,000 in a car and worry about it getting stolen?
I can put that $20,000 in a CEF and get a monthly dividend check of $240 for golf and
It is time to return to a free market economy where supply and demand determine rates and asset values instead of the central bank 0 % policy. Fixed return investors have been severely hurt by the Federal Reserve money printing and should mobilize and seek political relief like everyone else has.
I also believe that harm done to fixed return investors is a significant and overlooked drag on any economic recovery because they are not earning then they are not spending.
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ABOUT BILL FLECKENSTEIN
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
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As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay.
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