Friday, January 29, 2016

The Woodchipper of Earnings Disappointment

Earnings for Q4 of 2015 are coming in. Thursday was the single busiest day of the earnings season. Earnings are a bloodbath, yet the market is rallying, and rallying hard. So is the broad market no longer so laser-focused on earnings? YES!

I'll get to that. First ...

Earlier this week, the outlook was downright terrible. As of January 27th, S&P Capital IQ was calling for  6.11% decline in S&P 500 earnings.

Looking at this table, you can see how the outlook worsened over time.

So, that's borders on blood-bath. The good news is, at the end of the week, things look a smidgen better.  S&P Capital IQ says the Q4 earnings for the S&P 500 are estimated to be $28.83. That's a decline of 5.65%. Still bad, but not as bad as a couple days ago.

What's more, as the table shows, 6 of 10 sectors are in contraction. So, it's not just energy. Though the energy sector is being fed, feet-first and screaming, into the Woodchipper of Earnings Disappointment.

I always like to use multiple sources. FactSet says the S&P 500 is now likely to show a 5.8% decline in Q4 earnings, up from a projected 4.7% decline on Dec. 31. What a bunch of party-poops, eh?

Apple missed ... Amazon disappointed ... Chevron whiffed. What a parade of pain!

So, why did stocks rally so hard today? Well, the economic news has been downright awful. And I'm not just talking the fourth-quarter GDP numbers, which came out at growth of a pathetic 0.7%. No, it's also things like the Durable Goods numbers, which tumbled 5.1% in December.

And the Fed spoke this week. And while not saying so directly -- because it never does -- the Fed seems to realize that its rush to raise interest rates is a mistake.

And that is reason #1 why the market is headed higher. The sense that we won't see four Fed rate hikes this year. We might not even see two.

The second reason the market is rallying is that the global economy is getting worse. Japan's economy is doing so poorly, Japan's central bank actually went to negative interest rates

That's kind of a big deal. It's also pushing the value of the Japanese yen down, which pushes the value of the U.S. dollar higher. 

And it's not just the yen. China careens from one crisis to another. Europe has its own messes. This hurts those currencies ... and boosts the dollar.

For my analysis on why the U.S. dollar will be stronger for longer, read my latest piece at the Non-Dollar Report.

Every Tom, Dick and Apple and Amazon which blamed the strong dollar for impacting earnings results doesn't need a stronger dollar. They will scream bloody murder eventually. But the market isn't focused on that right now.

No, the market is focused on the fact that one-fifth of the global economy now is operating under negative interest rates. That gives some on Wall Street the idea that not only will the Fed not hike rates -- it might actually lower them.

The third reason stocks rallied is because oil rallied. And it rallied for no good reason besides speculation.

And that's how we get to a 300+ point rally in the Dow today.

Now, let's look at the chart of DOOOOOM. I'm spelling it with 5 "O"s now because an authoritative Mexican robot says so.

(Updated chart)

Support still holds. There is room for a continued bounce higher. I'll point out that if the Fed does do another round of QE, well, that's usually rocket fuel for stocks.

Still, despite recent action, keep this in mind. The gapped and ferocious crack addict smile the market is wearing today is hiding something; underneath it all, the market is scared. 

Certain politicians will do their darnedest through November to keep people scared. This is very good for gold, by the way, as I pointed out here, and also here a week earlier.

Part of my investment thesis is that the market is more scared than it needs to be. It is anticipating a recession that is not on the horizon.

The market's anticipation of a recession may in itself be a trading opportunity.

Still, we'd be amiss to not notice that there are some dark clouds. JPMorgan Chase just cut its forecast for U.S. stocks by 9.1% -- saying it sees the S&P 500 ending the year at 2,000. 

“There is increasing risk that elevated volatility starts incurring enough technical damage to market psychology,” a team led by Lakos-Bujas wrote in a note to clients on Tuesday. That could spill over and negatively affect business and consumer sentiment, “resulting in a lack of risk taking, and eventually creating a negative feedback loop into the real economy.”

In other words, JPMorgan is saying the thing we have to fear the most is fear itself.

The JPMorgan team also says stocks in the S&P 500 will earn $120 a share in 2016, compared with an earlier $123 estimate. The S&P 500 is likely to post two straight years of flat to negative earnings growth, as the “risk of earnings recession is rising.”

And if you are smacking your desk saying "by Neddie Jingo, that's just what Sean predicted," well, yeah. I get to say "I told you so."

Still, let's check our old friend, the forward P/E ratio of the S&P 500.

The forward p/e ratio is at 16.016 -- higher than it was last Friday. And yet the earnings outlook is deteriorating. A dollar that is stronger for longer -- which is what we seem to have -- will not help the earnings situation. So, there may be good reasons to buy, but a cheap market is not one of them.

Right now, the market is high on the high-speed chicken feed of Fed expectations. The market expects the Fed to stop hiking rates, and maybe even engage in QE. 

If these junkie dreams go unfulfilled -- and junkies usually have Liquid-Sky-high fantasies -- the let-down could be quite severe. The Woodchipper of Earnings Disappointment could come back into play. 

And that might bring us to a washout, which would likely be a great buying opportunity.

Or, watch Yellen announce a new round of QE on Monday and make fools of us all.

Have a great weekend.

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