Macro Man is both tired and pressed for time, so in the spirit of continuing the discussion of US corporate profits he'll confine himself to presenting 5 charts on various profit measures today:
1) Quarterly profit measures are negative y/y for both the SPX and economy as a whole. Reported earnings are also negative y/y, but they break the scale on the chart so were omitted.
2) The trend in quarterly reported and operating earnings looks worse than the monthly figures presented in this space a couple of days ago.
3) Personal income as a multiple of corporate profits continues to hover near post-war lows. Small wonder consumer confidence has never recovered its levels of 20 years ago.
4) One reason for this is that the effective tax rates for US businesses, both public and private, have trended lower for the past 50 years.
5) Since 1980, the long-term growth rate of corporate profits has been much, much higher than that of nominal GDP. The only real exceptions to this have been the recessions of 2001 and 2008-09. However, the long-term growth rate in profits has recently declined below that of GDP once again. Incidentally, the long-term nominal GDP figure in this chart provides evidence that the Fed is right to suggest that the neutral policy rate is lower than it used to be.
Macro Man hopes to complete the rates component of the CTA proxy project later today, but failing that he'll do so tomorrow.
1) Quarterly profit measures are negative y/y for both the SPX and economy as a whole. Reported earnings are also negative y/y, but they break the scale on the chart so were omitted.
2) The trend in quarterly reported and operating earnings looks worse than the monthly figures presented in this space a couple of days ago.
3) Personal income as a multiple of corporate profits continues to hover near post-war lows. Small wonder consumer confidence has never recovered its levels of 20 years ago.
4) One reason for this is that the effective tax rates for US businesses, both public and private, have trended lower for the past 50 years.
Macro Man hopes to complete the rates component of the CTA proxy project later today, but failing that he'll do so tomorrow.
28 comments
Click here for commentsDid you mean Cromulent Profits and how embiggened they are?
ReplyAnon @ 3:13am on prev blogpost. "At what point do bears turn..."
ReplyIt's a valid question, and much bettwr to ask than simply say "bears get smashed baby". If you were to read all Nico's posts in recent minths, you will see him swing long plenty of times.
Personally, I think the framing of the question misses some important points. Why not ask, "at what point do they get short"? There's an assumption of being short the whole time. The odds are generally stacked against shorts into ECB, FOMC and Opex. Shorting on those days are thereafter provide better odds.
Returning to how a bear frames the current price action versus a bull. It depends on your point of reference. If you take the price action in the last 12 months, since Dec or, the start of the year, there's not a lot for a bull to shout about. If you take it from the last 6-8 weeks, you've got something.
I next look at where we are in relation to all this CB stimulus and jawboning. Is it really that impressive? Europe has underperformed, the banking sector still isn't biting and the Spoos is struggling to get into last years range. Banking, energy and mining sectors are all warning about the future earnings. Add these all up and I get my bear case. This is without even factoring in the slowdown in China and the immigration & terrorism issues in the EU.
To add. 6-8 eeeks ago the media headlines were all about bear markets. Recently, we've seen headlines about technical bull markets. Such volatility suggests to me a classic bear market rally.
Replylove these charts. Could also explain Bernie Sanders success, don't you think ? Personal income/Profit lower than in the 50's... Piketty "dans le texte"
Reply@ Anon 8.46 Ugh. Corrected.
ReplyOn the last chart can you clarify what the profits line shows? (compounding 10 year average). Is it annualised rolling 10y change?
ReplyFor both, it's the rolling compounded 10y average annualized change.
Reply@MM thx for those thoughts - I think the more interesting one to tackle is the nasty debate between GAAP and non GAAP earnings - on your charts however, I remembered there are two key assumptions the market makes about earnings with such conviction that one would be forgiven for thinking Isaac Newton had come up with them. Both these assumptions seem amusingly thoughtless when you dig below the surface - they are:
Reply1. Corporate Earnings can only go up over long stretches of time - there will never be a secular trend of decreasing earnings either in absolute terms or as % of gap (insert favorite theory about human capital,technology, robots, trade etc etc)
2. If earnings begin to turn down, we are headed for an equity crash in the next 5 seconds, because then they will go down a lot very quickly and make everyone feel the world is about to end, but it won't, because, see 1.
Interesting, innit?
In the world of financial spreadsheets this translates as volatility increases with the sqrt of time such that v trumps g in the short term and vice versa in the long term. Such that we have to use log scales to chart indices over macro periods.
Reply...or Nico x sqrt t > jbtfd where t <1
Reply... which means both should do very nicely within their respective time periods and hence can put their willies away. Girth and length are equally impressive.
Replyhttps://secure.marketwatch.com/story/sp-downgrades-china-credit-outlook-to-negative-from-stable-2016-03-31-5911224
ReplyEquity markets have recovered over recent weeks despite sell-side analysts
Replycontinuing to cut their profit forecasts. We believe a focus on the net EPS
upgrade/downgrades alone misses the point of why equity prices appear to
have recovered, and instead we highlight the 2nd derivative in EPS
revisions has started to improve. Simply put, ‘bad news is no longer getting
worse’ and it appears the upside is likely to favour cyclical parts of the
market rather than defensives
why a rise in the 2nd derivative
should not be ignored despite ample EPS downgrades. Historically (since
1995), equity markets show a high probability of rising, and the sector tilt
usually favours cyclicals like Materials, Technology, Industrials and
Discretionary rather than defensives like Staples, Health Care, Telecoms
and Utilities, when EPS revisions rise from their trough irrespective of the
number of EPS downgrades outnumbering EPS upgrades.
"since 1995" ,nothing to do with the commodity bull cycle then? Frankly I would beware basing my future outlook on backward looking ideas like that. Indeed doing so has kept more than a few people poor in the post 2009 period. For this view to really hold we have to see that we have actually transitioned from a debt crisis into some new cycle where debt levels are manageable ,because on that basis consumption could comfortably expand and make that idea a reality. So , are we there yet? Personally ,I don't see that happening in this decade which will on it's own test most people's patience.
Replyabbe, thx for your post
Reply!.except for govt transfer payments the US economy at the bottom is a cash economy
2.household debt to net worth (per fed data) has declined significantly since 2006 and continues to decline, and if stocks and housing do not decline significantly (ie bears are wrong at this juncture), will continue to decline.
3. gasoline consumption per eia is up 5% in the last 4 weeks y/y, which rarely happens without other consumption up as well.
Abee I agree. Expectations are so bad that anything not quite so bad will obviously be good too.
ReplyThen we have the ability to say well, GAAP is GAAP. What was then is not now....look at the op earnings, just look at the cash. Who cares about the original investors in the rigs (see railways re who made money).
The main question though hanging over this earnings season to my mind is - to what extent has the opportunity been taken to kitchen sink write offs so that one's bonuses can be re-based to a lower level of profit expectations, versus the well trodden path of not nearly warning enough early enough about the future. They do say sell a company on their first warning as it turns out it isn't enough. But that was then and this is now... when managers are so much more canny about managing their personal outcomes. Price action seems to suggest second derivative is in play.
Hotair,
Replycompanies with more debt than they should have wouldn't be looking to write off any more than they have to, and that includes pretty much everyone in the oil patch.
Europe is closing an ugly quarter in an ugly way
ReplyNico, nice call on EU equity shorts.
Reply@abee, interesting insight, but the price level of SP right now does not really reflect any disastrous earning. It seemed to me the market is pricing in a much better Q2 right now. So the 1st/2nd degree change in guidance might be more important here.
US corp earnings outside of oil exposed companies are not exactly a disaster, so why should they be priced for such?
Replyanon 4:18 - EU equities hardly moved today, so nico's trade is nothing to crow about. You can also add in that he's losing on his SP position.
ReplyLots of chatter about how quarter end positioning is the only think keeping spoos up before the hammer comes down. Since I am (temporarily) stopped out of my shorts, which is a stellar bearish indicator if you ever saw one (Nico, I'm looking at you mate), I certainly sympathize.
ReplyOne thing perplexes me though - this quarter has been, in the end, quite flat for overall equities (or even negative for the average fund when you consider weightings to various sectors etc), but stellar for govvies of all stripes, unless you quibble with anywhere from 25-40% annualized returns for lending money to the man - my tiny brain would conclude that quarter end window dressing issues would apply much more strongly to bonds of all variety than equities, with the subsequent 'reversion' also being bigger.
Then again, if I had a dime for every time punters ascribed something to quarter end, I'd probably be well past caring about that question.
anon 5:50 Eurostoxx -1.3% and currently losing 0.09% on Spoos if this is what you mean
Replyi will take -1.3% as a 'hardly moved' in my favor every day
let's speak in 2 weeks.
Chart 5 is the interesting one.
ReplyWhat is it about election years and corporate products?
This is anon 4:18.
Replyanon 5:50, I do not know what you are smoking but I am glad you got some satisfaction out of it.
Yes it is only one day, but give credit where credit is due. I respect those who share their trading ideas and reasoning here BEFORE the market makes a move. It is not easy since if you are wrong everyone will see it.
For most of those screaming CB's buying everyday, where were they before 2/11?
Interesting commentary by Evans yesterday to the effect that Fed would need to see inflation data through the end of summer before knowing whether inflation pickup is transitory (Sep earliest hike?). That would seem to give EM some space to rally further from here. Cutting against that conclusion, however, are: 1) SPX perhaps about to turn, 2) positioning is now long in oil and producer hedging perhaps caps it <$40-45 near-term, 3) metals positioning long too and likely still in bear market (though new project starts picking up in China and maybe we saw the beginnings of some upswing in industrial profits in the Jan/Feb data?). Curious how others see it.
ReplyChina unveils proposal for 50 trillion global energy network-well that would help a few commodities.
ReplyGiven all the fuss over a small atoll in the south china sea, do you really see the regional players hooking themselves to a chinese grid. ?
Reply